Who Wins in Tesla’s Battle Versus Dealers?

Jacob Harper  |

The ongoing battle between various state legislators and Tesla Motors (TSLA) has been an interesting reframing of political talking points, to say the least.

On the theoretical Right, you have the progressive-minded electric automaker Tesla, arguing that it is “an affront to the very concept of a free market” to try to limit their right to bypass the use of third-party sellers. On the theoretical Left, you have the National Automobile Dealers Association (NADA) lobby, arguing that all automobiles, gas-powered or electric, must be sold via licensed dealerships to protect consumers.

The heart of NADA’s argument is less altruistic however, asserting that Tesla should not get special treatment just because they’re a green company. Concerning a bill in Arizona that would allow Tesla to operate without independent dealerships, lobbyist Mike Gardner told the Senate Commerce, Energy, and Military Committee that "what we're opposed to is allowing one of our competitors to go around the dealer network and sell directly to consumers,” purportedly giving Tesla an unfair advantage.

Tesla sales are currently banned in Arizona, as well as Texas and New Jersey. They currently are also facing challenges in New York and Ohio.

The question of whether or not the elimination of dealerships is a net benefit for consumers is tricky. While it would seem cutting out a state-sanctioned middleman in favor of factory-direct vertical integration would be beneficial for consumers, the model also has some drawbacks for car buyers.

Trade Commission-FREE with Tradier Brokerage

One, factory direct eliminates price haggling. Trying to get Tesla to come down on a Model S is like asking Best Buy (BBY) if they’d knock a few bucks off that toaster. In short: not happening. Also, according to the dealer’s lobby, if Tesla were to ever go belly-up customers would obviously be unable to return to their dealer for repairs. And as Tesla is such a highly specialized car, finding mechanics willing to work on them can be difficult.

In a blog post on the Tesla website, Tesla CEO Elon Musk completely dismissed such concerns as generated from the powerful automobile dealer’s lobby. In the post, Musk argues that the lobby has a vested interest in keeping sales of gas-powered vehicles high and minimizing electric car sales since electric cars have less service issues and thus less need of costly dealer repairs. On that point Musk is especially vehement, saying that dealerships should not try to bank any kind of profit from servicing and that “it does not seem right to me that companies try to make a profit off customers when their product breaks.”

Musk also argues that the entrenched system heavily favors deals with the “Big Three” of Ford (F) , GM (GM) , and Chrysler makes the very idea of an “start-up auto company” succeeding via traditional distribution impossible, pointing to the failure over the last twenty years of DeLorean, Tucker, Fisker, and Coda.

Whether Musk or the dealer’s lobby is correct, Tesla has quite a battle in front of them. In a March 19 interview on CNBC’s Squawk Box, former Chrysler chief Robert Nardelli warned that NADA is very strong and enjoy “tremendous state support,” while suggesting that Tesla’s direct model was “where the world is going.”

But regardless of where the world is going, Tesla faces quite a battle in front of them. NADA spends $6 million a year on lobbying and political contributions, and has a very, very keen interest in not losing any more market share to an upstart who seeks to ultimately make their entire industry obsolete.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.


Symbol Last Price Change % Change