Auto dealers in Ohio seek to stop Tesla’s way of direct selling

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  • Jonathan Quilter | Dispatch
    James Chen, vice president of regulatory affairs and associate general counsel at Tesla Motors, parks a 2013 Model S P85 at the Statehouse. The car was available to legislators for test drives yesterday.
  • Jonathan Quilter | Dispatch
    Tesla, a maker of all-electric cars, will open its first Ohio dealership on Friday at Easton. Next week, one will open in Cincinnati.

December 3, 2013

Days before Tesla Motors opens a dealership at Easton, its first in Ohio, a proposal in the General Assembly seeks to ban the company’s business model.

The measure, a one-paragraph amendment to an unrelated bill, says that an auto manufacturer cannot also own an auto dealership.

Tesla is a relatively new automaker and intends to own all of its own dealerships. Nearly all other auto dealerships in the country are franchises.

Tesla executives say this legislative move is the latest salvo in an ongoing battle with the automotive establishment, which views company-owned dealerships as a threat. Those fears include company-owned dealers getting exclusive access to new vehicle lines or allowing direct sales to consumers, bypassing franchise dealerships.

“This, for all intents and purposes, shuts down our operations,” said James Chen, Tesla Motors’ vice president of regulatory affairs and associate general counsel.

Tesla, a California-based maker of all-electric cars, has faced similar attempts to prohibit company-owned dealerships in Massachusetts, Minnesota, New York and North Carolina.

In other states, such as Texas and Arizona, there already were laws in place that bar automakers from owning car dealerships.

Rather than open stores in those states, Tesla has retail “galleries” in which customers can look at the cars, but they cannot take a test drive or make a purchase. Customers must call a toll-free number or go online to discuss pricing and make delivery arrangements.

State franchise laws were designed to prevent automakers from opening company-owned stores, which would have an unfair advantage if they competed in the same markets with independently owned dealers selling the same brands, said Rhett Ricart, co-owner of Ricart Automotive in Groveport.

Tesla is not covered by many of the existing laws because it doesn’t have any independent franchises.

Dealers have long argued that the auto industry works better when independent retailers are sharing in the risks and the profits, and Ricart has concerns that the model could unravel if several states open the door to manufacturer-owned stores.

“Tesla is Armageddon,” he said.

If Tesla succeeds with its approach, Ricart thinks that established auto manufacturers will respond by introducing new brands and selling directly to consumers. This would send shockwaves through Ohio’s new-car dealerships, a group that employs more than 36,000 people.

One industry observer doubts whether the effects would be as dramatic as dealers fear but says they have reason to be concerned.

“Dealerships can be incredibly profitable businesses from a sales and service perspective, and (franchise owners) do not want to see that go away,” said Ed Kim, vice president for industry analysis at AutoPacific, a research firm in Tustin, Calif. “If Tesla does it, then that sets the precedent for other automakers to do it.”

Tesla said last week that it will open its first stores in Ohio, with an Easton outlet set to open on Friday and one in Cincinnati on Dec. 13. Its only other Ohio presence is a service center in Dublin that opened last year.

If the legislative proposal becomes law, it would take effect about 100 days later. Dealerships that opened before then would be allowed to remain open.

But the company would not be able to add stores in Cleveland, Akron or Dayton, which are all cities being considered for dealerships, said Diarmuid O’Connell, Tesla’s vice president for business development.

“The reason we sell direct is not to eviscerate the franchise dealer model,” O’Connell said. “It’s because we’re introducing a novel and innovative technology that requires a lot of customer education and support.” He describes traditional auto dealers as “classic incumbent monopolists” who would like to change Ohio law without debate.

Dealers are attempting to add the provision to Senate Bill 137, which would require motorists to move over for a highway maintenance vehicle in the same way they must for public safety, emergency and road-safety vehicles. The bill passed the Senate unanimously in June, and it is scheduled for amendments and a possible House committee vote this afternoon.

Rep. Rex Damschroder, R-Fremont, the committee chairman, said he is not sure what’s going to happen to the amendment. He has spoken to both the auto dealers and Tesla representatives and does not think there is a solution that would satisfy both sides.

“I wish it was in a stand-alone bill,” he said. “Everybody is getting excited and rushing a bit. That’s why they’re making an attempt to put it in.”

Neil Clark, a lobbyist representing Tesla, sent House members a letter last week urging them to block the amendment. “This kind of market suppression simply flies in the face of competition ...” he wrote.

Clark also noted that Tesla recently met with JobsOhio, the state’s economic-development entity, regarding the company’s plans to build a pickup-truck manufacturing plant. Tesla told JobsOhio that Ohio was “under serious consideration” for the plant, Clark wrote, and that the amendment would eliminate the state from contention.

A JobsOhio spokeswoman declined to comment.

Tesla has made similar statements in Texas. In April, CEO Elon Musk told Automotive News that Texas “would be a leading candidate for the truck plant” if lawmakers eased franchise restrictions.

Asked about this, Tesla’s Chen said Ohio and Texas both “offer a compelling case” as locations for the truck plant, but the company will not bring manufacturing to a state with a hostile regulatory climate.

Damschroder said he still wanted to see the final draft of the amendment, but he called it a “fairness issue for all dealers in the state of Ohio, which should be operating under the same game plan for equal competition.”

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