Tesla Confirms Texas for Next Gigafactory – How Will Franchise Dealers Respond?
[July 23, 2020]
On July 22, 2020, Tesla finally put an end to the mystery of where the next U.S.-based Gigafactory would be built. Over the last several weeks and months, the leading finalists were between Tulsa, Okla., and Austin, Texas. After receiving some initial pushback from local activists about the perceived overly generous incentives offered to Tesla to locate there, Tulsa wasted no time ratcheting up its courtship efforts. But Austin ultimately prevailed.
Austin’s selection is not a great surprise to me. The city has a long-standing reputation as being one of the most progressive locales in the state, and is home to a large number of tech company offices, as well as being one of the leading destinations for California expats, much to the chagrin of locals, in many cases.
The Lone Star State might become a PR battleground for direct-to-consumer vehicle sales.
However, the selection of Austin will shine a stark, uncomfortable spotlight on the state’s auto dealer franchise laws, which are among the strictest in the nation in regard to allowing for factory-direct sales. Only recently has Tesla even opened service and delivery centers in the state. The only state with laws and regulations more hostile to Tesla’s factory-direct sales model is Michigan, which only in May 2020 opened a service center in the Detroit suburb of Clarkston.
The National Automobile Dealer’s Association (NADA) has long insisted that automobiles must be sold through an independent franchised dealership, and was able to push through additional protections to their favored model in several states once it became obvious that Tesla wasn’t willing to play by their rules.
NADA, and it’s state-level deputies (TADA, the Texas dealer’s association, being one of them) have long argued that franchised dealerships are the most “pro-consumer, pro-competition” model for selling and servicing cars, and that having multiple independently owned outlets in an area ensures competition for the lowest price and best service.
However, there’s no getting around the fact that at their core, franchised dealerships are inherently a middleman organization. So sure, within their legally protected cartel, they compete to offer the “best deal.” However, if manufacturers weren’t constrained on the sales model, they could conceivably sell direct-to-consumer and not have to worry about building in an automatic margin to allow the dealers to profit. The ostensible protection of the franchise dealers to prevent manufacturers from competing with existing franchise dealers does not apply in this case, since Tesla has never had any franchised dealers to begin with.
Some OEMs, at least publicly, have said they have “no desire” to go to the direct-to-consumer model, and are happy to allow the franchised dealers to deal with the sales, registration, and service paperwork involved in new cars. Behind closed doors, many would probably relish the opportunity to cut out the redundant middlemen and sell direct.
I do feel a slight twinge of conflict as my late uncle owned a multi-franchise dealership for many decades, and managed to make a successful business out of it. At the time of his passing, he left his heirs and survivors a not-insubstantial sum. Good for him. I bought two cars from him and my cousin, who took over operation and management of the dealership for a few years after his passing before taking a buyout offer from an OEM to close operations.
But getting back to the main subject of whether the location of the next Gigafactory in Texas will tighten the screws on TADA to drop their hostile, antagonistic stance on allowing factory-direct vehicle sales in the state....
I am sure there will be additional hearings, legislative proposals, and perhaps even lawsuits challenging the direct-sales ban in Texas. TADA and NADA’s defense of the franchise dealer model as the only way to sell cars is ringing hollower and hollower in these days of the Apple store, Amazon, and other companies that are truly focused on delivering maximum value and convenience.
Texas’ allowance of service centers is a small crack in the wall that may crumble further under public scrutiny of a system that doesn’t allow a future employer of thousands, a net contributor of tens of millions, and ultimately, potentially billions of dollars to the local economy and tax revenue, to not be able to sell directly in the state. You can bet the PR battle to win the hearts and minds of Texas politicians and consumers has just begun.
(Main image courtesy Tesla)
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