When Tesla comes to Town

Posted by on July 24, 2017

By Jason Zhu*

Tesla is the new black. Since 2015, Tesla has sold more than twenty thousand electric cars. Thousands of Tesla car are now running on the roads every day. And consumers regard Tesla as the brand of the future.  However, America may not be Tesla’s future due to its restrictive domestic laws.

Background and the US approach

Tesla sells cars in a nontraditional way, through direct customer sales. This is different from the standard dealership model used by most US automakers and dealers.[1] The standard dealership model has a long history stemming all the way from the 20s and 30s.[2]  During the outgrowth of American motor industry, General Motors, Ford Motor Company, and Fiat Chrysler decided to license the rights to sell their cars to local car dealers.[3] The logic underlying this model is comparative advantage, that the carmakers are better at making cars and car dealers at selling them. Therefore, it can be a win-win if they divide up the work.

One problem with this model is that the carmakers hold too much sway over the car dealers, because the carmakers are much more powerful than the car dealers. Big automobile corporations like GM have financial resources and technological expertise that a car dealer does not have.[4] Additionally, there are only a few car makers, but there are thousands of car dealers. These two factors result in fierce competition among local car dealerships and stark power imbalance between local car dealerships and the carmakers.[5] To solve this problem, state legislators started passing dealer franchise laws to protect the local car dealers from direct competition with the car makers. The idea being that if car makers are free to open their own local stores, they might use that as a bargaining chip to coerce the local car dealers to sell cars that they do not want to sell.[6] The dealer franchise laws, roughly speaking, prevents exploitation of car dealers by the car makers, who has much more bargaining power than the dealers do.

In a different time and space, the dealer franchise laws are preventing Tesla from entering many states in the US, because it prevents exactly what Tesla wants to do: to set up their own stores and sell cars directly to customers. As for now, there is a total ban on direct sale of Tesla in Michigan, Texas, West Virginia, Utah, Arizona, and Connecticut. New Jersey permits only four stores throughout the whole state.[7]

Tesla’s New Method

Why is Tesla insisting on direct sale? Elon Musk has doubts about having traditional car dealers to sell Tesla. What will happen is that they would sell gasoline cars and electric cars at the same time, since gasoline cars are still the absolute norm. Musk believes that when a dealer sells both kinds of cars, she would have a hard time defending the merits of an electric car. Musk explained in his blog:

Existing franchise dealers have a fundamental conflict of interest between selling gasoline cars, which constitute the vast majority of their business, and selling the new technology of electric cars. It is impossible for them to explain the advantages of going electric without simultaneously undermining their traditional business. This would leave the electric car without a fair opportunity to make its case to an unfamiliar public. [8]

To closely compare an electric vehicle (“EV”) with a traditional vehicle would overshadow the merits of an EV. Tesla also argues that traditional car dealers have no incentives to sell EV because EVs have much lower maintenance costs than gasoline cars, and car dealers will profit less from maintenance. These two factors make traditional dealers less likely to push hard for Tesla cars. Therefore, Tesla decided to do it on their own. But they now face legal roadblocks that are not easily removable.

This is one prime example showing how laws of yesterday postpones the arrival of future. This further reveals one dimension of law: that the protection it affords to the car dealers would one day become the obstacle to technological progress. This case also raises interesting economic questions: who are these dealer franchise laws now protecting and benefiting? Finally, there is a case to be made for the environment as well: should lawmakers and administrators adopt a more EV-friendly approach to help companies like Tesla grow? They are indispensable for furthering research and development in green energy, but should lawmakers give them a pass because they serve an environmental cause?

China’s Approach

As shown by the latest regulatory filing, Tesla’s revenue from China tripled to more than $1 billion. The Chinese market accounted for more than 15 percent of Tesla’s $ 7 billion total revenue last year.[9] Tesla’s entry into Chinese market is not always smooth. In 2015, Tesla’s revenue from China fell by a third due to slow deliveries, speculative orders, and Tesla’s incompatibility with Chinese charging standards.[10] To address these problems, Tesla plan to introduce converters that would allow Tesla drivers to charge at state-run charging stations, and expand Tesla’s Chinese presence through new stores, supercharger stations and charging points.[11] The adjustment to Chinese market and expansion of infrastructure are significant for its growth.

Two legal factors lurk behind the exponential growth of Tesla in China.

First, six major cities, Shanghai, Hangzhou, Guangzhou, Shenzhen, Beijing, and Tianjin, have exempted electric vehicles, and even the ones imported by Tesla, from restrictive licensing rules.[12] For example, in Beijing, an ordinary gasoline car with plate number ending with 3, can only be on the road on odd number days: 1st, 3rd, 5th, 7th. If one buys a Tesla in Beijing, one can plug it in and hit the road on any day of month.[13] EVs are also easier to register. Buyers do not have to go through the lottery pool that decides who would get a plate number this year for her car. If you buy a Tesla, you will be guaranteed a plate number in Beijing.[14]

Second, on December, 2016, the Chinese National Development and Reform Commission and the Ministry of Commerce announced a new policy regarding EV production in China. Before that, when a foreign automaker wanted to produce automobiles in China, it had to partner with a Chinese company and share some of its technology with the Chinese partner.[15] As a gesture to encourage companies like Tesla to produce in China, the Chinese government has made an exception for EV producers.[16] This means that Tesla still has complete control over its capital, assets and technology if it decides to set up a factory that serves the Chinese market.[17] If Tesla finally sets up a manufacturing line in China, then it will no longer have to export Tesla cars from California to Shanghai.

Conclusion

The policy adopted by the Chinese government effectually lowers the transaction costs of moving California cars into China. This means Tesla will be cheaper and more competitive in the Chinese market. Tesla might find its largest market outside of the United States, as predicted by Tesla’s guru Elon Musk. Considering this development, municipal and state governments in the U.S. can learn from Tesla’s experience in China and adopt similar policies to support Tesla, an American brand that does not find itself too at home in America.


*Jason Zhu is a Junior Editor on MJEAL. He can be reached at jasonzhu@umich.edu.

 

[1] Daniel Gatti, Why You Can’t Buy a Tesla in These 6 States,

Feb. 26, 2017, Union of Concerned Scientists, http://www.ecowatch.com/states-cant-buy-tesla-2278638949.html

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] Id.

[8] Elon Musk, The Tesla Approach to Distributing and Servicing Cars, Oct. 22, 2012, Tesla Blog, https://www.tesla.com/blog/tesla-approach-distributing-and-servicing-cars

[9] Jamie Butters, Tesla’s China Sales Triple to More Than $1 Billion

by Jamie Butters, Mar. 1, 2017, Bloomberg Technology, https://www.bloomberg.com/news/articles/2017-03-02/tesla-overcomes-china-stumbles-as-sales-triple-pass-1-billion

[10] Id.

[11] Id.

[12] Bertel Schmitt, The Tesla China Numbers That Elon Musk Won’t Tell You, Mar. 7, 2017, Forbes, https://www.forbes.com/sites/bertelschmitt/2017/03/07/the-tesla-china-numbers-elon-musk-wont-tell-you/#1b74998b2cce

[13] Id.

[14] Id.

[15] Frederick Lambert, China opens the doors for Tesla and other foreign automakers to produce electric vehicles in the country, Dec. 21 2016, Electrek, https://electrek.co/2016/12/21/tesla-china-other-foreign-automakers-electric-vehicles-production/

[16] Id.

[17] Id.

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