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Tesla Operating Illegal Stores, Really?

Tesla Accused Of Operating Illegal Showrooms In 4 States
October 10, 2012 | 3 commentsby: TheCarConnection | about: TSLA By Richard Read

Given today's high gas prices, many car shoppers are turning their attention to hybrids and other fuel-efficient vehicles. Electric cars like those built by Tesla (TSLA) could be attractive to better-off buyers, but Tesla is facing some legal problems that may slow the selling process.

Automotive News reports that dealer networks and government regulators across the U.S. have begun to question Tesla's sales techniques. And in several cases, they've threatened legal action to stop the startup.

A New Paradigm for Auto Sales

According to the National Automobile Dealers Association, 48 states have franchise laws that forbid or restrict the ability of automakers to sell vehicles directly to the public. That's why dealerships tend to be independently owned and operated. Tesla showrooms, on the other hand, are owned by Tesla itself.

However, Tesla says that the majority of its showrooms -- designed by George Blankenship, the man behind Apple's outrageously successful chain of retail shops -- don't actually conduct sales; they simply share information about Tesla vehicles. When it's time to seal the deal, Tesla staff point prospective shoppers to the automaker's website, where they can customize and reserve their vehicle.

Other dealers aren't buying it. They insist that even though Tesla's showroom staff don't technically sell vehicles on site, they do everything else that a traditional dealership would do. In short, they argue that by facilitating the sales process, Tesla showrooms are essentially conducting sales.

To date, questions about the legality of Tesla showrooms have arisen in four states: Illinois, Massachusetts, New York, and Oregon. Because franchise laws vary from state to state, each case is a bit different. Some complaints have been brought by dealer associations, and in Illinois the challenge was lodged by the Secretary of State. Tesla says that it is doing everything it can to comply with each state's regulations.

Tesla currently maintains 17 showrooms in 10 states and the District of Columbia, but it's set to open another six this fall. As Tesla expands operations and its reputation grows, we'd expect to see many more challenges to its business model down the line.

Will Tesla eventually shift to a conventional model of independently owned dealerships? Or will it bring about a change in the way that state laws are written, laws generally written decades ago when there was far less competition in the marketplace and states wanted to put big automakers on more equal footing with smaller ones?

And more importantly, will Tesla's unusual sales paradigm -- which has recently been copied, in part, by Audi -- change the way that automakers interact with customers?

This is absurd. Has anyone felt that they were "sold" a car in the stores? I sure didn't.

One of many examples of protectionist laws that stifle innovation and end up costing everyone more.

God forbid someone should come up with a better business model...

+1 tesla.mrspaghet...

Big Oil doesn't like it, Detroit doesn't like it, and now the dealers' associations don't like it. Next will be the gas station associations. Resistance is futile.

Great news!

Just tells me that the other makers are getting nervous that Tesla may be on to something ....

As long as the person who signs the deal in back in Freemont I think there argument is invalid.

@adurstewitz

Unfortunately, it costs nothing for dealers to make the claim and get their state AGs on Tesla's rear end. But it does cost Tesla money to defend itself whether the suit is baseless or not.

And of course, my original point isn't that Tesla is not guilty of violating the law (it probably isn't), but that the laws shouldn't be there in the first place.

Why shouldn't you be able to order a car directly from Ford, Toyota, Nissan, etc, as well as Tesla?

People resort to low tactics when threatened. Car salesman don't have a high regard in this respect in general, so it shouldn't be a surprise that their employers aren't afraid to take the low ground...

I can't wait to get my Model S I'm TRIED OF FILLING MY G55 AMG OF $300/WEEK.

This is a sad state of affairs when innovation is stifled. I bought gas this AM and am too very tired of going to the gas station! Innovation will win out in the end!

Whatever the legal definitions, it will be some time before anyone can "buy" a Tesla from any location. At best, they could be called 'Reservation Centers'.

I look forward to the day when a buyer can walk onto a car lot and purchase a Tesla. That will be when production has caught up to demand and cars have been built which don't have a buyer chomping at the bit to take delivery.

@BrianMRolfe

I'd be happy to someday not have to go through a dealership at all. Configure your car online and pick it up at some kind of regional distribution center when it's ready. Know exactly what you're paying for, get exactly what you want, no upselling or games.

Avoid all the things everyone loves (NOT) about dealerships, along with reducing the ridiculous waste in the form of inventory which the current 'dealership' system perpetuates.

If you are going to rock the boat, you have to expect waves!

Don't be mad at me. Eventually, I think TM will adopt the independent dealership model. They will earn hefty franchise fees, lower their overhead, and most of all, when supply catches up with demand dealers will place orders to keep Fremont busy. Imagine being a house rich-cash poor billionaire.

One last point. If TM had gone the traditional route from the beginning, the dealers would have committed to purchasing the first 2-3 years of production. Sigs would be marked up $25K over MSRP and normal production marked up to whatever the market would bear. Supply/demand. This would not have been ideal for launching a new product or building new name.

I have found nothing but great honest technical help at the show rooms. Zero pressure to order a car. Honest answers and a willingness to admit they don't know everything but will help me get the answer. I love this environment vs the other way. If the current laws were designed for a level playing field among small and large manufacturers, I would say Tesla actually found the best way to actually achieve this within the law.

Same boat here, I've been to the Chicago store many times. Most of the time on Sunday and they let me know they cannot tell me any prices for the car options as we look through them. So we pull up the TM webiste on our phone and do it that way. Not a big deal to me but never been pressured towards buying.

