Tesla fights the Model T sys­tem of sell­ing cars

The elec­tric-car com­pany wins a leg­isla­tive fight in In­di­ana “Con­sumers … want a choice in how they buy their prod­ucts”

Bloomberg Businessweek (North America) - - Contents -

“We need your help,” Tesla wrote in a Feb. 19 e-mail to its cus­tomers in In­di­ana. The state leg­is­la­ture was about to move for­ward with a bill that would have forced the elec­tric-car maker to find a fran­chisee to op­er­ate its one show­room in the state, set­ting a prece­dent that would make it harder for Tesla to open oth­ers else­where. The com­pany claimed the leg­is­la­tion re­flected the in­ter­ests and in­flu­ence of one ri­val: Gen­eral Mo­tors. “Don’t

let GM tell you that your only op­tion is to buy a car from a tra­di­tional fran­chised dealer by shut­ting out Tesla,” the e-mail con­tin­ued. Tesla asked re­cip­i­ents to con­tact their law­mak­ers.

The com­pany’s ral­ly­ing cry worked. On Feb. 25, the In­di­ana Se­nate com­mit­tee con­sid­er­ing the bill de­cided to drop the amend­ment that would have forced Tesla to adopt the deal­er­ship model. But the brawl in In­di­anapo­lis opened a new front in the cold war be­tween Tesla, which leads the bat­tery-pow­ered­car mar­ket, and GM, which plans to in­tro­duce its elec­tric Chevy Bolt late this year. Tesla is also pre­par­ing its first mass-mar­ket car, the Model 3, ex­pected in late 2017. Both ve­hi­cles will go more than 200 miles on a sin­gle charge, and both are slated to cost less than $40,000 be­fore govern­ment in­cen­tives— dra­mat­i­cally ex­pand­ing the mar­ket of po­ten­tial buy­ers.

One ad­van­tage Tesla holds over a legacy be­he­moth like GM: the way it sells cars. Tesla, which based its retail op­er­a­tion on Ap­ple’s, sells di­rectly to cus­tomers. Rather than go to a deal­er­ship to hag­gle over mod­els on the lot, peo­ple who want a Tesla can place their or­der on­line or visit one of the com­pany-owned show­rooms that have popped up in malls and high-end retail strips in more than 2o states and Wash­ing­ton, D.C.

That’s rad­i­cally dif­fer­ent from the ap­proach taken by old-line au­tomak­ers, which sell ve­hi­cles through fran­chised deal­er­ship net­works that evolved a cen­tury ago. “You hear this from con­sumers all of the time, that they want a choice in how they buy their prod­ucts, in­clud­ing the op­tion of deal­ing di­rectly with the per­son sell­ing it to you—the man­u­fac­turer,” says Daniel Crane, a Univer­sity of Michi­gan law pro­fes­sor who spe­cial­izes in an­titrust and reg­u­la­tory is­sues. “The last thing GM wants to see is an up­start com­pany like Tesla come along, never get en­cum­bered with an in­ef­fi­cient dealer-dis­tri­bu­tion sys­tem, and ba­si­cally be able to leapfrog GM com­pet­i­tively.” GM has about 4,900 fran­chise deal­ers in North Amer­ica. The com­pany is pro­hib­ited from sell­ing di­rectly to cus­tomers al­most ev­ery­where in the U.S. be­cause of con­tracts with those deal­er­ships and state laws pro­tect­ing the fran­chises from fac­tory com­pe­ti­tion.

