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Are car dealers relics in 2014?
That's the heart of the argument between New Jersey and Tesla. The New Jersey Motor Vehicle Commission voted on Tuesday to ban direct sales of Tesla in the state, starting April 1.
The press, particularly tech blogs that are justifiably enamored with Tesla, were quick to frame the conflict as New Jersey vs. Progress and intimated that the state's MVC is in the pocket of a powerful car dealers' lobbying group.
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"I don’t doubt that moves to block Tesla sales are merely short-term pauses — raise your hand if you actually think that local dealer groups can hold back the tide of change," wrote Alex Wilhelm of TechCrunch. "Banning Tesla is an index of the corruptness of state governments as banning Uber is of city governments," tweeted Paul Graham, an influential Silicon Alley investor.
That may be the case, but the reality is probably more complicated than that.
First, let's look at Telsa's claim that Gov. Chris Christie is going "outside the legislative process by expediting a rule proposal that would completely change the law in New Jersey."
Actually, it would require that Tesla conform to the same law that all the other automakers do: To refrain from selling directly to consumers. According to a rep from Tesla's archenemy in the state, the New Jersey Coalition of Automotive Retailers, Tesla improperly received two licenses from the NJMVC allowing it to sell cars directly in the state. NJCAR, which spent more than $155,000 lobbying last year, is definitely opposed to the idea of Tesla selling directly to consumers in the state. The organization proposed a rule back in October that would ban direct sales of Teslas. (Two other states — Texas and Arizona — also ban direct sales of Teslas.)
Tesla reps declined to comment on this story.
Tesla claims it had gotten word from Christie's administration that the state would hold off on issuing the rule until there was a public discussion. Instead, the rule was passed on Tuesday. A Christie rep told The Star-Ledger that the administration never agreed to Tesla's stated deal: "Since Tesla first began operating in New Jersey one year ago, it was made clear that the company would need to engage the Legislature on a bill to establish their new direct-sales operations under New Jersey law," spokesman Kevin Roberts told the newspaper. "This administration does not find it appropriate to unilaterally change the way cars are sold in New Jersey without legislation and Tesla has been aware of this position since the beginning."
Jim Appleton, president of NJCAR, told Mashable that there are three ways Tesla could operate in the state: by conforming with the current law and selling through dealers, by changing the law so that all automakers can sell directly in the state or by getting a special exception so that it can sell directly but competitors can't.
Appleton offered the slippery slope argument. Although he agrees that Tesla is a fine product, if all automakers sold directly, then consumers would be losing their chief advocate, the local dealer. In particular, when a customer comes in to make good on a warranty, the manufacturer sees see "nothing but expense and a headache," Appleton says. Dealers get paid to fulfill such contracts, though and have a vested interest in representing the consumer against the automaker. Without such a bulwark, he argues, consumers might get burned by less reputable automakers.
Not everyone sees it that way, of course. In the popular imagination, a car dealer is a charlatan, one who makes the process of buying a new car about as pleasurable as a colonoscopy. Realizing this, carmakers have in the past sought to cut out this middle-man with limited success. In Germany, for instance, Daimler last year was considering shuttling some company-owned Mercedes-Benz dealerships to be more competitive with Audi and BMW, which have proportionally more franchised dealerships. In Germany, Daimler found that the dealerships were expensive, in a large part because it cost more to pay its own employees than it did to run a franchised dealership.
U.S. automakers who have dabbled in company-owned stores in the U.S. have had the same experience. "It turns out that having workers whose pay depends on sales, who know customers personally, who can anticipate demand and who aren't shuffled around or overruled by a remote marketing manager sells more cars," wrote Justin Hyde of Motoramic.
Roger Lanctot, associate director of global automotive practice at Strategy Analytics, says dealers are an asset, albeit an unappreciated one: "I believe in dealers but in an ideal world you wouldn’t see your car dealer very often, but when you need him you want him to be there in a timely, trustworthy manner," he says. "Dealers ought to be embraced as a key competitive edge the car makers have over Tesla, but to be leveraged to some advantage they need to be seen as more than just a necessary evil."
Luckily for Tesla, Lanctot says, the brand has a stellar image and its cars don't seem to need much maintenance. "New kid on the block Tesla has an amazing brand halo which seems to inoculate them against all negative perceptions and consumer recriminations," says Lanctot. "Go figure."
If anyone should be able to test a dealership-less model then, it's Tesla. For that reason, the company's argument that it deserves a special exception in New Jersey makes sense. In the auto world, Tesla is special. However just because Tesla is a new, disruptive company doesn't mean it's on the side of the angels. Uber claims a similar pedigree, but its surge pricing is a much worse deal for customers than rates that heavily regulated taxis provide.
For similar reasons, consumers might find new things to love about car dealers if Tesla succeeds in shaking up the auto industry. Or they may conclude that Tesla is right and car dealers don't serve a purpose anymore. People in New Jersey, Texas, Arizona and the other 47 states should get to decide that for themselves though. The bad news for Tesla is that that's not the case.
"Car dealers have an enormous amount of political clout at the state house," says David Kiley, president of New Roads Media and longstanding auto analyst. "They give a lot of money to politicians to keep franchise laws tough in protecting their business interests. They also give a lot to the communities. Musk is facing a political buzz saw in every state he goes into."