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What Does the Future Hold for Tesla Motors?

Tesla is gaining momentum as it plans a gigantic battery factory and a mid-range offering, but states remain uncertain about whether its direct sales model is good for consumers.

If the auto marketplace is a pimply face, Tesla Motors is a hot needle, prodding away.

Over the past decade, the high-end electric vehicle maker has built a niche following in a remote corner of the market, only posting its first profit in 2013. But with a mid-range, mass-market production model scheduled for release by 2017, it looks like founder Elon Musk has bigger plans for his car company. Tesla recently announced its proposal to blanket the nation with high-speed electric vehicle stations, providing 98 percent population coverage by the end of 2015; and on July 31, the company announced a partnership with Panasonic as it plans construction of a large-scale battery plant somewhere in the U.S.

The planned factory is expected to span 10 million square feet, employ 6,500 people by 2020, and provide a lot of economic benefit to the state where the factory is built. Tesla says it is considering Texas, New Mexico, Arizona and Nevada as possible sites (California was removed from Tesla's list earlier this year for no specified reason).

As states in the southwest try to woo Tesla, others -- like New Jersey -- debate whether the car maker’s distribution model is good for consumers, or even legal.

Tesla doesn’t use dealerships to sell its vehicles, but rather sells its vehicles directly from showrooms. In most states, auto franchise laws make this model of vehicle distribution illegal. Though New Jersey looked the other way for a year, as Gov. Chris Christie said in July, The Garden State had to put its foot down and enforce the franchise laws. “I don’t like the law either,” Christie said. “I didn’t vote for it. I didn’t sign it. But I don’t get to just ignore the laws I don’t like.”

Legislation is now pending before the full Senate that would make Tesla an exception to the franchise laws, allowing the company to make direct sales in four New Jersey showrooms. The proposed law would also alter the state's franchise laws to provide new protections to dealerships.

Musk’s stance is well publicized – he says the intent of the franchise laws is being twisted to prevent his company from fairly competing in the marketplace. The intent of the laws, he wrote in a blog post, was not to prevent a new company that has no franchises from selling directly to consumers, but simply to protect existing franchisees from being preyed on by automakers.

Tesla can’t effectively sell through dealerships because dealerships don’t have an incentive to sell electric cars, he said. “Auto dealers have a fundamental conflict of interest between promoting gasoline cars, which constitute virtually all of their revenue, and electric cars, which constitute virtually none," he wrote.

Years before Tesla was in the news, the U.S. Department of Justice’s Antitrust Division commissioned a research paper called Economic Effects of State Bans on Direct Manufacturer Sales to Car Buyers, written by an economist named Gerald Bodisch. The paper is now being referenced in discussions by legislatures like the one in New Jersey to determine if Tesla’s distribution model would be beneficial or harmful to consumers, an issue that organizations like the National Automobile Dealers Association (NADA) and Tesla seem to disagree on.

Bodisch’s paper argues that today’s auto industry looks different than the one from the early 20th century, the time when dealer networks were first established to protect consumers. “There were maybe three car manufacturers that were the dominant manufacturers,” Bodisch said in an interview with Government Technology. “Any arguments that might have prevailed earlier as related to the manufacturers taking advantage of dealers are less likely to apply because there is so much more competition among manufacturers now.”

The argument made by dealers that Tesla’s direct sales model would hurt them and ultimately disadvantage consumers is confusing because Tesla doesn’t have dealers it could disadvantage. Tesla’s model is to sell directly to consumers, and the level of competition in today’s market is such that government intervention might not be necessary, Bodisch said. “Economically, it’s not clear what the dealer concerns are,” he said.

People are confused about what dealers are fighting for when it comes to Tesla, said Jim Appleton, president of the New Jersey Coalition of Automotive Retailers. “Nobody wants to see Tesla out of business, but Tesla has chosen in New Jersey what I consider to be an unwise but also unlawful distribution model.”

Tesla had several options when it began selling, Appleton said. Tesla could have complied with the franchise laws by appointing franchisees, it could have challenged the laws in court, or it could have gone to the legislature, which it eventually did. But, he said, the company didn’t start with any of those approaches.

“We want to see Tesla comply with the law, and if Tesla can make a good argument – and I’m not sure they can – that the law is too restrictive or chafing for them, then they need to make the argument that the law should be changed," Appleton said. "They’re not really making the argument that the law should be changed. They’re just making the argument that they should be exempt from the law.”

The franchise laws that Tesla is fighting against should be preserved because they protect consumers in several important ways, Appleton said, adding that franchise laws encourage vigorous inter-brand and intra-brand competition, which is good for consumers. Apple, he said, is an instance of how a lack of intra-brand competition can drive up prices; the current auto franchise model fosters a market where consumers can buy cars at affordable prices and avoids the kind of uniform pricing that Apple enjoys.

Today’s franchise model also promotes public safety, Appleton said, noting that having an extensive network of independent franchisees that view warranty and recall services as profitable parts of their business means the cars on American roads are generally safer. Without state legislatures creating the framework that makes offering those services profitable, he said, car makers would avoid offering things like warranties or fixing cars when they break, and everyone would be worse for it.

Where Tesla is concerned today, Appleton admitted that these arguments don’t strongly apply because Tesla offers an “excellent” product that performs well in the marketplace, gets consistently favorable reviews, and is targeted at a relatively wealthy demographic. “I’m not particularly concerned about the welfare of somebody who can afford to buy a Tesla, because I assume these are people who can take care of themselves,” Appleton said. The concern, he said, is that if Tesla is allowed to bypass these consumer protections, then other companies could do the same.

“What happens when there’s a $9,000 car that direct retails to the public that consumers buy in high numbers?” Appleton said. “A $100,000 vehicle, whether its direct retail or sold by a franchisee, you can expect it to perform at a level that’s very different than one that might be retailed directly by a factory.”

Ultimately, it’s not personal toward Tesla, Appleton said, it's about the precedent being set. “Tesla’s not a big enough issue to want to fight that fight out, I guess,” he said. “They’re one-tenth of 1 percent market share. My sense is that two years from now, Tesla won’t be building cars anymore. They’ll be a supplier to automakers and they’ll be in the battery storage business.”

Colin wrote for Government Technology and Emergency Management from 2010 through most of 2016.
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