Tesla Motors: Direct Sales Method Inhibits Success in North Carolina

Jana Benson, J.D./C.L. 2015, Paul M. Hebert Law Center, Louisiana State University

I.            Who is Tesla Motors?

Tesla Motors was founded in 2003 by a group of engineers that was determined to transition the world into electric mobility through affordable and modern electric cars.[1] Consumer Reportscalled the Tesla Model S the “best car it had ever tested.”[2] The Model S, an all-electric, plug-in car, scored a 99 out of a possible 100 in the magazine’s tests.[3] In addition to producing a cutting edge, zero emission car, Tesla Motors also chose a unique way to sell their vehicles — directly to the consumer. Consumers simply go online and order their custom made Tesla car or SUV, and Tesla Motors delivers that vehicle directly to the consumer.[4]

II.            Tesla Motors Success with Direct Sales

Tesla Motors found selling directly to consumers aided the company in overcoming market barriers faced by electric car manufacturers.[5] This approach has worked remarkably well for Tesla Motors as the demand for their cars has consistently increased. Tesla has delivered more than 10,000 electric vehicles to customers in thirty-one countries.[6] Tesla Motors gave the world a product that could spark the transition from petroleum to electric.

III.            North Carolina’s Fight Against Tesla

While many consumers may be eager to accept what Tesla Motors has to offer, some states are putting up quite the fight to keep Tesla Motors from conducting business in their states. This year, North Carolina proposed Senate Bill 327, which would require all vehicles sold in the state of North Carolina be sold through a licensed dealership.[7] This bill would, in effect, prevent Tesla from selling its vehicles directly to consumers in the state of North Carolina.[8]The bill would force consumers to purchase cars through a dealership, ultimately eliminating the North Carolina consumer’s option to purchase a Tesla vehicle.

North Carolina’s Senate Bill 327 would apply to all car manufacturers.[9] However, despite the seemingly broad application of the law, it is very clear that this bill is aimed at Tesla Motors. Tesla is the only car manufacturing company that sells the majority of its vehicles through direct sales.[10]  The North Carolina Automobile Dealers Association, which represents franchised dealerships, claims that the bill attempts to destroy “unfair competition” between manufacturers and dealers.[11]

          a)      What does North Carolina really have against Tesla?

While North Carolina claims it is worried about its consumers, it appears that North Carolina may also be worried about its local car dealerships. North Carolina’s legislature may also think this bill is protecting the consumer from “unfair competition,” but this bill, if copied by other states, could serve as a large roadblock in the transition to electric vehicles. Car dealerships serve as the middlemen in the automobile industry. Tesla’s sales model is new in that it eliminates the middleman car dealership. North Carolina and its car dealers may fear that the Tesla business model will become the new norm. The automobile dealerships are significant contributors to state legislators in North Carolina.[12] Also, these dealerships generate a significant amount of tax revenue for the State.[13] Therefore, one could intuit a number of reasons why both North Carolina and its car dealers do not want to allow the Tesla sales model in North Carolina. The automobile dealerships may fear this new norm of direct sales because it removes the need for the dealership’s services, eliminating jobs and the traditional scheme of getting an automobile to the consumer.

The automobile dealerships ignore that it is natural for markets to evolve over time especially when the nature of products change. One could say that the effect of Tesla’s direct sales model in the automobile industry is still too new to know the actual effects that will take place in the market. If these effects are unknown, then it makes even less sense for North Carolina to attempt to prevent this change that at these early stages only guarantees a positive impact for the environment. In this case, Tesla automobiles represent a change in the nature of the automobile, a change that could invigorate this market.[14] State legislatures should not be able to impede this change through legislation because they fear a product that would be beneficial to its citizens. As time progresses, changes in the market are inevitable and adjustments have to be made, but fear of change is an insufficient justification for stopping the sale of Tesla vehicles in North Carolina.

Tesla’s Vice President of Corporate and Business Development, Diarmuid O’Connell rejects North Carolina’s claim that Senate Bill 327 is intended to protect consumers.[15]According to O’Connell, the Senate Bill in North Carolina is not protecting consumers from unfair competition, but instead fosters unfair competition by excluding the electric car from the market in North Carolina completely.[16] This bill is preventing a transition into the future of the automobile industry.

