Tesla Motors has two Texas showrooms for its luxury electric cars, one
in Austin, the other in Houston.
But don't call them stores.
Texas law prohibits carmakers from selling directly to customers, as Tesla does elsewhere. Instead, the companies must sell through franchise dealerships, something Tesla so far refuses to do. Tesla tried to get the state's law changed, to no avail.
So instead of stores, Tesla's Texas facilities are "galleries," where customers can examine the company's $62,400-plus Model S sedan and talk with Tesla reps about the car's features. And that's about it.
"They can't tell you the price of the car, how to buy the car or give you a test drive," said Diarmuid O'Connell, Tesla's vice president of business development. "All they can really do is tell you about electric cars."
Dealers dig in
As Tesla expands across the country, the company has run into a dogged foe: the traditional auto dealership.
Dealer associations in several states have tried to shut out Tesla with lawsuits and legislation, viewing the company's direct-sales model as a challenge to their way of doing business.
They aren't necessarily worried about Tesla itself. The Palo Alto company, which reports its second-quarter earnings Wednesday, remains tiny by the auto industry's standards, planning to sell just 21,000 cars worldwide this year. The car dealers don't want other automakers to follow Tesla's lead, opening company-run stores that would compete with franchisees.
"They feel threatened by this, as they have when other companies have tried to do this in the past," said Jack Nerad, editorial director and executive analyst at Kelley Blue Book. "Dealers are part of a well-developed supply chain, and they want to keep it that way."
To Tesla, the fight represents a classic Silicon Valley story -- an innovative startup disrupts an established industry and faces resistance. The dealer associations, Tesla executives say, are trying to stifle change in a stodgy marketplace that could use a little shaking up.
"They go to the legislature and say, 'We need protection from innovation,' " O'Connell said. "There's really a fundamental question here: Should the government be prescribing a business model for automotives? Apply that argument, and we'd still be riding horses and delivering messages by hand."
To the dealer associations, direct sales could destroy a franchise system that they say works for manufacturers and consumers alike, even if many buyers don't realize it.
Texas, for example, has auto dealerships in 284 cities and towns, according to the Texas Automobile Dealers Association. Of those, 163 towns have fewer than 15,000 residents. If the auto industry switched to direct sales, the car companies wouldn't maintain stores and service centers in the smaller communities, said the association's president, Bill Wolters.
"The manufacturers would do exactly like the big-box stores have done with all the other products -- they would only be in the metropolitan areas and big cities," Wolters said. "The franchise system provides a much broader network of dealers than you'd have if manufacturers controlled the outlets."
The ability to sell cars in the hinterlands was, in fact, one of the main reasons the auto industry adopted the franchise model.
In the industry's early days, manufacturers experimented with direct sales. But developing their own networks of company-run stores across the country would have been wildly expensive. Working with franchisees solved that problem. As the industry evolved, dealers pressed their state legislatures for laws that would cement the relationship.
No problem here
California law, for example, prevents automakers from opening their stores within 10 miles of one of their franchisees, said Brian Maas, president of the California New Car Dealers Association. For a startup like Tesla, that isn't a problem, because the company doesn't have any franchisees.
Texas law, in contrast, prevents car manufacturers from owning dealerships. Tesla lobbied to have the law amended this spring, but couldn't drum up enough support in the capital of Austin.
"Elon Musk kind of made Texas a battleground to change our law," Wolters said. "We didn't pick a fight with him."
In other states, including New York and North Carolina, politicians friendly to auto dealers have introduced bills to block direct sales. Most of those bills have stalled. But Colorado passed such a law in 2010, shortly after Tesla opened a store there.
Prodigious generators of jobs and sales tax receipts, auto dealers wield considerable clout. Tesla has tried to fight back by mobilizing public support. More than 114,000 people have signed a petition on the White House website -- a petition written by a Tesla fan, rather than the company itself -- saying states should not be allowed to stop Tesla's direct sales.
The White House has not yet responded. But Tesla executives have publicly discussed seeking some kind of federal help if the state-by-state fight goes badly.
Some dealership associations say Tesla's attitude toward franchisees may change if the company continues to grow.
The company has just 33 stores or galleries scattered across the country. But if Tesla someday becomes a true mass-market brand, selling hundreds of thousands of cars per year, its direct sales model may no longer work, Maas said. Owning and operating a big, nationwide network of dealerships is still too expensive, he said.
"It just doesn't pencil out to have company-owned stores, company-owned service facilities at that size," Maas said. "They're going to have to choose. And we think the franchise system works."
Looking down the road
O'Connell agreed that as the company becomes larger and more established, Tesla may decide to work with franchise dealerships.
"When we get to our Gen 3 vehicle and we're doing 100,000 cars per year, it's going to make sense in some situations to sell through dealers," he said. "So if this is just about Tesla, all they have to do is wait a few years."
Until then, some analysts doubt the fight will seriously curb Tesla's sales.
The most important potential markets for Tesla -- such as California, Europe and China -- remain wide open, said Andrea James, research analyst with the Dougherty & Co. investment bank. And the conflict with auto dealers may generate goodwill among car buyers.
"In the court of public opinion, this is helping them, because Tesla looks like the underdog," James said. "People do not like being told by their government what they can and can not buy, especially when the source of that rule is an entrenched interest."
David R. Baker is a San Francisco Chronicle staff writer. E-mail: email@example.com Twitter: @DavidBakerSF
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