Why Auto Dealer Associations Oppose Tesla

As Tesla Motors goes against the tide to establish its non-franchised retail stores and service centers to support its Internet-based sales, implied and stated allegations and assertions have clouded complex issues.

Among these are the question whether Tesla has become a darling of the public and media and is getting off easy while garnering lots of free publicity. Or, are state and national level auto dealer associations trying to strong-arm poor aspiring Tesla and its ideals intended to better the world? Or is Tesla a half-baked scofflaw with a pretty face and lots of promises that does not understand the precedents it could set to undermine the American economy? Or are the dealer associations the actual thugs, albeit dressed in business suits, protected by laws, money, legislators, and attorneys?

Tesla’s factory owned retail stores are located in high-traffic, upper socioeconomic-level retail areas, and aim to benignly present the award-winning Model S and models to come. They follow Apple stores in concept, and are being established with direction by former Apple marketer George Blankenship who’s now a VP for Tesla.

Tesla store locations from its Web site.

Tesla store locations from its Web site.

Its associates are friendly, upbeat, helpful, and not commissioned. It will be considered a job well done if after a person wanders into the Tesla store, he or she feels positively disposed toward Tesla and wants to come back.

The hands-on stores feel very liberating, and shun haggling and attempts to close the sale – things many car shoppers detest.

Meanwhile, this contrarian and seemingly egalitarian retail model has been opposed in various ways by state dealer associations including those in Colorado, Massachusetts, Illinois, New York, Oregon, Texas, and North Carolina.

Twenty nine states have some type of statutory prohibition on the books against factory ownership of new vehicle dealerships, according to Texas Auto Dealer Association President, Bill Wolters.

The National Automobile Dealers Association (NADA) told Automotive News that including these 29, a total of 48 U.S. states have at least some form of restrictions on factory owned dealerships. Tesla CEO and co-founder Elon Musk has said he’s aware of 20 states that make it “extremely difficult” for Tesla to operate as it would like.

A Tesla associate talks with a shopper at the new Tesla store in the King of Prussia Plaza shopping mall which just opened Friday, May 17.

A Tesla associate talks with a shopper at the new Tesla store in the King of Prussia Plaza shopping mall which just opened Friday, May 17.

George Blankenship has said Tesla rolls with what it has to, while otherwise being staunchly determined.

“We do what we’re capable of doing, and we do whatever they let us do,” said Blankenship to Automotive News. “It’s unique for each location. If we can’t be a dealer in a mall, we won’t do reservations on site. We tell people where to go on our Web site to make a reservation.”

And whether Tesla is getting a pass as a new-age Robin Hood of sorts or not, it does do fairly well in the deliberate campaign to rouse public opinion to its side, and has succeeded in getting its way in some fights to date.

“We certainly have a lot of battles in a lot of places,” said Musk. “So far we’ve been successful in those fights. It’s because right is on our side.”

The car dealer associations meanwhile have often been portrayed as self-serving, hypocritically opposing free trade for which they might otherwise clamor.

Skateboard chassis. Unlike Apple stores, Tesla lets you whip out your camera and snap away.

Skateboard chassis. Unlike Apple stores, Tesla lets you whip out your camera and snap away.

Musk has pointed out the seeming protectionist stance enforced by varying state-by-state laws is an American phenomenon not seen to such a degree in Europe.

Others have likened the car dealer associations to unionists who’ve gotten too big for their britches, are now getting their come-uppance, and others besides have expressed no love for auto dealers which have been generally accused of unethical practices.

A leaked e-mail from Musk himself about Texas says such attitudes have been stirred up by Tesla.

“If the people of Texas knew how bad this was, they would be up in arms, because they are getting ripped off by the auto dealers as a result (not saying they are all bad – there are a few good ones, but many are extremely heinous),” wrote Musk in an internal e-mail that was “unfortunately” leaked, according to a Tesla media rep. “For everyone in Texas that ever got screwed by an auto dealer, this is your opportunity for payback.”

Of this e-mail, in an interview with Automotive News April 15, Musk explained.

