Car Dealers Sue Tesla For Breaking With Tradition

We’ve been writing about Tesla Motors’ (Nasdaq:TSLA) unique sales strategy of introducing people to their electric cars by locating dealerships where they shop – in malls and outdoor shopping areas.

But traditional car dealers aren’t happy about that and dealer groups in New York and Massachusetts are suing Tesla, arguing the company is violating state franchise laws that prohibit car manufacturers from owning dealerships.

The Massachusetts suit, brought by the state’s dealers association attests that Tesla – which recently opened a showroom in a mall there – doesn’t have a license to do that. They want to prevent Tesla from opening manufacturer-owned dealerships in the state.

The National Automobile Dealers Association is getting involved, which represents almost 16,000 dealers across the US. They will provide legal support to state dealer associations, if necessary.

Tesla doesn’t sell cars directly from those showrooms – the only way to buy a car is to reserve it way in advance. The showrooms are for educational purposes, to introduce people to their cars and electric cars in general.

The company has 24 showrooms in North America and 34 worldwide.

Tesla CEO Elon Mush argues its approach to educating the public about electric vehicles is necessary. It would be easier to pursue the traditional franchise dealership model, he says. It would save a lot of money on construction and result in widespread distribution overnight.

"Existing franchise dealers have a fundamental conflict of interest between selling gasoline cars, which constitute the vast majority of their business, and selling the new technology of electric cars," he writes. "It is impossible for them to explain the advantages of going electric without simultaneously undermining their traditional business. This would leave the electric car without a fair opportunity to make its case to an unfamiliar public."

"By the time most people decide to head to their local dealer, they have already pretty much decided what car they want to buy, which is usually the same make as their old car. At that point it is largely just a matter of negotiating with the dealer on price. Tesla, as a new carmaker, would therefore rarely have the opportunity to educate potential customers about Model S if we were positioned in typical auto dealer locations," says Musk.

Automotive franchise laws specifically prohibit manufacturers from competing with existing dealers that have invested time and money in promoting their business. It doesn’t apply to Tesla because the company doesn’t use franchising at all, says Musk.

Tesla is far more focused on opening service centers – where carowners can easily access company-certified mechanics – for their cars than they are on showrooms. At the beginning of 2012, they had 9 Service Centers in the US, but by the end of this year, they’ll have 26. Over 85% of people that have reserved a Tesla Model S in North America will be within 50 miles of a service center, and 92% will be within 100 miles.

Tesla is also implementing a plan to build a US charging network for its cars that’s powered by solar energy.