March 10 (Bloomberg) -- To hear Ohio car dealers tell it, the sleek Tesla Motors Inc. showroom that opened last year in a Columbus mall is a threat to a bedrock U.S. institution.
These businesses are pressing lawsuits that would stop Tesla’s showroom and a second in Cincinnati from letting people order customized Model S electric cars right from the factory. They argue that Tesla’s direct sales violate state automotive franchise rules. After failing in a previous attempt last year, the group also backs legislation pending in a Senate committee to force Tesla to use franchise dealers if it wants to open more sales points in the Buckeye State.
Car-sellers in states including New York, Minnesota and Georgia have also sought in the past year to block Tesla from directly retailing its models. Texas dealers successfully backed a law setting the nation’s toughest restrictions on Tesla, and Virginia and Arizona also imposed limits on its retail activities.
Dealers fear Tesla’s model would set a precedent that could let other automakers sidestep the way independent franchisees have sold and serviced vehicles for eight decades. If Tesla succeeds in bypassing middlemen, some argue then future startups or entrants from China or elsewhere could sell directly or even create online retail outlets that sidestep dealers entirely.
’Mickey Mouse Thing’
“I don’t want ‘Hydrogen Motors’ to come along five years from now or some other Mickey Mouse thing to come along and then just jack up the industry,” said Rhett Ricart, president of Ricart Automotive in suburban Columbus and a plaintiff in a lawsuit filed against Tesla in Ohio. “It’s not right.”
Tesla is “building this great car,” Ricart said. “But the reason these laws are in these states is so that it protects the consumer.”
Tesla argues company-operated stores are necessary as it develops because it has to both sell vehicles and promote a new technology, Diarmuid O’Connell, the company’s vice president of business development, said in an interview last week.
“I disagree with the characterization that this is disruptive,” he said. “It’s only disruptive from their point of view. It is logical and pragmatic from our point of view.”
This isn’t the first time that 42-year-old Tesla co-founder Elon Musk has disrupted established industries. He helped remake online commerce as a co-founder of PayPal Inc. and has more recently shaken up the auto, aerospace and solar-power industries. Last month he announced plans to build the world’s largest battery plant to supply Tesla cars and provide flexible power storage that could rattle the power-grid model by letting customers power their homes for spurts.
Tesla’s Model S, which starts at $71,000 and can sell for more than $100,000 with options, leads in Consumer Reports rankings as the best car of 2014. Shipments of the electric sedan from Tesla’s Fremont, California, factory are to grow more than 55 percent this year, with sales expanding in Europe and starting in China this month.
Shares of Palo Alto, California-based Tesla are up sixfold for the past year, which has helped push Musk’s wealth to about $12 billion this year, according to the Bloomberg Billionaires Index. Tesla slipped 3 percent to $238.84 at the close in New York. The shares have risen 59 percent this year.
“Elon Musk certainly has the resources to fight this battle,” said Aaron Jacoby, a Los Angeles-based attorney who leads the automotive industry practice for Arent Fox LLP and says he hasn’t done work on cases related to Tesla. “While any individual dealer may not be worth as much as Elon, there are thousands of them.”
Tesla faces two lawsuits in Ohio: One in Franklin County Common Pleas, where a magistrate has recommended dismissal for lack of standing, and the dealers have objected. Dealers also filed an original action in the 10th District Court of Appeals that is pending. The sides are set to meet March 11 to see whether compromise is possible regarding the legislation pending in the Senate committee.
A similar dealer-backed bill has been introduced in New York’s Assembly. Last week, Washington passed legislation tightening the state’s franchise rules while exempting Tesla, allowing the company to continue selling directly there.
At stake, dealers say, is the three-tier auto distribution system that puts independent dealers between automakers and customers. The first rules regulating dealer-automaker relationships date to 1937, said the National Automobile Dealers Association, which declined to comment on members’ efforts to block Tesla’s direct-sales approach.
While the approach varies by state, “it is easy to see the rationale for state laws that foster a well-capitalized, independent dealer network,” the association said by e-mail.
