New Jersey pulls the plug on Tesla

Tesla Model S (© Tesla Motors, Inc.)Click to enlarge picture

Tesla Model S

The State of New Jersey has pulled the plug on plans by upstart battery-carmaker Tesla Motors to sell its vehicles directly to the public.

Depending upon your point of view, Tesla is either at the forefront of an automotive retail revolution, or is simply trying to cut out the middleman to fatten its own bottom line. The Garden State is the third to ban the company from selling direct — following Arizona and Texas — a move meant to preserve the well-entrenched dealer franchise system that has been around almost as long as the auto industry itself.

For the moment, at least, it means that Jerseyans will have to head across the state’s borders if they want to buy one of the environmentally friendly Tesla Model S sedans. But it appears that the dispute is far from over.

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Automotive dealer groups continue pressing for bans on Tesla’s retail model in New York and a number of other states. The California-based maker has gotten its way in a few states and reached compromise agreements in others, including Colorado where it has been allowed to retain several company-owned stores but can’t open any others.

Over the years, the courts have routinely supported the dealer system and its major advocate, the Washington, D.C.-based National Automobile Dealers Association. But few expect Tesla and its brash and determined founder and CEO Elon Musk to roll over.

The latest flap was touched off on Tuesday when NJ Governor Chris Christie’s administration ruled in favor of a state requirement that new cars must be sold through licensed franchises. The rule had been proposed by the New Jersey Motor Vehicle Commission last October, about the time Tesla opened two of its own stores in the state.

The announcement triggered a testy response from Tesla which accused the governor’s office of having “gone back on its word” to find a compromise that would allow the carmaker to operate in the state. Tesla believes it will now have to shutter its NJ outlets or sell them to private franchisees.

“Having previously issued two dealer licenses to Tesla, this regulation would be a complete reversal to the long-standing position of (New Jersey Motor Vehicle Commission) on Tesla’s stores,” Tesla said on its blog, adding its frustration that, the issue is about more than “just Tesla customers, but also New Jersey citizens at large.”

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Tesla is far from the only automaker to have been frustrated over the years by the well-established franchise system. Ford Motor Co., for one, tried a number of alternatives around the beginning of the New Millennium, including setting up factory-owned stores and exploring operations for direct online sales. The maker was ultimately forced to fall back due to established regulations as well as pressure from its existing retailers.

“Dealers are very firmly entrenched” and not very open to change, cautions Stephanie Brinley, a senior analyst with consulting firm IHS Automotive, who points out they have built grassroots support in local communities as well as collectively becoming one of the strongest political lobbying forces in the country.

That’s not to say change can’t or won’t happen. A decade ago, it was the auto industry that attempted to block the emergence of publicly traded corporate dealer chains like AutoNation and Asbury Group. They’ve since become an established part of the system. And while you can’t buy a new car online like you might a TV, books or CDs, studies by J.D. Power and Associates show that nearly nine in 10 shoppers now do much of their preliminary research on the Web.

But that isn’t likely to satisfy Tesla, the maker’s blog post lamenting “it is vital to introduce our own vehicles to the market because electric cars are still a relatively new technology.”

It’s probably a good time for the maker to be battling the system, contends analyst Brinley. Right now, she notes, Tesla has more demand than it can supply. But that could change as it expands its capacity and adds two more product lines: the Model X battery crossover and the more affordable Model E expected in 2015.

“It’s difficult to predict how it will turn out,” cautions Brinley, adding the likelihood “Tesla will win a few and lose a few” and ultimately reach compromise in states that won’t budge on their franchise laws.

Written by Lewis Shaw

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