States move to ban Tesla’s direct manufacturer-to-consumer business model

It seemed like a typical scene in a Paramus, N.J., car showroom.

Two salesmen quietly attended to an elderly couple and a middle-aged man with three youngsters Wednesday afternoon as they moved around the gleaming red roadster, and a similar white one, while a screen showed a speeding car interspersed with rave reviews about the cars.

“I think it’s great,” Rosalie Margolin, 78, of Fort Lee, N.J., said to her husband, Sy, after she stepped out of the red car. “I think it’s a car for our son.”

Yet the showroom sells electric cars made by Tesla Motors, and the showroom is on the second floor of the Westfield Garden State Plaza mall, flanked by a women’s clothing store and a designer jeans retailer. And by April 1, Tesla’s Paramus showroom, and another in Short Hills, N.J., apparently must close.

That’s the date Tesla’s operating license expires and a new state rule, approved last week by the New Jersey Motor Vehicle Commission, kicks in — banning Tesla’s direct manufacturer-to-consumer business model.

The rule amending the state’s Franchise Practices Act was the latest shot in a skirmish being played out across the nation between Tesla Motors Inc. and established car dealerships, who want to protect the existing structure, in which manufacturers sell cars through franchised dealerships. State officials said the amendment closed a loophole that let Tesla license its New Jersey locations.

Tesla says its vehicle, and the technology inside, is so new that it needs to talk directly with consumers, and the traditional high-volume sales model of a franchise does not work. Traditional dealers, however, say the franchise model allows for price competition, and that franchises have more incentive than manufacturers to respond to customer safety concerns and recalls.

What Tesla will do in response to the new regulation is unclear.

Patrick Jones, a Tesla spokesman at the company’s Palo Alto, Calif., headquarters, declined to comment on whether the company can appeal the regulations, or might file suit to make its argument in court.

The commission’s requirements include a demand that new car sellers have at least 1,000 square feet of display area, space for two vehicles and enough space to maintain equipment for the servicing of vehicles. Most difficult of all for Tesla to comply with is a requirement that the car vendor be the franchise of a manufacturer.

Texas and Arizona prohibit Tesla’s sales model. New York allowed the company to open four stores, but a bill pending in the New York Legislature — being pushed by car dealerships — would severely limit the circumstances under which a manufacturer can sell vehicles without a franchise holder.

In Texas, faced with a prohibition on direct manufacturer-to-consumer sales, Tesla opened two “galleries,” where people can see the cars and learn about them from company representatives, but can’t buy or test-drive the vehicles.

Texans who want to buy a Tesla have to go to the company’s website, where they can create a custom design for their roadster, which is then delivered from the factory in Fremont, Calif., by a “third party,” said Jones.

“We are still able to provide an educational experience and talk about the vehicles,” Jones said. But he added: “Not being able to discuss pricing and not being able to test the product are huge impediments to the purchasing process.”

This story was originally published March 17, 2014 at 9:31 PM with the headline "States move to ban Tesla’s direct manufacturer-to-consumer business model."