Efforts to expand Tesla Motors sales were dealt a blow this week when New Jersey officials decided to ban the premium electric car manufacturer from selling directly to consumers.
Tesla is now forced to sell through independent franchise dealerships like mainstream automakers, essentially barring all sales in the state for now. But the loss or benefit to consumers has been lost in finger-pointing between Tesla CEO Elon Musk and the administration of Gov. Chris Christie.
The bulk of new car sales in the United States go through independently owned dealerships, which act as a middle man between the big manufacturers and the consumer. Most states have regulations restricting direct sales, according to the National Automobile Dealers Association (NADA), though New Jersey is now one of the few that ban the practice outright.
The relatively tiny Tesla pursued a different model. Tesla “stores” are small, sometimes fitting inside a shopping mall, with only a handful of cars. Buyers order their cars direct from the factory and have maintenance performed at regional service centers. The strategy keeps overhead costs down for Tesla. But as Karl Brauer of Kelley Blue Book explained, it is not necessarily a benefit to the consumer.
“The current franchise system helps maintain consistent selling practices for dealers while it contributes to the local economies, so there are definite upsides to the franchise system,” he told ABC News.
“However, a direct-to-buyer system would allow manufacturers greater control over the entire process while making it more efficient, meaning automakers wouldn’t just design, engineer and price the cars but also control the sales atmosphere and the specific transaction pricing,” Brauer added.
In theory this could reduce sticker prices on vehicles, Brauer noted, but it is equally likely a manufacturer would simply pocket the difference.
“Neither system is necessarily better than the other. They just have different upsides and downsides,” he said.
For roughly a year, Tesla has operated two stores in New Jersey that will likely be forced to close when the decision takes effect April 1. Company officials raged against the ruling and in a blog post accused Christie, whose office is under a high-profile investigation for alleged abuses of power, of using his state’s Motor Vehicle Commission as another political cudgel and yielding to the powerful car dealers lobby in the Garden State. Tesla also accused the administration of reneging on a previous agreement to delay the ruling until the state legislature could address the debate publicly.
Christie’s office has largely distanced itself from the issue, however, only stating that Tesla saw the decision coming and motor vehicle officials were strengthening existing law.
Neither Tesla nor Gov. Christie’s office responded to requests for comment by ABC News.
But the leader of the car dealers lobby said the debate is not purely about protecting auto dealers’ livelihoods, but consumer protection as well.
Jim Appleton, president of the New Jersey Coalition of Automotive Retailers, said in an interview with ABC News that warranty and safety recall issues would place manufacturer-owned lots in a conflict of interest.
“The fox is in charge of the chicken coop [in a direct-to-buyer model]. The manufacturers sees a warranty as headache and expense, while a retailer sees the warranty and safety recall claims as an opportunity,” he said, pointing out that since dealers gets paid by manufacturers to service warranties and recalls they have a natural incentive to report them.
Appleton pointed to the recent scandal involving General Motors recalls as evidence that manufacturers could not be trusted to run large lots. As for the potential savings from the distribution model, he argued that even if Tesla or other manufacturers attempted to lower sticker prices, the difference would be negligible.
“They talk about eliminating the middle man but they don’t eliminate the middle cost,” he said. “They have the expense of employees, the expense of advertising. The cost of retailing is the cost of retailing.”
New Jersey is a booming luxury car market and its Newark-Elizabeth seaport, the largest in the US, imported and exported up to 700,000 vehicles in 2012, according to the Port Authority.
So where do the big manufacturers, who also hold a large stake in this debate, stand? They’ve been relatively mum. Kelley Blue Book’s Brauer said it’s because for them, this fight is a win-win scenario.
“If Tesla is successful at changing these laws, it will encourage the big automakers to consider following Tesla’s lead,” Brauer said. “Of course, the dealers, the NADA and their lobbyists all know this, which is why they will fight to keep the current laws in place. If Tesla is forced to follow conventional retailing practices, which means using a local dealer to sell its cars, that will cut into Tesla’s control and cost structure, making it more difficult for the fledgling automaker to succeed. In either scenario there’s an upside for conventional automakers, so this is really a no-lose situation of them. They can just sit back and enjoy the show.”
The split between Tesla’s popularity and the entrenched dealership model means neither side may win outright, however.
“It would take a lot of time and a lot of dedicated money from Tesla to break through that system, and I don’t see Tesla expending those resources,” Brauer added. “We’ll likely see a compromise situation where Tesla will get some very limited latitude to continue operating the stores [Musk has] already opened while also requiring him to work with NADA on future stores.”