“One uses stronger language internally than one would use externally,” he said. “But I feel like we are being attacked all over the place by dealers, and they’re causing us to spend a ton of money on legal battles, and they’ve slowed down our licensing approvals at DMVs in various states, and they’re just generally being pretty negative and behaving in an anti-competitive way.”

And on and on goes the back-and-forth portrayal of Tesla’s views and those which compete against its vision. Both sides make points held by some as valid and compelling, but it all adds up to a question:

Aside from the letter of the law, who holds the moral and ethical high ground? Is it Tesla or the car dealers associations of America? Or is the truth somewhere in the middle?

Untold Story?

Yesterday we had an in-depth phone interview with Texas Auto Dealers Association (TADA) President Bill Wolters who had been recommended as highly knowledgeable on the big picture by NADA Vice President of Public Affairs, David Hyatt.

TADA President Bill Wolters.

TADA President Bill Wolters.

Wolters, who joined TADA in 1982 after 13 years working for Ford Motor Co., said Musk is waging a successful PR campaign. Wolters said he’s mindful of the good, the bad, and the ugly alleged against auto dealers, and associations representing them, but said their motives are not well understood.

“Most people don’t call us and ask for the dealers’ side and I’m grateful that you did,” said Wolters. “And a lot of the interviews that I’ve done over the phone they did not print what I said.”

We told him we would print what he said.

And what is said in Texas does matter a great deal to Elon Musk who has said Tesla is considering Texas for a second manufacturing facility, it views the state as second only to California in potential importance, and it’s a possible a hub also for Musk’s separately managed SpaceX operations.

Unfortunately for Tesla, Texas has very narrowly written franchise laws that Musk “cannot wiggle through,” said Wolters. In April, Musk traveled to Austin to speak before the state’s House committee on business and industry in defense of proposed House Bill 3351/Senate Bill 1659.

These have since died in committee, and Tesla has until Monday, May 27 for a sliver of a hope that some amendment could be approved to give breathing room to Tesla’s two retail locations in Austin and Houston presently hog-tied, Texas style.

The Texas state legislature meets every two years, so if Tesla is not successful, it could be two more years before it gets another chance.

“The governor can call a special session of the legislature at any time but it is unlikely that Tesla’s legislation would be considered in a special session,” said Wolters.

American Economic Safety Net

Wolters said a major concern of auto dealer associations everywhere is keeping hard-won rights and privileges afforded to businesses and communities both large and small.

Tesla’s efforts are generally seen as setting the stage to erode a careful balance upon which many people depend for their transportation needs, economic base, and even their direct livelihoods.

Franchise laws presently stipulate that if a dealership has viable management and can meet the manufacturers’ requirements for dealership standards, the manufacturer must continue to support the dealership, and cannot close it down.

“I tell people that franchised dealers have a greater presence in our state of any significant organization except the public school system,” said Wolters. “You don’t find major retailers or major businesses in these towns of less than 15,000 population and the reason they exist there is a lot of our citizens [with transportation needs] live there.”

Auto dealers have already seen what happens when franchise laws are suspended, Wolters said, citing General Motors’ and Chrysler’s bankruptcies in 2009 when many viable businesses across the country through no fault of their own were shut down to save the manufacturers.

Customers are free to get in and sample the powered, but otherwise not drivable cars' features.

Customers are free to get in and sample the powered, but otherwise not drivable cars’ features.

Texas has 1,240 dealers in 248 cities. Of these 163 operate in towns of less than 15,000 population, and parallel example exist in various states, Wolters said.

In these small towns, there are many grandfathered-in domestic car dealers, but a clue to what would happen if franchise laws were eroded is also seen by the rise of imports, said Wolters.

Not forced to locate franchises in small, less profitable towns, import car manufacturers that have come along in recent decades did not waste their time and money, and in so doing, contribute nothing to small town economies.

Wolters likens this to the effect of big box retailers which only bother to operate in denser areas. They go where the money is, and in effect deprive local communities of direct economic support. Similar ramifications can be seen by the arrival of a Walmart or Walgreens or Best Buy, said Wolters, which can choke off local businesses besides.

