Navigant Research Blog

Another State Bans Tesla’s Sales Model

Scott Shepard — March 14, 2014

This week the New Jersey Motor Vehicle Commission (NJMVC) voted to ban Tesla’s direct manufacturer-to-customer sales model, starting April 1.  The move places New Jersey alongside Arizona and Texas as the only states to ban direct sales of the Tesla Model S.  The upstart automaker has been selling its Model S through showrooms where customers can experience the vehicle.  They are then directed to the company’s website to purchase the vehicle.  Subsequently, it is delivered to the customer’s home directly from Tesla.  This sales model bypasses traditional dealers altogether, much to the dismay of state dealer associations across the country.  Accordingly, since Tesla first began production and distribution of the Model S in 2012, it has been fighting legal battles in many states to permit its sales model under existing dealer franchise laws, with varied success.

Dealer franchise laws exist in almost all states and were first created to prevent automakers from forcing excess inventory unlikely to sell on dealer lots.  Tesla’s rationale for the allowance of its direct sales model under state franchise laws is premised on the unique characteristics of the company’s Model S and future vehicles.  Tesla argues existing dealers are not adequately incentivized to sell the company’s vehicle due to the lower servicing requirements of electric vehicles; thus, the direct sales model is critical.  While this may be true, Tesla’s struggles with state franchise laws raise questions about the legitimacy of the laws and the value of the dealerships they protect.

Between You and the Automaker

The president of the New Jersey Coalition of Automotive Retailers (NJCAR), a primary opponent of Tesla’s sales model, has claimed that an important reason for franchise laws (and therefore dealerships) is that car dealers act as consumer representatives vis-à-vis the automaker.  If that argument is true, then it follows that if all vehicles were sold directly to the consumer rather than through a dealer, consumers would lose their primary automotive advocate and be more susceptible to automaker abuse.

The validity of NJCAR’s argument assumes that consumers are ill informed about manufacturers’ products, warranties, etc.  While that’s sometimes true, it’s hardly absolute, particularly in the Internet age.  Consumer preferences are strongly shifting toward online purchasing platforms rather than brick-and-mortar retail – a sign that consumers are not always interested in dealer interactions in the first place.

Clean My Windshield

As my colleague Dave Hurst points out in a blog on this matter, dealers provide “important services within the new vehicle purchase process” that may not be as easily or adequately provided by automakers or by the web.  That’s undoubtedly true, but whether these services are indispensable is a question best answered by consumers rather than politicians.

Allowing Tesla to demonstrate that its innovative (and yes, disruptive) sales model is beneficial for both the consumer and the automaker is an appropriate step in determining whether dealer franchise laws are actually meaningful or simply protectionist.  It’s possible for the direct-to-consumer sales model to exist alongside the dealer retail model.  The Internet hasn’t put realtors out of business; it has just changed their business practices.  Requiring Tesla to sell through dealers is akin to requiring gas station attendants to pump gas rather than allowing vehicle owners to pump their own gas.  Interestingly enough, New Jersey is also one of the two states that still have this law.

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