Tesla will not franchise out dealerships. They also will not inventory cars. That is straight from GBs mouth. The cost of holding inventory of cars is the real role dealerships play as an advantage for the other OEMs.

Tesla's challenge will be to always ramp production to meet demand. Not an easy task.

GB said that the goal is to have a 3 month wait form reservation to delivery. I think that's a perfect amount of time.

* Put down deposit followed by a 30 day cool off period for you to back out or get more excited.
* Configure your car - wait 30 more to allow Tesla to build up a batch of similar cars.
* Get the delivery window call with the window starting 2 weeks out.
* Get the a call in 2 weeks with 2-3 days to choose from for delivery.

90 days is pretty short, in comparison to the old guard. well I have only 1 data point: a friend who ordered a BMW, because he did not want what was on the lot and it took 6 months to arrive.

@tesla.mrspaghet..., based on what I read in one of the other forms here, my understanding is that this is needed to to protect the consumer.

If anything happens to the vehicle - it is a lemon, its warranty needs to be honored, parts break, etc., then the consumer can take it to the dealership and expect the contracts to be honored. In the absence of a dealership, the consumer has to take up this issue in the car manufacturer's state of operation. For Tesla, it will be CA.

As such a scenario will place undue burden on the consumer to have his/her needs addressed, dealerships are required to be operating in the vicinity of the end consumer and be separate and independent from the manufacturer.

I could be wrong/incomplete in my understanding.

~ Prash.

Several people have mentioned it, but these "francise" laws, a lot like professional licensing laws, are there to protect existing businesses at the expense of new ones. They are simply erect a barrier to competition, which is bad for the economy, bad for workers, and bad for anyone that has a new idea!

Same on these states!

@prash.saka

based on what I read in one of the other forms here, my understanding is that this is needed to to protect the consumer.

Bull.

If anything happens to the vehicle - it is a lemon, its warranty needs to be honored, parts break, etc., then the consumer can take it to the dealership and expect the contracts to be honored. In the absence of a dealership, the consumer has to take up this issue in the car manufacturer's state of operation. For Tesla, it will be CA.

Who says they can't return it to the distribution center where they picked it up?

As such a scenario will place undue burden on the consumer to have his/her needs addressed, dealerships are required to be operating in the vicinity of the end consumer and be separate and independent from the manufacturer.

Any lemon/warranty situation is by definition a burden on the consumer, but dealerships are not the only way to handle it. E.g., distribution centers.

I could be wrong/incomplete in my understanding.

There is no right or wrong way to approach this, there is only an ability or inability to think outside of existing convention.

@tesla.mrspaghet

I agree that your idea of never having to go through a dealership is nice.

The "day" I was looking forward to, where you could buy a Tesla off a lot, was a reference (too subtle a reference) to the day when I might find a used Tesla on a dealer lot.

I might not live long enough to see the day when one of you 'upgrade' to a new model and trade in your old one, but it is likely the only way I could afford one.

(A guy can dream can't he?)

The dealerships obviously don't want this type of car retailing to catch on. They are trying to protect their current way of business, and is some states, they already have laws that protect them like this. (Not that I think these laws are good, I'm just saying, they are there)

As far as I can tell, Tesla has been staying on the right side of these laws because they don't technically sell cars in their stores.

Much to do about nothing. Can you imagine for a nano second any major auto maker handling sales and service the way TM does? Frankly, the independent dealers and the auto makers deserve each other.

At the BMW dealership, where I use to work in So. CA, they had six full time staff to handle the loan and rental car ‘fleet’ for the dealership. I suspect that is six more than TM has nationwide.

The company address on my MVPA says Oak Brook, IL. I suspect this is to generate all of the local taxes that must be paid. FYI, total taxes and fees (i.e., non-Tesla charges) add 8.5% to the cost of the vehicle. Most of this is sales tax. Geesh!

TM's store model is clearly the direction of the future, and old line automakers will eventually adopt it.

Why shouldn't you be able to buy a Ford too at a better price under a more efficient distribution model?

Traditional car dealerships are not a model that will make sense economically in the future. Land costs, inventory costs, conflicting incentives for dealer vs. manufacturer ... all are artifacts of the way we had to do things before we had online alternatives. They all add to the cost of getting a car.

Amazon will not be smaller 5 years from now, but lots of brick and mortar retailers will be. This trend is broad and inexorable.

During the transition, most auto dealers will fight this tooth and nail, instead of reinventing themselves to stay relevant. They will use legislative lobbying to block change.

If your state legislature is dumb enough to help them limit consumer liberty ... fire them.

Tesla doesn't have shops: it has information kiosks that are a little bigger than the average :)

I'd love to know how someone is gonna argue that the Tesla boutiques are doing any selling when all transactions are done online with Tesla's factory/plant in CA.

The TM Bellevue, WA store is on the second floor of a mall, next to Market Optical. I don't know how they get the demonstration cars in there, but you'd be hard pressed to find a car lot.

@electricblue0303 "FYI, total taxes and fees (i.e., non-Tesla charges) add 8.5% to the cost of the vehicle. Most of this is sales tax. Geesh!"

Thank you, Washington State! No sales tax on electric vehicles in WA. :)

I was just talking to a Renault dealer in Denmark. He said 85-90% of the customers who buy a car from that dealership already know which model and options they want when they come through the door. They have done their homework on the web.

This is the stupidest thing I have ever heard, and what is inherently wrong with America! The VERY FACT that I get to buy my Tesla directly from Tesla, and not some cruddy, immoral, stupid dealership, is a HUGE factor of what makes me feel more secure with buying this car.

I'll bet these are Red States, that have these laws... Go figure.


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