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Tuesday, 24 September 2013 17:13

Tiny Tesla Surges in Status and Stock Price, Despite only Three Galleries in Texas

Tiny Tesla Motors has made news recently for two remarkable achievements.

One is its unprecedented perfect 5-star rating from the NHTSA (see Attanasio article HERE); the other its stellar stock price five-fold increase this year. However, Tesla continues to run into obstacles to its growth, not the least of which is Texas' vehicle franchise sales  laws.

Tesla Motors has three Texas showrooms for its luxury electric cars, one each in Austin, Dallas, and Houston, but you can’t call them stores. Texas law prohibits carmakers from selling directly to customers, as Tesla does elsewhere. Instead, the companies must sell through franchise dealerships, something Tesla so far refuses to do. Tesla tried to get the state’s law changed, to no avail. So instead of stores, Tesla’s Texas facilities are “galleries,” where customers can examine the company’s $62,400-plus Model S sedan and talk with Tesla reps about the car’s features, but can't buy them there. You can buy one online.

“They can’t tell you the price of the car, how to buy the car or give you a test drive,” said Diarmuid O’Connell, Tesla’s vice president of business development. “All they can really do is tell you about electric cars.”

As Tesla expands across the country, the company has run into the traditional auto dealership and its franchise model. Dealer associations in several states have tried to shut out Tesla with lawsuits and legislation, viewing the company’s direct-sales model as a challenge to their way of doing business. They aren’t necessarily worried about Tesla itself. The Palo Alto company delivered 5,150 cars in the second quarter against a forecast of 4,500 and turned a profit of 5 cents per share while analysts expected a loss of 17 cents. Nonetheless, it remains tiny by the auto industry’s standards, planning to sell just 21,000 cars worldwide this year. The car dealers don’t want other automakers to follow Tesla’s lead, opening company-run stores that would compete with franchisees.

“They feel threatened by this, as they have when other companies have tried to do this in the past,” said Jack Nerad, editorial director and executive analyst at Kelley Blue Book. “Dealers are part of a well-developed supply chain, and they want to keep it that way.”

To Tesla, the fight represents a classic Silicon Valley story. “They go to the legislature and say, ‘We need protection from innovation,’ “ O’Connell said. “There’s really a fundamental question here: Should the government be prescribing a business model for automotives? Apply that argument, and we’d still be riding horses and delivering messages by hand.”

To the dealer associations, direct sales could destroy a franchise system that they say works for manufacturers and consumers alike, even if many buyers don’t realize it.

Texas, for example, has auto dealerships in 284 cities and towns, according to the Texas Automobile Dealers Association. Of those, 163 towns have fewer than 15,000 residents. If the auto industry switched to direct sales, the car companies wouldn’t maintain stores and service centers in the smaller communities, said the association’s president, Bill Wolters.

“The manufacturers would do exactly like the big-box stores have done with all the other products—they would only be in the metropolitan areas and big cities,” Wolters said. “The franchise system provides a much broader network of dealers than you’d have if manufacturers controlled the outlets.”

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