The franchise model continues to be important, dealers say. The system protects the investment of dealers who spend millions of dollars on facilities and inventory, said Ricart, the Columbus dealer, and creates strong local employers. The consumer gets to comparison-shop at multiple franchises and benefits by having dealers serve as advocates on warranty issues in a way manufacturers may not, he said.
Over the years, dealers have become some of the most powerful forces in communities, from providing jobs and sponsoring Little League teams to wielding political clout locally and lobbying in their states and in Congress.
“What dealers are opposed to with Tesla, I believe, is that it’s the first step on the slippery slope toward dismantling the system in place that provides protections for the dealers,” Jacoby said.
The estimated 17,600 U.S. dealers of new cars and trucks had $676.4 billion in total sales in 2012, accounting for almost 15 percent of all U.S. retail activity and generating hundreds of millions of dollars in tax revenue for state and local governments, according to the NADA. The average dealership is worth $3 million and produced a net profit before taxes of $843,697 in 2012, NADA said.
Dealers spent $86.8 million on state election races across the U.S. from 2003, when Tesla was founded, through last year, according to the National Institute on Money in State Politics, a nonprofit in Helena, Montana. They’ve also pumped $57 million into federal campaigns, the Center for Responsive Politics found. Tesla has invested about $500,000 in state and federal politics, according to data from the two groups.
The Ohio dealer group argues that Tesla’s sales model creates unfair competition with established dealers and puts their investments at risk. That, they say, threatens the 830 franchised motor vehicle dealers in Ohio who employ more than 50,000 people with a payroll exceeding $2 billion, collect more than $1 billion annually in state sales taxes and pay millions of dollars in business taxes.
Tesla touts its own economic impact in Ohio. Its operations add as much as $10 million and 20 jobs for each of its two locations, and the company also has used 20 Ohio suppliers with more than $40 million in orders, James Chen, the company’s vice president of regulatory affairs, said in written testimony Feb. 11 before Ohio’s Senate committee.
Attempts in 2013 to block Tesla stores with lawsuits failed in courts in Massachusetts and New York. In those cases, Tesla argued that state franchise laws were designed to regulate relationships between manufacturers and their affiliated dealers -- not to prevent competition among brands, O’Connell said. Dealers in Massachusetts and New York are appealing, Tesla said.
As the challenges have mounted, Tesla has stirred up support with local customers and brand fans. That approach may have helped in Washington state, where Tesla loyalists rallied against earlier legislation that would have restricted its stores.
Tesla store employees typically spend two to three hours with potential customers explaining fundamentals of owning an electric vehicle before a sale, and do follow-up visits, O’Connell said.
“Our stores, our retail model, our service centers are fundamentally about educating customers about a new technology,” he said. “There is nothing in the history of the franchise auto-dealer model which would suggest that we could be successful in that context at this time. Nothing.”
As Tesla grows, he said, it might eventually make sense for it to consider franchise dealerships, O’Connell said. “But that future is not now,” he said.
One looming battleground for Tesla is Texas, whose June 2013 legislation bars the company from selling cars altogether, permitting it to run “galleries” displaying its vehicles. Employees can talk to buyers about electric cars in general but provide no information on how to purchase one, O’Connell said.
Tesla last month identified Texas as one of four Southwestern U.S. states it’s considering for its battery “gigafactory.” Tesla said the $5 billion production facility would directly employ as many as 6,500 people by 2020, a job-creation project that could potentially give it leverage with a would-be host state whose officials tout it as a free-market bastion.
O’Connell declined to comment on specific selection criteria for that project.
“The issue of where we do business is in some ways inextricably linked to where we sell our cars,” he said. “If Texas wants to reconsider its position on Tesla selling directly in Texas, it certainly couldn’t hurt.”
Should Tesla ultimately be restricted in selling its cars in Ohio, New York and other states, it may take its case to federal courts, O’Connell said.
“That is certainly an avenue for potential relief if we get shut out somewhere,” he said, without elaborating on the company’s possible strategy or argument.