Technology, Tradition and Tesla

Technology, Tradition and Tesla

 by Rich Ehisen

When it comes to technology, California-based electric car manufacturer Tesla is undoubtedly on the automotive world's cutting edge. But the company's direct-to-consumer sales methods are, for many states, a blade that cuts a little too close to the bone. And as with other consumer-direct companies and products making waves in the marketplace — think Bitcoin, Uber and Airbnb to name a few — lawmakers are finding themselves uncomfortably caught between protecting the status quo and fostering innovation. 
Tesla's engine-less vehicles are marvels of modern automotive engineering — sleek, fast and stylish in ways that previous electric vehicle makers likely never dreamed possible. They are also pricey, starting at $60,000 and rising to over $100,000. Befitting that, the company's sales model is aimed directly at the well-heeled, tech-savvy consumer who is comfortable with buying just about anything online. Tesla defies the longstanding system that requires cars to be sold only through privately-owned dealerships in favor of a buyer experience similar to visiting an Apple store in the local mall. Which, incidentally, is where many of Tesla's stores can be found. 
But cutting the middleman out of the car deal has embroiled Tesla in a bitter state-by-state fight to be able to sell its products. Tesla currently has stores — it calls them galleries — in 22 states and the District of Columbia. In most, personnel are only allowed to provide information, with the customer still required to go online to make the purchase. In some states, gallery workers can also help a customer through the sales process via kiosks set up in the showroom. But in a handful of states facing intense pressure from car dealers to pull the plug on Tesla, things are not so easy. 
In Texas, for instance, gallery workers cannot tell interested consumers what a car costs, take them for a test drive, discuss how to order one or even refer them to another Tesla store out of state. And should a consumer figure that all out on their own and buy one anyway, the company cannot even bring them the car. The vehicle must in fact be delivered by a third party transport company, with Tesla employees specifically barred from being there for the delivery or from providing the customer with any guidance or information about the car for 48 hours after they receive it. 
Similar prohibitions are in place in Arizona, Virginia and Maryland, though the Old Line State does allow workers at its lone Tesla gallery in Bethesda to take customers on a test drive. Bills that would have added Minnesota and North Carolina to that list failed in 2013, though one (HB 1124) cleared the Missouri Senate last Wednesday. The House approved the bill in April, but the measure at that time did not contain any language to bar Tesla sales. Anti-Tesla forces were also handed a major victory in March when the New Jersey Motor Vehicle Commission surprisingly adopted rules that essentially require Tesla to close its two Garden State galleries. That precipitated a nasty public feud between Gov. Chris Christie (R) and Tesla founder and owner Elon Musk, who said Christie misled him into believing he was going to support legislation to allow Tesla sales. In a blog post on the Tesla website, Musk accused Christie of cutting "a backroom deal" with dealer groups to lock Tesla out. The company has since challenged the ruling in New Jersey Superior Court. 
Another court case is pending further north, as the Massachusetts State Automobile Dealers Association is suing to stop Tesla sales in the Bay State. The suit has been tossed out twice already, most recently in 2012 by a Norfolk County court that held the association lacked standing to bring the suit. The state Supreme Judicial Court heard an appeal to that decision last Tuesday. If it eventually sides with the dealers, the case would return to the lower court. A similar suit by New York auto dealers failed in 2013. 
Not all legislative efforts have been aimed at short circuiting the carmaker. Arizona lawmakers introduced a pair of bills this session that would have freed Tesla to sell directly to consumers without onerous limits. Neither was successful. 
That doesn't sit well with Rep. Warren Petersen (R), who authored one of the bills, HB 2123. That measure cleared the House in February but ultimately stalled in the Senate. Petersen expressed disappointment that the Republican-led Senate didn't offer more support for something he says would be a boon to consumers. 
"It's a paradox. It's a disappointment," he says. "Free markets are part of the Republican platform. If this issue really is about the free market, then let's let the consumer decide whether they're going to buy direct or not." 
