Tesla vs. NJ

Chris Christie has yet again found his way back into the national spotlight. The abrasive New Jersey governor – and potential Republican presidential nominee frontrunner – has found himself involved in another scandal involving automobiles. While less of a national media sensation than the bridge closure debacle, Governor Christie has found himself in the center of a tussle with billionaire entrepreneur Elon Musk of PayPal, SpaceX and Tesla fame. Musk, a serial entrepreneur and disruptor of traditional industry is not one to shy from conflict, especially when it concerns his business interests. Both Christie and Musk have a penchant for steering outcomes in their favor, and the outcome of this particular case could have far reaching impact in not just the Garden State, but the rest of the country.

The issue at hand is how Mr. Musk’s upstart automobile company sells its wares. Rather than going through a middleman in the form of an auto dealership, Tesla sells directly to the customer. Opening its first store in Los Angeles, CA, Tesla has expanded its retail segment to twenty two states, including two locations in New Jersey, where the company has thus far been allowed to operate unhindered. This on Tuesday, March 11, when the New Jersey Motor Vehicle Commission (NJMVC) set forth a rule that will prevent Tesla from selling its all-electric cars directly to consumers; it takes effect April 1 of this year.

In a blog post on the company’s website titled “Defending Innovation and Consumer Choice in New Jersey,” the Tesla Motors Team accused the governor’s administration of going back on its word to “delay a proposed anti-Tesla regulation.” And in a not-so-subtle jab at Christie, Tesla went on to say that “[the NJMVC’s ruling] is an affront to the very concept of a free market.”

Kevin Roberts, a spokesperson for the governor’s administration, disputed the notion that Musk and company had been hoodwinked, stating, “…it was made clear that the company would need to engage the legislature on a bill to establish their new direct-sales operations under New Jersey law.” The New Jersey Coalition of Automotive Retailers (NJCAR) alleges that Tesla had improperly obtained its two New Jersey licenses, arguing that the company should never have been allowed to operate in the first place. The group spent $155,000 lobbying in no small part to prevent Tesla from continuing its industry shakeup.

A common argument in favor of dealerships is that they are able to protect customers who would otherwise have to deal directly with manufactures. Warranties are used as the prime example. For instance, when a customer brings in her automobile to be repaired under warranty, a dealership is paid to fulfill the obligation, whereas to the manufacturer (i.e. Ford, Toyota, etc.) it is seen as an expense. Thus a local dealer has a financial incentive to fulfill the warranty, whereas a manufacturer does not necessarily.

Jim Appleton, president of NJCAR, uses the recent development concerning General Motors’ malfunctioning vehicles to make this point, “If you have any question about that dynamic, it is the GM situation now. Dealers reported it to the manufacturer. If there was no independent dealer in the mix, you’d have to wonder how long, if ever, GM would have taken to step up to the situation.” It is an interesting argument that is sure to pique the interest of people who see local car dealerships as businesses who not only increase the true value of automobiles, but try to nickel and dime customers for their services.

The Garden State is a large market for Tesla, as it is where many people who work in New York City choose to live and commute from. Its next step will be to take its fight to the state’s legislature in hopes of getting a law passed in its favor. But Tesla’s battles are not specific to New Jersey. Other states including Georgia, Minnesota, Ohio, New York, Texas and Virginia have shown reluctance to embrace the direct sale model. Texas auto dealers have successfully lobbied for a law banning the practice. Ever the innovators, Tesla’s management has found a way around some restrictions by creating “galleries.” Not to be mistaken for the typical car dealer showroom, a Tesla gallery is not able to advertise price, provide test drives, nor sell a car from its location.  Instead, the company uses its galleries as a type of electric car educational center, combined with a tactile advertising experience.

Tesla is an industry disruptor. It is not the first company to produce and sell an all-electric vehicle, but it is the first one to build a product that captures people’s attention and imaginations. It sold 25,000 units in 2013. And while that is an impressive number, it is a pittance compared to General Motors and Toyota, who in the same year moved 9.71 million and 9.98 million, respectively. This striking contrast only becomes more revealing when one realizes that Tesla’s market capitalization is half that of GM’s. These two facts, combined with the uproar Tesla’s direct sales have caused, is a testament to both investors’ and auto dealers’ recognition of Tesla’s ability to reshape the industry in Musk’s favor. The journey will be long and arduous; both sides should fill up.

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