Like New Jersey, Direct Retail Sales of Tesla Automobiles Not Allowed in Connecticut

by Lon Seidman | Mar 19, 2014 11:24am
(13) Comments | Commenting has expired

Tesla Motors

The Connecticut Department of Energy & Environmental Protection is co-sponsoring a contest for the auto dealership that sells the most electric cars by July 31, but the Tesla Model S — arguably the hottest electric vehicle on the market — will be excluded because it is currently restricted by Connecticut law from being sold at retail to consumers in the state.

Tesla is a new automaker based out of Hawthorne, California. Its CEO is Paypal founder Elon Musk, who splits his time between the disruptive car company and his other role running SpaceX, a startup that launches cargo and soon people to the International Space Station. Tesla entered the market last year to rave reviews from automotive publications, including the highest rating ever issued by Connecticut-based Consumer Reports.

Watch a video review of driving a Tesla Model S

The electric car maker’s business model differs from traditional manufacturers in that the company sells and services its vehicles directly and not through franchised dealerships like other car manufacturers.

The problem for Tesla is that the retail sale of an automobile from a manufacturer to a consumer is illegal in many states, including Connecticut. So while it is legal for Connecticut residents to own and drive a Tesla Model S, they can’t actually purchase one from a retail location owned by the automaker because Tesla does not sell the car through locally owned franchised dealerships.

Buying a Tesla in Connecticut

It’s not impossible to buy a Tesla in Connecticut, although the purchase of the car feels more like an e-commerce transaction than the back-and-forth negotiation typically experienced when buying a car at a local dealership.

Tesla recently opened up a service center and “gallery” in Milford, which resembles a traditional auto dealership complete with a showroom and a meticulously clean service area. On display are a few Model S sedans, a selection of tire, color, and trim options, as well as a stripped down chassis of the Model S to demonstrate its simplified drivetrain.

Lon Seidman photo

Tesla’s “gallery” at their Milford service center

Tesla offers test drives through the gallery locations, but staff are restricted from discussing pricing or actually selling the car on site. Instead, consumers need to call into a New York sales location to speak with someone specifically about pricing the vehicle, or they can configure the car on the Tesla website. Tesla outsources trade-ins through a partnership with Autonation.com.

Financing is more difficult, as two of the three banks that Tesla uses for its guaranteed trade-in value program will not finance Connecticut sales unless the customer travels to New York or New Jersey to sign paperwork at a Tesla location where it’s legal to sell the vehicle. A third bank, the Technology Credit Union, will finance the car at the same rates as the other two banks for Connecticut buyers over the phone. Tesla accepts payments via wire transfer, check, and now even automatic checking account withdrawals through its website.

Tesla delivers vehicles to Connecticut drivers at its service location in Milford. When the vehicle arrives, it usually has New Jersey temporary plates attached and Tesla representatives later register the vehicle on the owner’s behalf in Connecticut after delivery. Pickups can also take place at other Tesla owned service centers in New York and Massachusetts.

Lon Seidman photo

Visitors can browse vehicle options at the Tesla Milford “gallery”

Why Restrict Direct Sales?

Jim Fleming, president of the Connecticut Automotive Retailers Association, says the law is there to protect consumers and the many family owned dealerships in the state that he says employ about 13,000 Connecticut residents.

“Before there was a franchise law, an individual could open a store up, put a big investment in, and if the manufacturer decided they didn’t like somebody they could threaten to take the franchise or put somebody next door to them,” Fleming said.

Connecticut’s law requires that any new vehicle be sold to a consumer by a franchise that is not owned by the manufacturer. Each dealer location must be at least 14 miles away from another dealership selling the same brand.

Fleming says franchise statutes have held up over the years because there was no fair bargaining position between a small dealer and a multinational corporation.

“The reason my dealers and I support the franchise system is that it’s pro-consumer in that it provides competition between like brands,” Fleming said, adding that if a consumer had a problem with a Ford dealership they’d have the choice to go to another Ford dealership for sales and service.

The issue of franchise-only vehicle selling came to a head earlier this month after New Jersey announced that it was barring direct sales of Teslas.

Musk wrote a blog post on Tesla’s website about the situation, stating franchise laws were designed to protect existing auto franchises, not new manufacturers that have never sold through franchise operations.

“The reason that we did not choose to do this [selling through franchises] is that the auto dealers have a fundamental conflict of interest between promoting gasoline cars, which constitute virtually all of their revenue, and electric cars, which constitute virtually none,” Musk wrote, “Inevitably, they revert to selling what’s easy and it is game over for the new company.”

Musk pointed to the failure of auto startups like Tucker, DeLorean, Fisker, and others that all attempted to sell through auto franchises.

Fleming said there are some additional benefits to consumers and manufacturers, pointing out how manufacturers rely on local dealers to quickly address product recalls and other service related issues.

Lon Seidman photo

Tesla’s service area at their Milford service center

But Musk says service is more a profit center for local dealerships given the slim margins they make from selling new cars. And he says electric vehicles require far less regular maintenance.

“It does not seem right to me that companies try to make a profit off customers when their product breaks,” Musk wrote in his blog post. “Overcharging people for unneeded servicing (often not even fixing the original problem) is rampant within the industry and happened to me personally on several occasions when I drove gasoline cars.”

Can the Tesla Model Scale?

Tesla sold about 25,000 of its $70,000+ Model S sedans worldwide in 2013, a tiny fraction of the millions of vehicles sold by other automakers.

