Inside Tesla’s Latest Direct-Sales Assault

Johannes EiseleE/AFP/Getty Images

For Tesla, it’s been an unusually quiet month. We’ve grown accustomed to surprise announcements about power increases, developments on the Model X, or even the occasional rumor, like the one about the Model S getting a facelift. But with the company seemingly busy with several big projects, it’s been unusually tight-lipped.

Looking over its 2016 plans last month, we summarized:

…Tesla has a busy docket. First is making progress on the thousands of backorders (reportedly, the company has deposits and orders for over 20,000 of them). Second, the company will be putting the final touches on the Gigafactory, which will open up for production so that Tesla can begin on its third major project: getting the elusive Model 3 ready for its March debut. Lastly, it’s going to be ramping up production of the Tesla PowerWall up to speed.

So far, it’s been a nose-to-the-grindstone time in Fremont. Then this week, The Detroit News reported that Tesla has applied for a “Class A” dealership license in Michigan. For most automakers, this wouldn’t be a big deal, but for Tesla, which has spent the better part of three years in a public battle against several state governments to allow its direct-sales method, it appeared to be a rare defeat. Its current “Tesla Store” model cuts out privately owned dealerships altogether, something dealership groups – a powerful lobbying bloc in many states – are unsurprisingly opposed to.

Source: Tesla

But with everything else Tesla, the situation isn’t as simple as it seems. The company confirmed its application “in which it mandates the dealership look, act and do business exactly as the Tesla-run stores” to the paper, but also added:

“Submission of the application is intended to seek the Secretary of State’s confirmation of this prohibition,” said a Tesla spokesperson in an email to The News. “Once confirmed, Tesla will review any options available to overturn this anti-consumer law.”

So just like its cars, Tesla’s latest plan is to work within the existing framework to take down the obstacles holding it back. And if it works in Michigan, the direct-sales method could soon be coming to a state near you.

tesla model s
Source: Tesla

It’s a bold move for Tesla, but by no means a bad one. Best-case scenario: Tesla gets approval for a dealership license in Michigan, then get state officials to specifically confirm that a ban exists. Once confirmed, Tesla could take its case to the Federal Trade Commission, which could force the state to allow Tesla’s current model. The FTC has already come out in support of a direct-sales model, putting it bluntly in a May 2015 blog post called “Direct-to-consumer auto sales: It’s not just about Tesla:”

A fundamental principle of competition is that consumers – not regulation – should determine what they buy and how they buy it. Consumers may benefit from the ability to buy cars directly from manufacturers – whether they are shopping for luxury cars or economy vehicles. The same competition principles should apply in either case.

While the FTC’s sympathies may already lie with the EV startup, a definitive “no” from a state could be enough to force it into action. If that happens, Tesla will likely come out on top.

The losers in all this wouldn’t be the automakers or the car buyers, it would be the middlemen: the dealers. In New Jersey, Texas, Arizona, and Michigan, dealership groups have launched major PR campaigns against Tesla’s flat-fee, no-haggle system, arguing that it would signal the beginning of the end for their industry. In many of these states (excluding New Jersey), lobbyists working on behalf of dealers have sought to influence legislation to outlaw Tesla’s progressive model once and for all, and so far, they’ve put up a pretty tough fight.

Tesla Model S
Source: Tesla

In some places, dealerships have been pillars of a community for decades; they’re a part of a town’s history. But there’s also the incredible hassle associated with them. It’s a near-universal truth that no one likes going through dealers, and used sales through no-haggle companies like CarMax have have blossomed because of it. Automakers seem to know it too, with brands like Cadillac and Audi shifting to a Tesla Store-like experience (albeit through existing dealer networks) in order to sell their cars.

The worst case scenario is that the FTC refuses to weigh in and Tesla is left with a traditional dealership network in Michigan like every other major automaker, making it easier to buy and service a Tesla in the state than it is now. In that fight alone, customers win. Either way, traditional dealers have every reason to feel threatened by Tesla’s methods, and by now, they should be. Tesla’s latest move could mark the beginning of the end of this long battle. Let’s just hope that whatever the outcome is, the car buyer comes out on top.

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