Over the past few years, GM and state au­to­mo­bile dealer as­so­ci­a­tions across the coun­try have been try­ing to close loop­holes to make it harder for Tesla to do busi­ness on their turf. In 2014, Michi­gan banned Cal­i­for­nia-based Tesla from open­ing stores or show­rooms in the state. Repub­li­can Gov­er­nor Rick Sny­der signed the bill a month af­ter a Mas­sachusetts state ap­peals court is­sued a rul­ing in Tesla’s fa­vor. Car deal­ers there had sued to force the com­pany to close its show­room in the Bos­ton sub­urb of Nat­ick. In the court’s rul­ing, Jus­tice Mar­got Botsford pointed out that leg­is­la­tion pre­vent­ing car man­u­fac­tur­ers from sell­ing to the pub­lic was “aimed pri­mar­ily at pro­tect­ing mo­tor ve­hi­cle deal­ers from in­jury caused by the un­fair busi­ness prac­tices of man­u­fac­tur­ers and dis­trib­u­tors with which they are as­so­ci­ated, gen­er­ally in a fran­chise re­la­tion­ship”—not at head­ing off com­pe­ti­tion from other car­mak­ers. The Fed­eral Trade Com­mis­sion echoed that logic when it called on Michi­gan to re­peal its ban on Tesla stores in a May let­ter. “Cur­rent pro­vi­sions op­er­ate as a spe­cial pro­tec­tion for deal­ers—a pro­tec­tion that is likely harm­ing both com­pe­ti­tion and con­sumers,” the com­mis­sion wrote.

In 2015, 17 bills were filed in 10 states con­cern­ing Tesla’s way of do­ing busi­ness, ac­cord­ing to the Na­tional Con­fer­ence of State Leg­is­la­tures. Sev­eral were backed by Tesla, in­clud­ing a suc­cess­ful ini­tia­tive to al­low di­rect sales in Ge­or­gia. A sim­i­lar ef­fort in Con­necti­cut failed.

In­di­ana’s bill, in­tro­duced in Jan­uary, sought to turn Tesla’s own ac­tions against the com­pany. In 2013, as part of a deal al­low­ing Tesla a li­cense to op­er­ate a show­room in North­ern Vir­ginia, the car­maker agreed to turn the store over af­ter 30 months if a qual­i­fied dealer ap­plied to run it. The loop­hole al­lowed Tesla, which has con­sis­tently as­serted that fran­chise deal­ers sell­ing gas-pow­ered cars have an inherent con­flict of in­ter­est when it comes to mar­ket­ing elec­tric ve­hi­cles, en­tree to the wealthy Wash­ing­ton sub­urbs. GM, see­ing an op­por­tu­nity to hold Tesla to its word else­where, ap­plauded In­di­ana’s at­tempt to force the com­pany to ob­serve the 30-month deal­er­hand off ar­range­ment. “Com­pe­ti­tion in a fair mar­ket only works when the same set of rules are ap­plied to all par­tic­i­pants,” Ja­son Wet­zel, a re­gional man­ager of pub­lic pol­icy for GM, tes­ti­fied at a Jan. 27 hear­ing in In­di­anapo­lis. “That’s what our bill would do.”

Af­ter the anti-tesla lan­guage was re­moved from the bill, GM spokesman Chris Meagher said in a state­ment that the com­pany wasn’t done fight­ing. “We will con­tinue to work on this is­sue in In­di­ana and na­tion­ally, and will con­tinue to ex­press our con­cern any­where we find mar­ket par­tic­i­pants are

op­er­at­ing un­der dif­fer­ent rules.” A Tesla spokesman said in an e-mail that the com­pany wel­comes fur­ther hear­ings in In­di­ana, “where we will be able to fully air the is­sues of ve­hi­cle sales and con­sumer choice in an open and pub­lic fo­rum.” One ally, Repub­li­can Rep­re­sen­ta­tive Curt Nisly, who de­rided the pro­posed leg­is­la­tion as a “kill Tesla” bill, agreed: “We should be wel­com­ing Tesla to the state of In­di­ana, not chas­ing them out.” �Dana Hull, David Welch, and Tim Hig­gins The bot­tom line Tesla won a lob­by­ing fight in In­di­ana to keep open its store there de­spite op­po­si­tion from GM and auto deal­ers.

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