Tesla has shown it is going where the money is, and auto dealer associations are concerned, said Wolters, citing the precedent set by the imports.

NADA_Driving_states_economy

“They’ve proven where the manufacturers would go to make the most money,” said Wolters suggesting domestic makers are also loyal first to their bottom line but held in check by present franchise laws. “I don’t have a Toyota dealer in West, Texas [pop. 2,800], I don’t have a Honda dealer there; I don’t have a Nissan dealer. I have no import dealers, I have a Chevrolet dealer, and a Ford dealer.”

Having been down this road longer than start-up Tesla, auto dealers across the country echo Wolters’ sentiment, including Bob O’Koniewski, executive vice president of the Massachusetts State Automobile Dealers Association.

“If a manufacturer sees that Tesla is successful with this kind of business model, who’s to say they don’t break out their own EV product lines and create a separate system that bypasses dealers?” said O’Koniewski to Automotive News. “It’s extremely problematic.”

And a broad dealer network also constitutes a safety net, said Wolters, as it protects consumers with more dealerships to find recourse with their automotive issues even in remote regions.

“To me it’s part of the fabric of this country that car dealers of every size provide transportation but they also provide service and safety to the consumer,” said Wolters.

Hop in and check it out.

Hop in and check it out.

His view agrees with the NADA’s Hyatt who said in a statement:

“Buying a car is different from buying other products on the Internet. For example, when you have a problem with your iPad, it affects only you. When you have a problem with your car, it’s a matter of public safety, both for the driver and the driving public. The franchise dealer network promotes public safety and instills confidence in the consumer that there will be a place to go when help is needed.

Wolters also echoed Hyatt and added:

“When a manufacturer goes bankrupt – such as start-ups Fisker (which failed) and Coda – at least the independent franchised dealership remains, where a dealer is motivated to do everything possible to help the customer. When manufacturers discontinue a brand – such as Pontiac, Mercury, Oldsmobile, Suzuki, Saab and Saturn – auto dealers still remain and they are motivated to do everything they can to help the customer. In other words, manufacturers and brands may come and go but dealers are there for the long term.”

Who’s Really Served By Factory Direct?

Wolters contends fewer outlets do not automatically mean savings to the consumer, as has been implied with factory direct sales.

If franchise laws were successfully eroded, other manufacturers besides Tesla – which themselves continually propose legislation to weaken franchise laws – could re-arrange their distribution to maximize profits for themselves and not only starve or cut off some local dealers, but this could reduce opportunities for consumers as well, Wolters said.

“Now to me fewer dealers drives the price up. Fewer dealers drives the service down. Fewer dealers make people less safe on the highways because I don’t have a dealer in West [Texas] to take recalls,” said Wolters. “The price doesn’t go down when they have fewer outlets. And when they talk about the manufacturer being able to save more selling direct, there’s nothing that says they pass that along to the customer.”

The car business has actually become more consolidated with fewer dealers having to be very savvy to make a living from customers armed with the cost of the car, Wolters said, and who are willing to shop till they get the deal they want.

What’s more, Internet sales were not invented by Tesla, and dealers routinely get many sales via their Web presence.

Model S Signature Performance.

Model S Signature Performance.

Among retailers, Wolters said car dealers are unique in that dealer invoice can be discovered.

“I can’t go online and find the cost of a flat screen TV, a suit of clothes, a couch,” Wolters said, and the same is true of a Tesla Model S he added, which is sold at a non-negotiable price ostensibly to relieve buyers the stress.

In fact, Wolters said, the public has shown it has a love-hate relationship with car dealers. People say they dislike wrestling over price, but they insist on it anyway, he observed, because they want to save money.

With a vast franchised dealer network, profit margins have thus been driven down as a percentage of sales price in the past two decades, he said.

In the U.S., Wolters said NADA data shows the average price of a new car has climbed from $14,142 in 1988 to $30,910 in 2012.

