Last week, New Jersey announced that it would begin enforcing a ban on the direct sale of automobiles by manufacturers, a change that will cripple electric-vehicle maker Tesla’s business in that state. The company’s CEO, Elon Musk, responded with a fiery blog post accusing state legislators of cutting a backroom deal with traditional franchised auto retailers — retailers with which Tesla has consistently refused to do business — and playing by “mafia” rules. It was tough talk from a brilliant and powerful billionaire, but the Garden State’s car salesmen aren’t taking the criticism lying down.
“He needs to stop and take a breath.”
“He needs to stop and take a breath,” said Jim Appleton, the president of the New Jersey Coalition of Automobile Retails, or NJ CAR. “If you’re an internet billionaire, maybe you think the world revolves around you, and the world springs from your laptop. Well, I got news for him. This is not a new law, Tesla is operating illegally, and as of April 1st, they will be out of business unless they decide to open a franchise.”
Appleton is right that New Jersey had a law on the books banning direct sales from manufacturers, but that was a relic of a bygone era before dealerships were a firmly cemented incumbent. The state’s motor vehicle commission had issued two licenses to Tesla to operate its own stores in New Jersey. Given the recent rule change, however, those licenses will not be renewed when they expire on April 1st.
This may set a painful precedent for Tesla: state legislators in New York and Ohio are also considering an updated ban on direct sales, and byzantine rules in Texas prevent the company’s corporate-owned dealerships from even discussing pricing with potential customers. Tesla recently escaped a similar fate in North Carolina by offering state legislators free rides around the capitol.
New York and Ohio are also considering a updated ban
Tesla has steadfastly refused to work with franchised dealers and has promised it will continue to sell direct. Musk says this is necessary to survive, arguing that dealers will always prefer to sell gas-powered cars over electric, which he claims require fewer repairs and thus drive less recurring revenue to the dealership. He points to the failures of Fisker and Coda, two American electric-car companies that worked with dealers, as evidence.
“This Musk guy, he wants all the profits for himself.”
This conflict basically boils down to money and who gets a piece of each auto sale and the subsequent repairs. Without a franchised dealer, Tesla is avoiding the middleman. “This Musk guy, he wants all the profits for himself,” says Tom Dougherty, a 25-year veteran of the business who now works in sales at a luxury vehicle dealership in upscale Princeton, New Jersey. “They wanted to go direct, which means no sales force. That’s cutting out a lot of people. No way that’s gonna fly.”
While Tesla represents only a small portion of auto sales in New Jersey, the state was a major market for the high-end electric car company. It represented the fourth largest market for luxury automobiles — like Tesla’s Model S, which can tip the scales past $100,000 — trailing only New York, Florida, and California.
“His legal opinions are about as sound as my programming abilities.”
In his response to the New Jersey ban, Musk recommended customers head across the Hudson River to visit the Tesla showroom in lower Manhattan. But unless Tesla can find a way to match the influence auto dealers currently have with state legislators, the situation in New Jersey could be a harbinger for the company’s business prospects in many other parts of the country. “Mr. Musk is a brilliant man, and Tesla is an innovative company. We can all respect that,” says NJ CAR’s Appleton. “But he doesn’t get what it takes to do business in New Jersey. With all due respect, his legal opinions are about as sound as my programming abilities.”