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Tesla’s direct sales idea sparks dealer anger in Ohio

By Alan Ohnsman and Mark Niquette
Bloomberg News

To hear Ohio car dealers tell it, the Tesla Motors Inc. showroom that opened last year in a Columbus mall is a threat to a bedrock U.S. institution.

They are pressing lawsuits that would stop Tesla’s showroom and a second in Cincinnati from allowing people to order customized Model S electric cars right from the factory. The dealers argue that Tesla’s direct sales violate state automotive franchise rules.

After failing in a previous attempt last year, the group also backs legislation pending in a Senate committee to force Tesla to use franchise dealers if it wants to open more sales points in Ohio.

Car dealers in states including New York, Minnesota and Georgia have also sought in the past year to block Tesla from directly retailing its models. Texas dealers successfully backed a law setting the nation’s toughest restrictions on Tesla, and Virginia and Arizona also imposed limits.

Dealers fear Tesla’s model would set a precedent that could let other automakers sidestep the way independent franchisees have sold and serviced vehicles for eight decades. If Tesla succeeds, some argue future startups or entrants from China or elsewhere could sell directly or create online outlets that sidestep dealers entirely.

“I don’t want ‘Hydrogen Motors’ to come along five years from now or some other Mickey Mouse thing to come along and then just jack up the industry,” said Rhett Ricart, president of Ricart Automotive in suburban Columbus and a plaintiff in a suit filed against Tesla. “It’s not right.”

Tesla argues company-operated stores are necessary because it has to both sell vehicles and promote a new technology, said Diarmuid O’Connell, vice president of business development.

“I disagree with the characterization that this is disruptive,” he said. “It’s only disruptive from their point of view. It is logical and pragmatic from our point of view.”

This isn’t the first time that 42-year-old Tesla co-founder Elon Musk has disrupted established industries. He helped remake online commerce as a co-founder of PayPal Inc. and has more recently shaken up the auto, aerospace and solar-power industries. Last month he announced plans to build the world’s largest battery plant to supply Tesla cars and provide flexible power storage that could rattle the power-grid model by letting customers power their homes.

Tesla’s Model S, which starts at $71,000 and can sell for more than $100,000 with options, leads in Consumer Reports rankings as the best car of 2014. Shipments of the electric sedan from Tesla’s Fremont, Calif., factory are to grow more than 55 percent this year, with sales expanding in Europe and starting in China this month.

“Elon Musk certainly has the resources to fight this battle,” said Aaron Jacoby, a Los Angeles-based attorney who leads the automotive industry practice for Arent Fox LLP and says he hasn’t done work on cases related to Tesla. “While any individual dealer may not be worth as much as Elon, there are thousands of them.”

Dealers say the three-tier auto distribution system puts independent dealers between automakers and customers. The National Automobile Dealers Association, which declined to comment on members’ efforts to block Tesla’s direct-sales approach, said the first rules regulating dealer-automaker relationships date to 1937.

The franchise model continues to be important, dealers say. The system protects the investment of 17,600 U.S. dealers who spend millions of dollars on facilities and inventory, said Ricart.

The average dealership is worth $3 million and produced a net profit before taxes of $843,697 in 2012, NADA said.

The Ohio dealer group argues Tesla threatens the 830 franchised motor vehicle dealers in Ohio who employ more than 50,000 people.


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