The Connecticut Department of Energy & Environmental Protection is co-sponsoring a contest for the auto dealership that sells the most electric cars by July 31, but the Tesla Model S — arguably the hottest electric vehicle on the market — will be excluded because it is currently restricted by Connecticut law from being sold at retail to consumers in the state.
Tesla is a new automaker based out of Hawthorne, California. Its CEO is Paypal founder Elon Musk, who splits his time between the disruptive car company and his other role running SpaceX, a startup that launches cargo and soon people to the International Space Station. Tesla entered the market last year to rave reviews from automotive publications, including the highest rating ever issued by Connecticut-based Consumer Reports.
Watch a video review of driving a Tesla Model S
The electric car maker’s business model differs from traditional manufacturers in that the company sells and services its vehicles directly and not through franchised dealerships like other car manufacturers.
The problem for Tesla is that the retail sale of an automobile from a manufacturer to a consumer is illegal in many states, including Connecticut. So while it is legal for Connecticut residents to own and drive a Tesla Model S, they can’t actually purchase one from a retail location owned by the automaker because Tesla does not sell the car through locally owned franchised dealerships.
Buying a Tesla in Connecticut
It’s not impossible to buy a Tesla in Connecticut, although the purchase of the car feels more like an e-commerce transaction than the back-and-forth negotiation typically experienced when buying a car at a local dealership.
Tesla recently opened up a service center and “gallery” in Milford, which resembles a traditional auto dealership complete with a showroom and a meticulously clean service area. On display are a few Model S sedans, a selection of tire, color, and trim options, as well as a stripped down chassis of the Model S to demonstrate its simplified drivetrain.
Tesla offers test drives through the gallery locations, but staff are restricted from discussing pricing or actually selling the car on site. Instead, consumers need to call into a New York sales location to speak with someone specifically about pricing the vehicle, or they can configure the car on the Tesla website. Tesla outsources trade-ins through a partnership with Autonation.com.
Financing is more difficult, as two of the three banks that Tesla uses for its guaranteed trade-in value program will not finance Connecticut sales unless the customer travels to New York or New Jersey to sign paperwork at a Tesla location where it’s legal to sell the vehicle. A third bank, the Technology Credit Union, will finance the car at the same rates as the other two banks for Connecticut buyers over the phone. Tesla accepts payments via wire transfer, check, and now even automatic checking account withdrawals through its website.
Tesla delivers vehicles to Connecticut drivers at its service location in Milford. When the vehicle arrives, it usually has New Jersey temporary plates attached and Tesla representatives later register the vehicle on the owner’s behalf in Connecticut after delivery. Pickups can also take place at other Tesla owned service centers in New York and Massachusetts.
Why Restrict Direct Sales?
Jim Fleming, president of the Connecticut Automotive Retailers Association, says the law is there to protect consumers and the many family owned dealerships in the state that he says employ about 13,000 Connecticut residents.
“Before there was a franchise law, an individual could open a store up, put a big investment in, and if the manufacturer decided they didn’t like somebody they could threaten to take the franchise or put somebody next door to them,” Fleming said.
Connecticut’s law requires that any new vehicle be sold to a consumer by a franchise that is not owned by the manufacturer. Each dealer location must be at least 14 miles away from another dealership selling the same brand.
Fleming says franchise statutes have held up over the years because there was no fair bargaining position between a small dealer and a multinational corporation.
“The reason my dealers and I support the franchise system is that it’s pro-consumer in that it provides competition between like brands,” Fleming said, adding that if a consumer had a problem with a Ford dealership they’d have the choice to go to another Ford dealership for sales and service.
The issue of franchise-only vehicle selling came to a head earlier this month after New Jersey announced that it was barring direct sales of Teslas.
Musk wrote a blog post on Tesla’s website about the situation, stating franchise laws were designed to protect existing auto franchises, not new manufacturers that have never sold through franchise operations.
“The reason that we did not choose to do this [selling through franchises] is that the auto dealers have a fundamental conflict of interest between promoting gasoline cars, which constitute virtually all of their revenue, and electric cars, which constitute virtually none,” Musk wrote, “Inevitably, they revert to selling what’s easy and it is game over for the new company.”
Musk pointed to the failure of auto startups like Tucker, DeLorean, Fisker, and others that all attempted to sell through auto franchises.
Fleming said there are some additional benefits to consumers and manufacturers, pointing out how manufacturers rely on local dealers to quickly address product recalls and other service related issues.
But Musk says service is more a profit center for local dealerships given the slim margins they make from selling new cars. And he says electric vehicles require far less regular maintenance.
“It does not seem right to me that companies try to make a profit off customers when their product breaks,” Musk wrote in his blog post. “Overcharging people for unneeded servicing (often not even fixing the original problem) is rampant within the industry and happened to me personally on several occasions when I drove gasoline cars.”
Can the Tesla Model Scale?
Tesla sold about 25,000 of its $70,000+ Model S sedans worldwide in 2013, a tiny fraction of the millions of vehicles sold by other automakers.
The company is gearing up to produce a more mass market vehicle that will sell for potentially half the price or less than the premium sedan, and Fleming doesn’t think Tesla can scale to that volume without the help of local franchise dealerships.
“At some point they’ll adopt the franchise system and not want to make the capital investment,” Fleming said.
Legislative Action Unlikely
Tesla did not respond to inquiries about any changes they might seek to Connecticut statutes regarding franchise sales. Given the relative ease in which Connecticut customers can purchase the vehicles despite the franchise restrictions, it is unlikely the company will pursue legislative changes.
But Fleming said the Connecticut auto retailers are prepared to take action if Tesla or another manufacturer attempts to make changes to the law.
“The auto dealers here employ nearly 13,000 people in the 250 franchise dealers they have,” Fleming said. “If you did away with the franchise system and if you allowed a manufacturer to come in and compete with locally owned stores and put them out of business, you would lose a tremendous number of jobs.”