Testy about Tesla: Michigan Bans Electric Car Company’s Direct Sales Model

October 24, 2014

Michigan residents may now have a more difficult time obtaining Elon Musk’s inventive electric cars. On Tuesday, Michigan Governor Rick Snyder signed a bill that prohibits direct to consumer automotive sales.

Although this legislation applies to all car manufacturers, Tesla is currently the only company employing that model.

The bipartisan legislation, which passed through the Michigan legislature earlier in October, “forces automakers to sell vehicles through the network of dealers rather than directly to buyers.” However, the governor insists that the law only clarifies existing legislation that already limited car sales to transactions made through the established dealer-franchise system, under which all other companies (including many of the car manufacturers headquartered in Michigan) are already operating. Although Tesla can still sell cars to consumers online, the law creates “an effective prohibition against Tesla opening a store in Michigan.”
Michigan is not the first state to impose a direct-sales ban. Tesla is prohibited from selling direct to consumers in four other states as well: Texas, New Jersey, Arizona and Maryland. However, Tesla is still allowed to display cars to consumers in those states in galleries so long as the company does not discuss price, allow for test drives, or take orders.   The Michigan law prohibits even this interaction.
Tesla, which first gained recognition with the production of the Tesla Roadster, the first all-electric sports car, is innovative both in product design and business model. Not only is the company innovating the lithium batteries and other core technology designed for its vehicles (the battery in the Model S doubles the range of any other available electric vehicle), but it also utilizes an innovative sales model. Tesla does not sell its cars to dealers or distributors, instead preferring to interact with the customers through company-owned stores and showrooms and, of course, through the company’s website. In a previous interview with AutoTrader.com, a Tesla executive said that the goal of such a sales model was to “engage with people when they are not thinking about buying a car,” and “educate them on what electric cars and, particularly, what Tesla electric cars can provide.” The store or showroom, then, is a place to peruse, where Tesla’s website is the place to buy.
Most other car manufacturers use independently-owned and operated entities to reach the public, and are actually legally required to operate that way under many states’ franchise law. Tesla argues that it is exempt from such requirements because it has never licensed a franchise or dealership.   However, because the legislation signed into law by Gov. Snyder explicitly prohibits all direct-to-consumer sales locations, a distinction between franchised and non-franchised business is now moot.
As far as Tesla’s future for Michigan is concerned, Tesla executives will likely continue to discuss and object to the regulations, as Gov. Snyder invites them to do. However, if Michigan residents want to examine a Tesla or test drive a car in person any time soon, they will likely have to visit an out-of-state store or showroom, perhaps in near-by Ohio or Illinois, and then order the car online and have it delivered by a third-party service. Seems simple enough, right?