Fierce competition and consumers armed with information have driven gross profits down to around 4.15 percent, or an average of $1,283 out of the $30,910. And from this, dealers must pay commissions and overhead and might keep about $200 more or less.

Not so incidentally, Wolters observed states benefit from the present franchise system too, as they sit back and take in taxes on par with a dealer’s profits before expenses are collected, and the state shares a cut with no one.

Click on to enlarge.

Click on to enlarge.

By his estimation, dealers which represent a half of 1 percent of all operating businesses collect a good 6 percent or more of state taxes.

“So they are the largest uncompensated tax collector in the country,” Wolters said, and the state makes more on a car sale than a dealer.

If you think legislators considering whether they should erode franchise laws do not listen to this line of reasoning, you’d be sorely mistaken.

HybridCars.com did attempt to get equal commentary from Tesla, but requests via phone and e-mail to its communications people were not returned.

In this store, one can complete a sale as well as schedule a test drive in the parking lot. Tesla has two cars there on chargers. If needed, an associate can walk a customer through order placement in the store.

In this store, one can complete a sale as well as schedule a test drive in the parking lot. Tesla has two cars there on chargers. If needed, an associate can walk a customer through order placement in the store.

Musk has told Automotive News many points from his side of the story, however.

“We’re in a tough spot because I’m not fundamentally opposed to franchising, but I think it’s really difficult for a new company with a new technology to be franchised. It’s not possible to effectively sell a new technology like electric vehicles, for a dealer to do that, without undermining the story behind gasoline cars,” said Musk on April 15 regarding his then-recent testimony at Texas.

“In Texas, it’s the toughest of all because [the dealer association president] about 20 years ago was a really tough dude, and he worded it six ways to Sunday. Like Green Eggs and Ham, you know, Musk added, “If you’re a manufacturer, you cannot sell it any which way, no matter what. You can’t sell it in a house, can’t sell it in a mouse, can’t sell it in a grouse. It’s like, OK, wow. You can’t sell it.”

The road Tesla is taking is actually costing it millions, by Musk’s estimation. If it chose to, it could take a simpler path involving Tesla-only franchises – stores Tesla could not own but it could select management and have some control – and these could meet state laws.

“It would be cheaper for us to use the franchise system,” said Musk to Automotive News, “except I don’t have confidence that the franchise system would actually sell cars. It would not sell enough volume for us to be successful.”

Musk told Texas legislators Tesla would consider franchising but only after establishing a minimum sales threshold.

“If electric vehicle sales from Tesla exceeded 5 percent of new car sales in the state per year, then I’d say yes to that. We’re a million miles away from that,” Musk said to Automotive News.

The idea that a free market, something Texas normally prides itself on, was also broached.

“In Texas, we’ve got a really difficult battle,” said Musk who also had a discussion with the state’s Governor, Rick Perry, adding “it’s unTexan to have this kind of regulation.”

Immovable Object vs. Irresistible Force

What’s happening with Tesla and auto dealer associations over myriad nuanced details – but the same general issue – is a classic case of culture clash, and agreement to disagree.

Wolters is not buying the notion that Tesla’s consumer-friendly model is really going to be any better.

Actually, he said, there’s “incredible competition” among dealers to maintain consumer satisfaction. This is true if dealers expect to stay in business, and even be treated as well by the manufacturers upon which they depend.

Bad old days of unethical and manipulative car dealer experiences do however linger as memories, and Musk has said they will be overturned with Tesla’s sales and service model.

Monroney label from the white Model S Signature Performance. It says: $106,850.

Monroney label from the white Model S Signature Performance. It says: $106,850.

Wolters conceded ambivalence exists.

“I think there’s probably overwhelming public support to get rid of car dealers. But when it comes to negotiating the price of a car, in realty, they operate just the opposite,” he said of car shoppers. “What we find with most buyers is they dislike car dealers but they like their dealer.”

Further, Wolters said dealers are among the most highly regulated, and said this to Musk who he recently visited “with my hat in my hand” in Palo Alto. Wolters said he explained he wanted to help Musk and Tesla succeed, is in no way against electric cars, wanted to help Musk find a legal compromise that would work for him, but Musk would hear none of it.