Former California Assemblyman Lloyd Levine, now a consultant who specializes in clean technologies, says he understands the dealers' motivation to block Tesla but not the thinking of lawmakers. Levine, a Democrat, says freezing Tesla out serves no purpose for lawmakers on either side of the political aisle: Democrats who have traditionally favored environmentally-friendly technologies like Tesla's zero-pollution vehicles or Republicans who champion free markets heavy on consumer choice. 
"If you can separate it from cars for a moment, this is just the latest version of how new technologies are changing the old models of doing things, of how the marketplace operates," he says. "If I was in a legislature pondering one of these measures, I would ask my colleagues 'What problem are you trying to solve by preventing Tesla from selling cars this way?'" 
Tesla argues that their opponents' efforts are about strangling competition in the crib. On his blog, Musk says forcing Tesla to sell its cars through a web of existing dealers would be the death knell for his company because "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." Car dealers counter that the current system is best for consumers, offering them a way to shop for their best price, a place to have warranty work and other services done and, most of all, a way to hold manufacturers accountable to state and federal laws. And it is consumers, not Tesla, who are the most at risk by changing the system, they say. 
That stance doesn't carry much weight with Petersen or Levine. 
"A lot of these things are done in the name of consumer protection, but maybe what we need to do is provide more disclosure and more education and let consumers make educated decisions on the risk," Petersen says. 
"Are you trying to protect consumers or existing businesses?" Levine asks. "And if it's the businesses, then maybe those businesses ought to innovate and change as well." 
Meanwhile, at least three states have worked out compromise deals with Tesla. In April, Washington Gov. Jay Inslee (D) signed SB 6272, legislation that allows the company to keep selling cars through its galleries in Seattle and Bellevue, and to even open more showrooms if it likes. Slightly less Tesla-favorable deals in the works in New York and Ohio would allow the company to keep open current stores without further expansion unless it adheres to a dealership model. Legislation has also been introduced in New Jersey (AB 2986) that would allow Tesla to resume direct sales there. 
In the meantime, another factor has also come into play. With plans to mass produce a much less expensive model in the near future — and with Tesla starting sales next year in China, the fastest growing consumer market in the world — Musk is now planning a massive lithium battery "gigafactory" to build the low-cost battery packs he needs to run them. The plant is expected to cost up to $5 billion to build and produce approximately 6,500 well-paying jobs. And although California has spent millions of dollars on subsidies over the last decade to help him get his company off the ground, the Golden State's tough environmental laws were apparently too much this time around. 
Or were they? Although Musk recently told Bloomberg Businessweek that California's environmental regulations had taken it out of the running for the battery plant, Musk backtracked a bit during an earnings call with analysts last Wednesday. According to the Wall Street Journal, Musk said "I think California's still in the sort of improbable but not impossible category at this point," adding that "the governor and Legislature are going to try to do something" to help, though exactly what is not clear. And with Tesla wanting to break ground within a month or so, the chances of the Golden State getting the plant remain remote. 
With California most likely out, Musk has narrowed the potential plant site down to one of four states: New Mexico, Nevada, Texas or Arizona. Speculation is rampant that Musk will use the lure of the factory to influence population-dense Texas to change its perspective on his cars. Texas Gov. Rick Perry (R) recently indicated he would support taking another look at his state's dealership laws. 
Musk, however, complicated matters even further last week, telling Bloomberg he will mitigate the risk of another New Jersey-type last second snafu by moving forward on the plant "with more than one state, at least two, all the way to breaking ground, just in case there's last-minute issues." 
With so much on the line, will Texas or Arizona lawmakers be willing to forsake the powerful auto dealers' lobby if it means getting the battery plant? It is too early to tell, but to Petersen it doesn't seem like a hard question to answer. 
"I can't speak for Tesla," he says. "But if I was a business owner I would want to be in a state that is the friendliest to my business."

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