auto dealers

Don't count Elon Musk out yet

April 30, 2013: 9:45 AM ET

Tesla's founder has suffered setbacks in trying to expand sales of his innovative electric vehicles across the U.S. Don't expect him to stop any time soon.

By Doron Levin

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FORTUNE -- The always combative Elon Musk lost a round in his latest bid to sidestep the dealer-franchise system for selling vehicles. He may be down, but he's not out.

Musk, founder and chief executive officer of Tesla (TSLA), was rebuffed last week after the electric-car manufacturer applied to open a company-owned store in Virginia. The state's Department of Motor Vehicles denied the application in the face of opposition by automobile franchisees in that state.

Dealers throughout the U.S. have been a politically active and powerful group that oppose company-owned stores or selling directly to consumers over the Internet. Dealers have been successful in state legislatures to help frame laws that protect their longtime franchises, which operate as independent businesses.

"Not all good news," Musk tweeted. "Virginia DMV Commissioner just denied Tesla a dealer license despite hearing officer being in favor." Based on a March 16 review, a hearing officer said a company store would be in the public interest and recommended approval of Tesla's application. (Tesla did not comment.)

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Tesla is fighting for the right to sell directly to consumers in Texas and recently won a victory in Minnesota when legislators dropped a proposed law that would have prevented it. Musk has argued that the dealer franchise system is inefficient -- a point of view that others have tried to advance in the past without much success.

Musk has conducted polls among Texas legislators that he says prove that 80% of them favor allowing direct sales of electric cars by manufacturers to customers. The Austin Business Journal published a poll that showed similar results among its readers.

Musk recently accused the New York Times of dishonest and shoddy journalism after a reviewer criticized the company's Model S of not living up to its claims during a test drive. The founder of SpaceX and co-founder of PayPal (EBAY) has often quarreled with journalists who have criticized him or his ventures.

The dealer franchise system is well-entrenched and brings considerable financial muscle to the cause of protecting the legal and financial interests of car dealers. The National Automobile Dealers Association, based in suburban Washington, D.C., is one of the most powerful federal lobbies.

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But the nation's car dealers would be wise not to underestimate Musk. He is one of the nation's most determined, driven, and prosperous entrepreneurs, who is used proving his detractors wrong.

Many predicted his commercial space travel venture would flop -- it endures. Likewise, electric car companies have struggled and failed. But Tesla has collaborated with Toyota (TM) and Daimler; Tesla's stock is at an all-time high; and its Model S sedan has won mostly positive reviews. Look for more lawsuits and fights with state regulators over direct sales to consumers. The dealers will use their clout, which is considerable, to keep Tesla at bay unless Musk finally decides to appoint dealer franchisees.

The federal and several state governments have a divided interest: Politicians want to protect their benefactors, the car dealers -- but governments also have mandated cleaner automotive emissions, which Tesla and other makers of electrics and hybrids bring to the marketplace. So far Musk hasn't taken his fight to the U.S. Congress. Such a tactic wouldn't be a long shot if state governments keep refusing him.

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