The Report

Tesla's sales model? It's simple: don't sell cars

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Tesla Motors sells direct to consumers, which has prompted car dealerships to cry foul. Could the electric automaker change not just the cars we drive, but also how we buy them?

If you are waiting with bated breath for electric vehicles to revolutionize the transportation sector, you are likely to pass out. If it happens, it will not be an overnight process. That said, there is significant momentum behind the nascent industry. While sales of purely electric vehicles (EVs) and plug-in hybrid electric vehicles (PHEVs) are still minuscule compared to those with internal combustion engines, the 16 EV models on the market today will grow to 40 over the next two years and the 42 PHEVs models will grow to 73 by 2014.

Every major carmaker is putting considerable resources into electrification, but one of a few purely EV startups -- Tesla Motors -- is shaking up more than just the drivetrain.

Tesla began opening its retail stores and smaller format "galleries" in 2008. There are currently around 25 of them in North America. Visitors (both perspective owners and curious browsers) can learn about the cars, sit inside one and in some cases take test drives and place a reservation for their very own. Not unlike Apple stores, these spaces are high-touch and modern. But they're also rattling the foundation of how cars have traditionally been sold, and as a result, Tesla is being sued by the dealership franchise organizations in Massachusetts and New York and is under the threat of lawsuit in at least two others.

Stepping on Dealer's Toes
At issue is the fact that Tesla sells its cars direct to consumers. This might not sound so revolutionary, but in the world of auto sales, it sure is. In 48 states, dealership franchise laws prohibit manufacturers from also selling the cars they make, rather than selling through third party dealers. These rules are designed to ensure that manufacturers can't undercut dealers on price. In exchange, carmakers have rules and standards that dealerships must follow in order to be able to sell the cars, repair them and represent the various brands.

While it does not plan on suing Tesla, the National Automobile Dealers Association says it supports the state boards that are pursuing legal action and that the dealership model offers consumers "a reliable network for sales and service, which is strictly regulated to ensure the vehicle transportation needs of car buyers are met." NADA's chairman Bill Underriner adds that its dealers have fought this battle before -- and won.

"Over the years, other manufacturers have tried operating their own retail networks, but have concluded that the franchised new-car dealer system is the best method of serving the public for its vehicle transportation needs," he says.

George Blankenship

Who, Us?
For its part, Tesla says it takes pains to ensure it is operating within the laws of each state. Sometimes that means it can't operate on certain days, or provide test drives, or take orders onsite. (Tesla actually sells its cars online, so the location is moot in that respect.) But Tesla's vice president of sales and ownership experience George Blankenship says that's fine. Our goal is for "everyone to leave our stores with a smile on their faces," he says. If the company can make consumers stoked on EVs and especially on Teslas, that's the first step. "I want people to want the car, I don't want to sell them the car," he says.

That might sound Pollyannaish, but on the other hand, Tesla can't sell cars the way other automakers do, anyway. Each car is bespoke, and reservations are often placed many months prior to delivery. The stores and galleries exist, therefore, to introduce Tesla to a wider audience.

"It's fair to say that Tesla is facing a potentially challenging situation because I believe that conventional franchise auto dealers feel threatened by the Tesla model. They understand that consumers find it bizarre that they can't order a car [aside from Tesla] the way they order an iPhone. And because Blankenship is from Apple, the parallels [between Apple and Tesla stores] could not be clearer," says John Voelcker, EV expert and writer for Just-Auto.com, High Gear Media, and other outlets.

In 2010, Tesla recruited Blankenship, a retail veteran who served as vice president of real estate for Apple Computer, from 2000 to 2006 (and before that led retail strategy at The Gap) to direct Tesla's retail experiment. "In shopping malls, people who walk into our stores, they don't even know who we are. People will be walking down the mall and they'll see a car and they're drawn in by that" and often they don't know at first the car is electric. "We're educating, not selling. It's two different things. We're not just telling people why an EV is a good car but why it might be better than what they're driving today -- not just because it's good for the environment" but also for its storage capacity, or low maintenance or because instant torque provides a completely different driving dynamic, he says.

Holding a Charge
Last month, a Massachusetts judge refused to grant car dealers an injunction that would have forced Tesla to stop its operations there. Still, the legal battles might be long and protracted, and there are more than 45 other state franchise boards that could decide to sue Tesla, as well. Car dealer groups are digging their heels in. NADA's Underriner told Automotive News: "We've got a whole mess of lawyers in Washington who work on state franchise law." Yikes.

Underriner and Tesla CEO Elon Musk did have an hour-plus meeting at Tesla's California headquarters late in November, according to a report, but neither has divulged the specifics.

Meanwhile, Tesla continues to establish more retail outposts and is launching more production and distribution in Europe. Its Model S is Motor Trend's Car of the Year for 2013. Plus, Tesla has reached some milestones that naysayers loudly doubted, such as hitting its summer 2012 deadline for the Model S (which starts at $50,000). Confidence defines Tesla's corporate culture.

Blankenship has no shortage of confidence, either. What Tesla has accomplished thus far -- producing the Roadster, with its incredible speed and long range, followed by the Model S, with even more range -- wasn't just difficult, "it was impossible," Blankenship boasts. Given all that, what's a couple lawsuits (so far) threatening to shut down Tesla's factory stores? Time will tell.

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Mary Catherine O'Connor

Contributing Writer

Mary Catherine O'Connor has written for Outside, Fast Company, Wired.com, Smithsonian.com, Entrepreneur, Earth2Tech.com, Earth Island Journal and The Magazine. She is based in San Francisco. Follow her on Twitter. Disclosure