Texas Legislature may finally have a different outcome for Tesla | Crain's Austin

Texas Legislature may finally have a different outcome for Tesla

For the time being, Tesla has galleries in Texas that showcase its vehicles, but the employees in the stores aren’t able to talk price or actual sale information. | Photo courtesy of Tesla.

Tesla's fight to sell cars directly in Texas has sparked fears that it could upend the entire franchise dealer system in the state. But, Tesla's supporters say this is the way of the future.

Bills filed in the Texas House of Representatives and the Senate would allow manufacturers to establish vehicle dealerships for the first time. The state's franchise dealership laws are the strongest in the country and have no loopholes for Tesla to squeeze through as it sells vehicles directly to the public. Consumers have to jump through hoops to buy the luxury electric cars in Texas, which mandates that new cars can only be sold in franchise dealerships—a model Tesla doesn't want to use.

Rep. Jason Isaac, R-Dripping Springs, said he filed House Bill 4236 so Texans can buy cars however they choose. 

House Bill 4236 was referred to Licensing & Administrative Procedures on April 3 and Senate Bill 2093 was referred to the Business & Commerce committee on March 28. The identical bills would allow Tesla, or any automaker, to sell directly to the public. 

For the time being, Tesla has galleries in Texas that showcase its vehicles, but the employees in the stores aren’t able to talk price or actual sale information. Instead, consumers are referred to the website or to a phone number in California. Vehicles are delivered to Texas via third parties and come with California license plates.  

“They (consumers) just don’t understand why they can’t have a clean buying experience like they would if they were to buy from a dealership,” Isaac said. “They feel like they should be able to buy directly from Tesla.”

Third time’s the charm?

This marks the third session that Tesla has fought to change Texas’ strict dealer franchise laws. This time, the bills are broadly written for any carmaker, not just for Palo Alto, California-based Tesla.

“I’m not a big fan of carve-outs,” Isaac said. “This is a free-market approach to a 21st-century issue. It’s a great free-market bill and the Republican party overwhelmingly supports this.”

As in previous sessions, the bills will face an uphill battle from the well-entrenched Texas Automobile Dealers Association, which supports the current franchise dealer system.

“It just creates a monopoly for them if the manufacturer controls all the retail,” said Bill Wolters, president of TADA. “It’s still only Tesla that’s wanting to change state law. At this point, no other vehicle manufacturers have expressed interest in selling direct.”

The danger is that these bills would create a situation where a major auto manufacturer could start competing directly with franchise dealerships, Wolters said. Independently owned dealerships are involved in the community, offer services on their vehicles and are located in rural towns. Manufacturers could put the squeeze on rural dealers by withholding inventory or other methods to force them out of business, he said.

“It’s really a different dynamic when you have family-owned businesses than if manufacturers control retail,” Wolters said.

Rep. Isaac, however, said he didn't think allowing automakers to sell direct would have a significant impact on franchise car dealerships.

“I completely disagree with that notion,” Isaac said. “I don’t believe that’s happened in other states. I just don’t see their business going away.”

Beyond Tesla

The way technology has advanced in recent years, Isaac envisions a future where self-driving cargo trucks move goods and self-driving cars shuttle people around. Furthermore, Isaac said Tesla is just the beginning as other tech companies could jump into the vehicle manufacturing business—and Texas’ franchise laws would stifle that innovation by forcing them to sell through dealerships.

The fact that tech companies like Tesla can’t sell in Texas could also prevent them from building factories in the state. In fact, Tesla considered building a Gigafactory in Texas before settling on a site in Nevada.

“If they can’t sell, why would they set up shop here?” Isaac asked.

License to sell

Diarmuid O’Connell, vice president of business development at Tesla, said if the bills pass, they would get licenses to sell vehicles at their galleries, including the locations at NorthPark Center in Dallas, University Village Park in Fort Worth and the future location in Southlake Town Square.

There’s no timeline on when sales could actually start occurring in the state, O’Connell said.

“We would be appropriately diplomatic but aggressive in moving forward with licenses for our galleries,” he said. 

O’Connell acknowledged that TADA has strong political pull in the Texas Legislature. But he said the change is ultimately inevitable, whether it happens at the state or the federal level.

“There’s a legal challenge in Michigan that goes to the constitutionality of the issue,” O’Connell said. “There’s a strong book of legal precedence that this is an illegal monopoly.”

Wolters countered that Tesla would actually be the one with the monopoly. Dealerships have to compete on vehicle sales, trade-ins and service, something Tesla wouldn't have to do since it controls the entire experience, he said.

O’Connell called it a “ridiculous argument” to say Tesla doesn’t have to compete. Long-term, the electric engines have fewer moving parts and fluids that need changing, so there’s a lower service profile.

“That doesn’t mean we aren’t investing in service infrastructure,” O’Connell said. “We’re investing a lot of money to make sure they have a great service experience.”

April 10, 2017 - 10:16am