What does he think Musk’s core motives are then?

“Well, I think his core motives are, one: to publicize Tesla. I think this is a public relations campaign to promote his vehicle,” said Wolters.

Musk has been getting lots of free press, he said, and waging a grassroots campaign to stoke flames of public support, Wolters said, adding that any press is positive press, and in his view, most press has not been that bad, as the charismatic Musk has won over the media.

Tesla’s efforts to rouse support was suggested in Musk’s leaked e-mail.

“The Texas auto dealer association is trying to stop us from selling cars in the state and they have way more money and power than we do with legislators,” Musk wrote, “so we need to rally the people pronto to stop them from winning.”

KOP_Skateboard

Secondly, Wolters suspects what Tesla poses as a more egalitarian way will ironically erode safeguards to the marketplace and economy although there may be many who have not seen this.

Musk wants to “give himself a free reign in the marketplace without competition, said Wolters. “He doesn’t want his cars sitting next to a hybrid or a diesel or another battery powered vehicle … And to me that raises a red flag if he just wants to have an isolated showroom that a consumer cannot compare his product. There are a lot of magnificent automobiles that are wonderful for the environment in showrooms.”

But Musk told Automotive News a different story.

“There’s better things to do than attack Tesla. We’re a little company selling a small number of electric cars. And we’re just trying to make a go of it and not be yet another body in the graveyard of car company start-ups,” said Musk. “We’re not trying to poke a finger in their eye or do something unreasonable. If I thought there was another way to be successful, I would take that path. But the evidence suggests if we don’t at least initially pursue a direct sales model, we will fail.

“In the future I could certainly see us embracing a mixed model, where there’s a mixture of company-owned and franchised stores. There are good examples of those, like McDonalds. But we need to be a bigger company.”

What is a “bigger company” in Musk’s estimate?

“Roughly 1 percent,” he said. “That’s not a large number. But I think we’ve got to be at least 1 percent of new car sales in America, which would be around 130,000 or 140,000 cars.”

And On It Goes

Tesla is operating successfully in some states now, and is undoubtedly full of promise.

Musk said to Automotive News he would consider going above states by lobbying the U.S. Congress for legislation allowing direct sales of electric cars made by startup companies. He said such legislation could be tied to an energy or transportation bill.

He said he could also file a federal lawsuit challenging state restrictions as unconstitutional violations of interstate commerce.

The constitutionality of the franchise system was already evaluated a decade ago however, said Wolters, who gave testimony before the Federal Trade Commission on this very subject. It was found to be constitutionally valid.

But Musk said he was still mulling his federal-level options.

“If we’re seeing nonstop battles at the state level, rather than fight 20 different state battles, I’d rather fight one federal battle,” Musk said.

This Tesla store couldn't be any closer to an Apple store.

This Tesla store couldn’t be any closer to an Apple store.

The chairman of the NADA, David Westcott, was quoted as saying this would be a “mistake” and “NADA will vigorously defend the franchise system.”

The NADA has attempted to step back for now, although it has previously voiced strongly that Tesla will learn the error of its ways.

“The National Automobile Dealers Association supports a state’s right to enact and enforce auto franchise laws in the public interest,” said Hyatt. “State governments require the dealer to invest in brick-and-mortar facilities to ensure there is an independent franchised dealer available to car owners for the life of the vehicle, not just at the point of sale. Tesla should be required to play by the same rules as everyone else.”

But the game is not fair, unrelenting Tesla has insisted while in other quarters it is being rewarded with much praise for its product and the hope it represents to a public among which many remain largely unaware of how alternative vehicles operate, or that Tesla even exists.

Wolters said Tesla’ ability to sell the sizzle and dazzle the less-than-fully informed has further enabled Musk in efforts to win the hearts and minds of supporters, many of which cannot afford his present products, but hope to in a few years when Tesla releases a less-pricey car.

All of which brings us back to the question of who holds the moral and ethical high ground? Both sides say they do, observers have their opinions, but this ultimately has yet to be fully determined.