As the NJ sales ban goes into effect, what's next for Tesla?
On Tuesday, New Jersey's ban on direct Tesla sales officially went into effect. Now Tesla's two NJ stores in Paramus and Short Hills can function only as "galleries" where potential buyers can look at the cars and talk to representatives about how the machines work, but cannot discuss pricing nor even test drive the vehicles. If customers like what they see, they'll have to go online to make the purchase.
The New Jersey ban, like similar bans in Texas and Arizona, are the result of aggressive lobbying and political donations, in this case from the New Jersey Coalition of Automotive Retailers, to prevent auto manufacturers from selling directly to customers. When you buy a Honda, you don't buy it directly from Honda, you buy it from a independently-owned dealer who acts like a middleman. In theory, the existence of these middlemen offers more competitive pricing and consumer protections, though many question how valuable they really are to buyers. The real benefits are more to big car manufacturers like Ford who may prefer to farm sales and service out to franchises instead of handling it themselves.
But with Tesla's comparatively small scale, it can service and sell cars itself. Furthermore, while there are certainly things that can go wrong with a Tesla vehicle, it has fewer mechanical parts than cars that run via internal combustion engines. And because of its connected diagnostics, a Tesla service center might know there's something wrong with the car before the driver even does, catching problems before they get worse. Finally, from a sales perspective, Tesla convincingly argues that its sales representatives are better-equipped to explain how electric cars work than traditional dealerships.
This is "rent-seeking" in its purest form. The dealers have nothing to offer consumers that Tesla isn't willing or capable of providing. As I wrote last month, this isn't about a tech company circumnavigating regulations designed to protect consumers, like in the cases of Airbnb and Uber. This is a group of incumbents using its political power to pass laws – or enforce otherwise intended existing ones – that are harmful to newcomers and wasteful to customers.
So how much of an effect have these laws had on Tesla's sales?
Tesla's Vice President of Business Development Diarmuid O’Connell appeared on Bloomberg TV's "In the Loop with Betty Liu" today to discuss the ban. So far it's too early to see any sales dip, according to O'Connell, but he has observed an effect on his customer base who largely oppose the ban.
"Certainly there's been an effect as far as public opinion is concerned, and anecdotally the reaction of our customers and the broader market to the idea of the ban and in particular how the ban came to be," he says.
By "how the ban came to be," O'Connell is referring to the promise Christie allegedly made to Elon Musk to postpone the ban. For Christie's part, he says it was not his intent to push Tesla out, laying blame instead on the New Jersey state legislature.
"I have no problem with Tesla selling directly to customers, except that it's against the law in New Jersey," Christie said at a town hall meeting. "What they were asking for was an exception from the law. I'm not the king. I don't get to grant exceptions to the law."
From Uber to Airbnb, innovative upstarts have discovered that, eventually, in most cases, you have to be willing to compromise and work with existing regulations and infrastructures. So why doesn't Tesla just give in and work with the dealers?
"Right now ,what we are doing does not require any independent dealers, in terms of volume of distribution," O'Connell says. "And in fact, we believe very firmly that our success is driven by the fact that we're representing this new technology to the public ourselves."
That may change over time if Tesla gets so big that it requires the capacity to increase its sales volume or geography reach, something dealerships can provide, or if electric cars become so widely-accepted and understood that they don't require a Tesla salesperson to convince buyers of their value.O'Connell also touched on the proposed $5 billion dollar "Gigafactory" Tesla is looking to build, which would be used to mass-manufacture lithium ion batteries. Four states are reportedly in the running to host the factory -- Arizona, New Mexico, Texas and Nevada. And ironically, two of those states have direct sales bans on Tesla cars. But O'Connell assures the Bloomberg hosts that these issues, while related, are not directly connected.
Bloomberg pressed O'Connell on what that factory might be used for other than creating batteries for Tesla vehicles, including possible partnerships with the US military. That's all we need, another tech company getting into the military contractor business, right? It's a valid question, considering O'Connell's resume includes a stint as the Chief of Staff at the State Department's Bureau of Political Military Affairs. O'Connell didn't rule it out, but said it likely wouldn't be the factory's number one priority.
"Whether there are military applications along the way is something we haven't spent a lot of time on, but from my prior experience, I am aware of some of the potential applications, but frankly the scale is in the consumer market," he says.
Watch the full video here: