On Tuesday, Michigan Governor Rick Snyder signed legislation that bans direct car sales by automakers. This prohibits the sale of automobiles through non-franchised methods, such as online or via company stores and galleries. While the law does not specifically mention Tesla Motors, it essentially outlaws their signature business model.
With the signing of House Bill 5606, Michigan now explicitly requires automakers to sell their vehicles through franchised dealers. Though this amendment was made to the bill at the last-minute, Snyder has publicly stated that it only strengthens a law that already exists.
“This bill does not, as some have claimed, prevent auto manufacturers from selling automobiles directly to consumers at retail in Michigan – because this is already prohibited under Michigan law,” Snyder said in a letter to lawmakers.
He reiterated this position in a public video:
So what does this have to do with Tesla?
Most auto dealerships operate as independent franchises. As Popular Mechanics explains,
“It’s a business model that began as a way for automakers to spread their geographic reach quickly and with minimal corporate investment—the franchise owner assumes most of the financial risk. Along the way, states enacted laws designed to prevent corporate ownership of dealers, which prevents manufacturers from providing in-house stores with advantages not available to franchisees.”
Texas is one state that bans direct-to-consumer sales (see the video below), but the specific laws governing franchises and who can sell what and to whom varies by state.
Tesla Motors is a low-volume automaker that has chosen to bypass the franchise system for various reasons. While CEO Elon Musk has a reputation for iconoclasm, being able to order Teslas online is more a matter of convenience than rebellion. But there’s a financial aspect to it, too.
In a 2013 interview, Diarmuid O’Connell, Tesla’s Vice-President of Business and Corporate Development, said a dealer who is trying to sell electric vehicles alongside traditional fossil fueled vehicles would have to “talk down their existing technology” to make the EV more attractive. Because the dealers have a lot more of the existing technology to unload, it gives fossil fuels the advantage. More importantly, however, O’Connell mentioned that “a Department of Justice study found that five to ten percent is added to the cost of a car because of the dealer system.”
Ostensibly, O’Connell is saying that Tesla is just cutting out the middleman. In reality, Teslas are already expensive (a Tesla Model S starts at $70,000 and can go above $100,000), and making them 10 percent more costly is simply out of the question.
So Tesla has been fighting for its right to sell its cars all over the U.S. On its website, it provides a map to show where consumers can and cannot buy a Tesla directly. Currently, direct sales are banned in 26 states, allowed in 22 states and contested in two states.
As to how Tesla views this latest move by the Michigan legislature:
“We do take at their word the representations from the governor that he supports a robust debate in the upcoming session,” O’Connell told the Detroit Free Press. “We’ve entered an era where you can buy products and services with much greater value than a car by going online.”
O’Connell told the DFP that it is currently unclear if the company will challenge the law.