One Foe Tesla can’t conquer: The lowly car dealer

Tesla Motors CEO Elon Musk obviously hates to lose. But the escalating battle he’s fighting with auto dealers in various states is beginning to look like one fight he shouldn’t have picked.

New Jersey is the latest state to ban or limit Tesla (TSLA) from selling cars through company-owned stores rather than traditional franchised dealerships, and New York and Ohio may now do something similar. They’d be joining Texas, Arizona, Virginia, Minnesota and Georgia in restricting Tesla’s direct-to-consumer sales model. The standoff seems to have glazedTesla’s stratospheric stock, which fell more than 4% on the distressing news from New York and New Jersey. “Dealers have been here for 100 years and they’re here to stay,” says Seth Berkowitz, president of car-research site Edmunds.com. “Tesla may just have to moderate its sales model.”

Most consumers don’t care who owns the dealerships they buy cars from, but this is still a big battle that could cause Tesla unanticipated growing pains. Musk argues Tesla is different from other automakers, because its all-electric cars require a specialized sales force able to educate buyers about the technical aspects of its $70,000 Model S sedan. "It is much harder to sell a new-technology car from a new company when people are so used to the old," he wrote in a recent blog post. Musk also took a jab at New Jersey Gov. Chris Christie -- still reeling from a scandal involving the deliberate shutdown of local roads near the George Washington Bridge -- for siding with the state's dealer lobby:

The rationale given for the regulation change that requires auto companies to sell through dealers is that it ensures “consumer protection”. 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. As anyone who has been through the conventional auto dealer purchase process knows, consumer protection is pretty much the furthest thing from the typical car dealer’s mind.

No matter how maligned car dealerships may be, however, they remain important local businesses that account for about $675 billion in sales every year and employ nearly 1 million Americans. They also tend to be politically savvy, contributing to local and state-level political campaigns and enjoying the strong support of elected officials. For all of Tesla’s moxie, taking on dealerships in their own backyards may be a war of attrition it can’t win. “Tesla has an innovative product, but its distribution model isn’t innovative. It’s stupid,” says Jim Appleton, president of the New Jersey Coalition of Automotive Retailers. “It will relegate them to being a bit player in the auto market.”

Tesla obviously feels differently, arguing in another blog post (the company’s preferred way of communicating with the press and public) that any ban on its corporate-owned stores is “an affront to the very concept of a free market” and a sop to special-interest groups trying to protect a monopoly. Still, Tesla’s U.S. market share is less than two-tenths of 1 percent, and hype alone doesn’t generate pull in most state capitals, even with an impressive car like the Model S. With little leverage in most states, Tesla may blink before dealer groups do.

But it still has options. Here are four:

Challenge existing laws. Tesla may do this in New Jersey, through the courts, but going state-by-state seeking changes in laws that have been on the books for decades could be a huge, costly and unnecessary distraction.

Set up its own dealer network. “Why hasn’t Elon Musk set up his own dealership company?” asks Dave Sullivan of forecasting firm AutoPacific. “He could even put his name on it, like The Musk Group.” That sort of arrangement could give Musk considerable control over dealerships even if Tesla itself didn’t own them, thus satisfying the requirement for independent dealers in states that require them.

Set up Tesla service centers that don’t sell cars. For now, Tesla solicits buyers in states where it doesn’t have dealerships by holding road shows where they offer test drives, closing deals over the phone, and delivering cars to buyers’ driveways. That still leaves the considerable problem of how to provide service in areas where it has no dealerships, which is prohibitively expensive — and inconvenient — from a long distance. But there’s nothing that would prohibit Tesla from opening a network of service centers where they could fix and maintain cars, as long as they don’t sell them. “Telsa could still deliver to people’s doors, then open a bunch of garages with a couple lifts where people could bring the cars in,” suggests Sullivan.

Change course and work with traditional dealers after all. This is a last resort if dealership battles really begin to dent sales and undermine Tesla’s growth. It might cost Tesla more money, since it would have to split profits with dealers, but contracting with dealers would hardly be ruinous: Luxury carmakers such as Mercedes-Benz and BMW sell through traditional dealers, yet they still seem able to convince buyers their products are innovative and worth paying top dollar for.

For now, Tesla has the advantage of being a low-volume automaker selling a status product buyers are willing to go out of their way for. So it can probably get away with unconventional selling methods and hand-delivered cars for a while. But Tesla itself has said it needs to boost Model S sales by 50% this year, and its strategic plan calls for expanding its lineup and selling much larger volumes of less-expensive cars.

At some point, Tesla will have to confront the reality that almost all car sales are local transactions, whether car dealers are popular or not. Maybe Tesla will even start to sponsor local Little League teams.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.