California Car Dealers Say Tesla Is “Misleading” Consumers

By · September 19, 2013

Tesla Store in Santa Monica

Tesla is disrupting the conventional auto dealership model by operating its own chain of stores, like this one Santa Monica, Calif.

The California New Car Dealers Association appears to be picking a fight with Tesla Motors. The organization sent a nine-page letter (PDF) on Sept. 16 to the California Department of Motor Vehicles asking it to investigate Tesla’s advertisements. The car dealers claim that Tesla ads deceive customers.

Tesla sells its electric vehicles through factory-owned stores—rather than through the conventional industry structure of using dealers. But that is not what the dealers are upset about, CNCDA president Brian Maas told PluginCars.com. “This isn’t about Tesla’s ability to sell cars,” he said. “What we are concerned about is they are doing so in a way that is misleading to consumers.”

EV versus Gas

The complaint focuses on a cost of ownership calculation tool on Tesla’s website. The website says the cost of ownership tool “is intended to give you an idea of how much you can save by owning a Model S” compared to a gasoline powered vehicle.

It makes a number of assumptions, such as an owner’s income level, amount of business travel, money saved not waiting in line for gas, the price of gas, and the availability of electric vehicle purchase tax incentives, to arrive at monthly cost of ownership as low as $580.

“They took numbers out of thin air and claimed consumers are going to realize that savings,” said Maas. “We would like the advertisement to be reflective of what the law requires.”

Maas said the CNCDA doesn’t necessarily want the DMV to stop Tesla from selling cars in California. But “at the minimum they should change the advertisement,” he said, “and if some sanction is required, that is entirely up to the DMV.”

Power Struggle

By trying to open its own stores, and sell over the Internet, Tesla has run afoul of powerful political interests. Car dealers are protected from competition at many levels through franchise laws. Each state has its own laws, but in general they require automobiles to be sold through a dealership network with stores owned by individuals rather than the company that produces the vehicle.
Because they employee a lot of people in each state, and are huge contributors to political campaigns, dealers are powerful political forces. Each state has a dealer association with lobbies for dealers there. The National Automobile Dealers Association lobbies for dealerships at the national level.

Other companies have also run into trouble by trying to change the dealership model. TrueCar.com had to change its business model after dealers complained. The model allowed consumers to in essence play one dealership off another online to obtain the best price. But the dealership model is already changing, mostly due to the Internet, which has given consumers much more power in negotiating for a new car.

Tesla founder and CEO Elon Musk has said he doesn’t trust franchised auto dealers to sell electric vehicles because the majority of their sales come from gas-powered vehicles. Tesla therefore sells its expensive electric vehicles through factory-owned stores.

Some 48 states have restrictions on factory-owned dealerships, and dealer associations in many states have taken Tesla to court to block Tesla from selling there. Tesla has also tried to have laws changed.

The results have been mixed. In Massachusetts and New York judges dismissed the case, saying dealers lacked standing to sue. In Texas, which has one of the most restrictive laws against factory selling, Tesla introduced legislation to have the law changed. That failed after Texas dealers pumped more than $700,000 into the fight.

In other states, dealers are threatening to change state law to explicitly ban Tesla from selling there. If that happens, Tesla may get the feds involved in the dispute. In April, Tesla founder and CEO Elon Musk said, "If we're seeing nonstop battles at the state level, rather than fight 20 different state battles, I'd rather fight one federal battle."

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