electric cars

Tesla's Elon Musk: State ban on direct sales of EVs is 'twisted'

March 14, 2014: 6:06 PM ET

Facing New Jersey regulation that bars the company from selling electric cars directly to buyers, Tesla turns to showrooming and blog brawling.

By Kirsten Korosec

Tesla Motors CEO Elon Musk at a Senate Appropriations subcommittee hearing in Washington, D.C. in March

Tesla Motors CEO Elon Musk at a Senate Appropriations subcommittee hearing in Washington, D.C. in March

FORTUNE -- Tesla Motors CEO Elon Musk accused New Jersey Gov. Chris Christie on Friday of cutting a "backroom deal" with the state's auto dealer lobby to push through a rule change that effectively bars the electric car company from selling vehicles directly to consumers.

In response to the rule change, Tesla Motors (TSLA) will convert its two sales centers into "galleries" after April 1, Musk wrote in a comprehensive post on the company's blog.

Consumers will be allowed to see the car and ask questions, but staff will not be able to discuss price or complete a sale in the store. Interested buyers can still purchase Tesla's Model S sedan at its Manhattan store and order vehicles from New Jersey for delivery via the company's website.

Tesla Motors is also considering legal action to open sales back up in the state, Musk wrote.

MORE: Clues emerge for Tesla's $5 billion battery factory

On Tuesday, the New Jersey Motor Vehicle Commission amended a rule to prevent auto manufacturers from selling cars directly to consumers. The rule change, which was approved in a 6-0 vote, was made to "clarify our regulations to conform to state statute," said NJMVC spokeswoman Elyse Coffey.

Musk insists Gov. Christie promised the issue would be put to a vote before the state legislature, not a commission comprised of political appointees. Musk said the regulation is "fundamentally contrary to the intent of the law."

A spokesman with Gov. Christie's office says since Tesla first began operating in New Jersey one year ago, it was made clear that the company would need to work with the legislature on a bill to establish new direct-sales operations under New Jersey law.

"This administration does not find it appropriate to unilaterally change the way cars are sold in New Jersey without legislation and Tesla has been aware of this position since the beginning," spokesman Kevin Roberts said in an e-mail to Fortune.

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The New Jersey Coalition of Automotive Retailers argues the regulation change conforms to state law, which was originally enacted to serve the public interest. The lobby group says Tesla's factory-model creates a "vertical monopoly and limits competition" and places the "fox in the charge of the chicken coop" as well as limits consumer access to a qualified, independent source for warranty and safety recall service.

"Unless they are referring to the mafia version of 'protection,' this is obviously untrue," Musk wrote.

A new approach

Tesla Motors' business model is a departure from the status quo in the auto industry, in which manufacturers sell vehicles using franchised dealers.

"There are companies out there that do sell specific niche vehicles via direct sales," said John Gartner, research director of smart transportation at Navigant Research. "But this is the first time someone has tried to be a mass marketer of vehicles through this model."

Tesla is determined to use the direct sales model largely because the company believes that dealers have a fundamental conflict of interest between promoting gasoline cars, which make up nearly all of their revenue, and electric cars, which constitute virtually none, Musk wrote.

MORE: Why Google should acquire Tesla

Dealers aren't incentivized to sell EVs, Musk argued, because their new technology requires additional employee training and less maintenance -- critical, because most dealer profits are made by servicing vehicles. "Inevitably, they revert to selling what's easy and it is game over for the new company," Musk wrote.

Other electric car startup companies, such as Fisker and Coda, tried to use the auto dealer system. All failed, Musk wrote.

Even incumbent automakers have had difficulty compelling dealers to sell electric vehicles. Cadillac, owned by General Motors (GM), has had its own problems motivating dealers to sell its luxury ELR plug-in hybrid, the brand's first such vehicle. Nearly half of Cadillac's 940 dealers in the U.S. decided not to sell the 2014 ELR, according to a February Edmunds report.

MORE: Would you watch an electric-car racing series?

About 94,000 electric vehicles were sold in the U.S. in 2013, Gartner said. Two to three percent of those U.S. EV sales were in New Jersey, making it the tenth-largest state in terms of electric vehicle purchases, he added.

"New Jersey is a reasonably large market, and while it's not clear what percentage of those sales were from Tesla, they definitely had a presence," Gartner said. "At least for now, it closes one window [of opportunity] for them -- an important one."

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