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Why it’s illegal for Tesla to sell its cars in Texas

Tesla workers cheer on one the first Tesla Model S cars sold during a rally at the Tesla factory in Fremont, Calif., Friday, June 22, 2012. The first mass-market sedans offered by electric car maker Tesla are now on the road.
AP Photo/Paul Sakuma
Tesla’s battle to sell cars in Texas tests the American free market.
  • Tim Fernholz
By Tim Fernholz

Senior reporter

Published This article is more than 2 years old.

Here are some things that employees in electric car-maker Tesla’s Houston and Austin “galleries” cannot do:

  • Discuss purchasing, financing or leasing one of Tesla’s vehicles
  • Tell customers the price of a Tesla vehicle or how they might reserve one
  • Offer test drives
  • Refer customers to an out-of-state store that does any of those things

We imagine it’s a pretty unfulfilling job, and pretty unrewarding for anyone in Texas who visits the galleries to buy an all-electric sedan—Automobile magazine’s 2013 car of the year—starting at $62,400. The reason for this weird experience is a Texas state law forbidding car makers to sell their wares directly. All vehicle sales must go through a licensed dealership franchise. Most states around the country have some version of this law.

While a franchise system made sense as a way to deal with the capital-intensive nature of storing, marketing, and servicing cars as the industry evolved, it’s also expensive for consumers. Distribution makes up about 30% of a car’s final price. But as the internet and supply-chain innovation made the logistics more manageable, more industries want to go direct, including automakers, as this US Department of Justice report explains:

A real-world example of the benefits of a build-to-order, direct manufacturer sales model is GM do Brasil’s experience with production and sale of the Chevrolet Celta economy car at its modern Blue Macaw plant in Gravatai. Since 2000, customers in Brazil can order the Celta over the internet from a site that links them with GM’s assembly plant and 470 dealers nationwide. By 2006, 700,000 Celtas had been produced and the car continues to be one of Brazil’s best sellers. Consumers have 20 “build-combinations” from which to configure a model of their choice, including colors and accessories, and can view each change as it is being made. GM built five distribution centers throughout Brazil to reduce transportation time from its assembly plant and buyers can track location of their car online on its way to delivery at a dealer of their choice. The time from configuration at the factory to delivery is only about a week, in contrast to the several week wait that can be common in ordering a car in the United States.

Innovations like that in the US have been forestalled by state laws that protect dealerships from competing with manufacturers directly, since that could destroy their business model. Dealers have strong political voices, as we saw during the government’s rescue of the auto industry in 2009, when they won the passage of a law to protect them from closing in bankruptcy.

Tesla, founded in 2003 by tech entrepreneur Elon Musk, hoped to get around such blockages, but in states where the company has opened stores and made sales, like New York and Massachusetts, car dealership associations are suing the company. In Texas, Tesla is pushing for a narrow exception in state law that would allow makers of all-electric cars—i.e. Tesla—to sell their wares directly, in the hopes that dealers more worried about GM or Ford might give the start-up a chance.

“Texas is a free-enterprise state that prides itself on being the freest in the nation—I think that’s a good thing,” Musk told the Texas Tribune. “The laws that are in place to protect the big established auto dealer groups are very un-Texas.”

Update: Looks like a judge just dismissed an effort by New York dealerships to block Tesla today:

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