The company is gearing up to produce a more mass market vehicle that will sell for potentially half the price or less than the premium sedan, and Fleming doesn’t think Tesla can scale to that volume without the help of local franchise dealerships. 

“At some point they’ll adopt the franchise system and not want to make the capital investment,” Fleming said. 

Legislative Action Unlikely

Tesla did not respond to inquiries about any changes they might seek to Connecticut statutes regarding franchise sales. Given the relative ease in which Connecticut customers can purchase the vehicles despite the franchise restrictions, it is unlikely the company will pursue legislative changes.

But Fleming said the Connecticut auto retailers are prepared to take action if Tesla or another manufacturer attempts to make changes to the law.

“The auto dealers here employ nearly 13,000 people in the 250 franchise dealers they have,” Fleming said. “If you did away with the franchise system and if you allowed a manufacturer to come in and compete with locally owned stores and put them out of business, you would lose a tremendous number of jobs.”

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(13) Comments

posted by: art vandelay | March 19, 2014  1:06pm

art vandelay

Here we have a state government that embraces green energy.  Solar panels, windmills, trash to energy, recycling you name it.  When it comes to the most successful green product developed in the last few years, NO DICE!  The Automotive Dealership lobby is so powerful, they will not budge or change their sales practices.
Wake up times are changing and they better get on board.  The days of old time horse trading are over.  It’s an outdated mode of doing business.  Tesla’s leading the way.  Go Tesla.

posted by: Weapon | March 19, 2014  3:19pm

You do not need to do away with the franchise laws for Tesla to sell directly. Just let manufacturers who have no franchises sell directly. Or don’t let manufacturers open a dealership within 100 miles of the same brand.

Also, I’f like to point out the franchise laws NEVER protect the consumer. They protect only the franchise. The consumer doesn’t even want franchised dealerships.

And competition within the same brand is ridiculous. Having a 3rd party always brings up the price. So no matter what they do it will cost more to the consumer through a franchise dealer. Even if that was hypothetically the case(which it isn’t) nothing is stopping the manufacturer from having 1 exclusive franchised dealer and his whole case goes poof.

posted by: art vandelay | March 22, 2014  5:16am

art vandelay

Wait until Tesla designs & builds an automobile in the price range of a Toyota, Honda, Ford & Chevy.  Tesla will bring the entire franchise system to its knees.  I hope they do.  It’s called free enterprise.

posted by: art vandelay | March 23, 2014  7:42am

art vandelay

Malloy should embrace Tesla and offer the company one of his “First Five” grants.  Malloy would have a fantastic “Photo Op” cutting the ribbon at a Tesla Store in Fairfield County.  Malloy should also court Tesla to construct an assembly plant.  Imagine the jobs that could be created.  Keep the dealer lobby & unions out.  Let the company prosper in Connecticut.  Tesla’s a winner.  Jackson Lab & the Busway are total losers.

posted by: StanMuzyk | March 24, 2014  12:48pm

@Art: Gov. Malloy would never allow Tesla to build an assembly plant in Connecticut.
Like Pres. Obama, Malloy is not a job creator and would never keep the dealer lobby and unions out. He promotes unionism to keep him in office. We should be thinking about preventing Malloy from a reelection victory—to save our failing state of affairs.  I believe that you agree that “we need a change for the better to give Connecticut a fresh start” Mr.Vandelay.

posted by: Derek G | March 24, 2014  6:55pm

““The reason my dealers and I support the franchise system is that it’s pro-consumer in that it provides competition between like brands..”

Oh, come on.  Show me one auto buyer who thinks the franchise system is pro-consumer.  Auto dealers are an obstacle to buying a car, not a help.  They add absolutely no value (other than perhaps local storage of cars) but add considerable cost.  I’ve wished for years that one could just buy directly from the manufacturers.

posted by: StanMuzyk | March 25, 2014  9:05am

@Derek G: If we bought our motor vehicle’s directly from the manufacturer—where would we get them serviced according to warranty specifications?

posted by: art vandelay | March 31, 2014  3:37pm

art vandelay

@StanMuzyk,
Believe it or not each dealer is 3 independent businesses.  Sales, Service & Parts. All Tesla is doing is establishing a service center where the car can be fixed under warranty just like a dealer.  Think outside the box.  If you drove your new car to a different area of the country, you could get it fixed at one of the 3 independent companies I previously mentioned.  Tesla’s doing the right thing.  The days of the Auto Dealer are or should be over.

posted by: IOU | April 11, 2014  10:47pm

IOU

Go S.

posted by: justsayin | April 14, 2014  10:43am

Why is the state trying to “protect” those who do not need it? If you buy this car you all these things and accept that. Just like buying from amazon. No local presence but for the value you the consumer are OK with the decision. State has no place hear, this is more consumer than pro.

posted by: StanMuzyk | April 14, 2014  1:07pm

@Art:
You know that Malloy would never allow non-union involvement in promoting hypothetical Tesla business in Connecticut.

posted by: StanMuzyk | April 14, 2014  1:31pm

@Art: Why even go there?  You know that Malloy’s hypothetical promotion of
Tesla non-union business in Connecticut—will never happen. That’s why Malloy is a well-documented loser of business in Connecticut—and has a negative job-approval rating. What would make you think that Malloy
would change his Democrat-mastered-failing-philosophy?

posted by: ABC | April 15, 2014  7:12pm

Blatant anti-consumer, anti-American protectionism at its worst. 

But unlike others, I’m not so sure that Malloy won’t begin to put pressure on these car dealer racketeers. 

After all, he surprised us when he stood up for consumers with Sunday sales in liquor stores.