Tesla CEO Elon Musk

The New Jersey Motor Vehicle Commission decided last Tuesday to tighten its franchise laws and require Tesla to close its two licensed stores and layoff 27 of its employees. This is a sad chapter in the saga of Tesla versus America’s auto dealers, and Telsa CEO, Elon Musk, is understandably pissed. “The rationale given for the regulation change that requires auto companies to sell through dealers is that it ensures ‘consumer protection,'” wrote Musk in a letter posted to the Tesla website. “If you believe this, Gov. Christie has a bridge closure he wants to sell you! Unless they are referring to the mafia version of ‘protection,’ this is obviously untrue.”

Direct automaker-to-consumer sales are prohibited in almost every state by franchise laws requiring that cars be sold only by licensed, independently-owned dealerships. The rationale for these laws is always consumer protection. Dealerships are supposed to act as knowledgeable intermediaries between the consumer and the automaker — a service to guide consumers through the buying process and provide support in the event of vehicle difficulties. Consumer protection, however, is usually “the furthest thing from the typical car dealer’s mind,” According to Musk.

In Musk’s view, dealers will prioritize sales of traditional, gas cars because their familiarity makes them easier to sell and their high-service requirements make them more profitable to dealerships. A new technology, EV car that requires little to no service center visits is less profitable. Musk fears (rightfully) that under this system, consumers aren’t being protected — dealerships are, and dealerships don’t like Tesla trying to undermine their protections.

Dealer associations in Massachusetts and New York have unsuccessfully sued Tesla for violating the states’ franchise laws. When Tesla planned to open a retail store in the Mall of America and a service center in Edina, the Minnesota Automobile Dealers Association’s Executive Vice President, Scott Lambert, was quoted as saying that the possibility of dealers having to compete with automakers on the retail front was simply “not fair.”

Despite the auto dealers associations’ recent history of open hostility and aggression towards Tesla, Jim Appleton, head of the New Jersey Coalition of Automotive Retailers, dismissed Musk’s letter on Friday as a “hissy fit.” “This is the business equivalent of a temper tantrum,” Appleton said. “Elon Musk needs to take a deep breath … hhat they’ve been doing is unlawful.”

While Appleton may be technically right, it may be time for New Jersey — and other states — to consider whether franchise laws are still working. Consumers most benefit from a competitive market where businesses earn money by providing high-quality, low-cost services. When laws protect businesses that don’t provide these services, consumers lose. And especially today, when consumers are so ready and eager to buy from direct distribution companies (like Amazon.com), are franchise laws even necessary?

Musk has said that Tesla will continue to operate galleries in New Jersey after the new regulations take effect April 1. The company will also evaluate judicial remedies to correct the situation.

That said, Tesla may be the new kid on the block, but it’s certainly no wimp.


News Source: Tesla Motors