Last week, New Jersey informed Tesla it would require the California automaker to only sell cars through licensed in-state dealers, forcing it to stop selling cars through its own stores by April 1. Arizona and Texas have similar rules in place, effectively banning Model S sales in those states.
These state rules may come as a surprise to most people, but they have been on the books for a while. CEO Elon Musk, in a blog post on Tesla's site, actually defends the intent of these laws. Musk points out how, after an independent dealer built up a business, an automaker might put pressure on the dealer, such as restricting product supply, to force the dealer to sell the business to the automaker. In the same post, Musk complains that now the auto dealers are using the rules to prevent competition from Tesla, which was not the original intent.
In New Jersey and other states currently banning Tesla's direct sales, Tesla could turn to an in-state licensed dealer to sell its cars, but that would be a bad idea.
Setting the tone
When I visited one of the first Tesla stores in downtown San Jose a few years ago, I found a quiet and pleasant environment, a modern store staffed with polite and helpful people. I could browse the store, look at a wall full of color samples, check out different wheel options, and use a computer kiosk to configure a car. The staff could tell me how to keep the batteries charged, and what options I had for installing a home charger.
It was a very different experience from walking into a traditional dealership.
Tesla cites its need to educate buyers on how electric cars drive, which is radically different from gasoline-powered cars, in maintaining direct sales through manufacturer-owned stores. While I agree that education is important, I would add that it is just as important for Tesla to set the tone of its sales.
The company is going for a modern sales model, and would suffer from a chaotic cadre of independent, commission-driven sales people. A high-pressure sales tactic is not in the Tesla's interest, as the sales experience is often the first contact a buyer has with the product. A bad sales experience would end up coloring Tesla's brand reputation.
A couple of decades ago, I worked for an advertising company that handled the Saturn car account. With Saturn, GM was trying to reset many things about the car business, not the least of which was the sales experience. Staffers from Saturn went out to dealers who had signed up to sell the cars, educating them in the Saturn sales experience. Saturn wanted to eliminate haggling and pressure.
Many dealers incorporated the new sales model, leading to happy stories from Saturn buyers about the experience. However, I also heard tales of a few dealers who preferred to do things their way. These dealers had built up businesses using traditional tactics, and they weren't willing to change.
Tesla spends a lot of money taking care of its owners, for example, setting up its network of Supercharger stations where the Model S can charge for free. An independent dealer would not need to uphold that level of care, or even set the same tone in the sales experience. Many dealers might, but a few could tarnish Tesla's reputation, not something a nascent car manufacturer needs.
There is another wrinkle to Tesla's troubles selling in certain states -- laws or regulations banning Tesla's direct sales may be unconstitutional. Article 1, Section 8, Clause 3 of the U.S. Constitution, commonly referred to as the Commerce Clause, gives Congress the power to regulate interstate commerce. That Article has been exceptionally important for the United States, as it prevented states from passing protectionist legislation to isolate their economies from the country as a whole. Free interstate trade has been an important factor in making the United States' Gross Domestic Product, one measure of economic strength, the highest in the world.
If one state tells a manufacturer in another state that it can't sell its products, that state would be assuming a power assigned to Congress. There is, however, a little wiggle room. New Jersey, Arizona, and Texas can claim they are not banning sales from this California-based automaker, just requiring it to sell products through its own dealers.
A judge would need to decide if that requirement is an unreasonable impediment to Tesla's attempt at interstate commerce.
I think it is. Tesla wants to sell its cars in a specific manner, setting a tone for the sale experience in its stores. That is the sort of innovation the Constitution should protect.