The political power of automobile dealerships and the legislature’s fear of changing the current sales structure explain why North Carolina is preventing sales of Tesla vehicles in its state. Dealerships are putting pressure on their legislature to protect the traditional form of their market because the current structure clearly benefits the dealers. This traditional structure, however, does not support Tesla’s goal of getting its zero emission car to the public. Tesla wants its product to be the future of the automobile industry because it will aid in the transition from dependence on petroleum to renewable energy sources.[17] The transition to electricity will increase the independence of the automobile industry along with reducing emissions.[18] The North Carolina legislature fails to realize that the benefits of the zero-emission cars will outweigh the burden placed on the automobile market. The truth is that Tesla Motors is a new company that is critical “to developing a cleaner, more independent transportation paradigm.”[19] It is the opinion of some that promotion of Tesla’s goal is more important than fear of a new business model in the automobile industry.[20] As a new company Tesla needs to form a solid foundation through direct sales in order to break through in the automobile market. North Carolina needs to consider whether protecting the traditional car sales scheme is in the best long term interest of the state, its citizens, and automobile market.

          b)     Is Senate Bill 327 Constitutional?

The North Carolina legislature is eliminating the consumer’s choice by constructing this barrier to market entry that prevents consumers from purchasing a Tesla vehicle.[21] In order for a state to enact a statute, the enactment in question must be “rationally related” to a legitimate governmental interest.[22] The “rational basis” test is applied to constitutional challenges to federal or state law through the Fourteenth Amendment.[23] The North Carolina legislature will likely claim that protecting North Carolina citizens from “unfair competition” creates a “rational basis” for enacting Senate Bill 327. This argument assumes that there actually is “unfair competition” created, however that very fact is in dispute. Others, in fact, would argue quite the opposite of the North Carolina legislature, urging that there is no rational basis or compelling state interest that would allow North Carolina to enact this barrier to market entry and consumer choice.[24]

Senate Bill 327 prevents Tesla Motors from entering the automobile market. It also prevents the consumers of North Carolina from choosing to purchase a Tesla automobile over other fuel-powered vehicles. North Carolina’s legislature should not be able to enact this bill because a government interest is likely not satisfied by preventing Tesla Motors from entering North Carolina’s automobile industry. One could interpret the bill was proposed in order to protect automobile dealerships in North Carolina from “unfair competition.” However, the government interest here is a pretext because the bill is only helping North Carolina automobile dealerships object to the change proposed by Tesla’s direct sales method. If this is the only legitimate motivator for Senate Bill 327, then this bill will not pass the “rational basis” test, because there is no legitimate state government interest. So, while North Carolina’s claim to protect its consumers from “unfair competition” sounds rational on its face, the actual basis of the statute protects the automobile dealerships interests, and not the state government nor its citizens.

         c)      Where is Senate Bill 327 today?

North Carolina ultimately decided to split Senate Bill 327 into two bills. The part of the bill that passed was attached to another bill and unrelated to the issues affecting Tesla Motors.[25]  The part of the bill relating to Tesla Motors is still alive, but it was not addressed during the 2013 legislative session. Rather, the Bill will roll over into next year’s session in May 2014.[26] Tesla has until next May to meet with the Automobile Dealers Association to work out a solution.

IV.            Conclusion

Perhaps if the North Carolina legislature could take a ride in Tesla’s new car, then they would decide that these zero emission cars are, in fact, the cars of the future. If North Carolina decides to adjust its perspective on Tesla’s direct sales strategy then it can learn to grow with Tesla. North Carolina needs to focus on what Tesla is trying to do and how North Carolina and its citizens can benefit from this new electric car market, as opposed to being fearful of the way the Tesla Motors approach may change the traditional car sales market.

The North Carolina legislature should withdraw this proposed legislation in order to promote this movement to electric vehicles because the benefits of electric cars outweigh the changes that might take place in the automobile industry sales market. Tesla’s goal to provide a zero emission car is a crucial player in transitioning vehicles to electricity. This transition benefits everyone by making the automobile industry more independent and puts more energy-efficient vehicles in use. The fear of a new sales method should not cripple a product that could ultimately change the automobile industry for the betterment of consumers and the environment. The automobile industry should embrace this change even if that means facing the challenges that accompany the elimination of car dealerships as a middleman to all car sales. Zero emission vehicles are the way that the automobile industry is moving. It is important that North Carolina embraces this new and forward-looking transition instead of preserving a sales model that is stagnant and inhibits progress.

Preferred citation: Jana Benson, Tesla Motors: Direct Sales Method Inhibits Success in North Carolina, LSU J. Energy L. & Res. Currents (October 9, 2013), http://sites.law.lsu.edu/jelrblog/?p=320.