Tesla Makes A Clever Legal Move in Direct Sales

Tesla Makes A Clever Legal Move in Direct Sales

There's a strange law in the USA where certain states ban the direct sales of cars. There are several states that force automakers to sell through dealers. Even if you order directly from the factory, you must go via a car dealer to complete the transaction. The high cost of the dealer distribution system adds around 30% to the cost of an automobile.

All of those cars parked on the lot are on the dealer's inventory, and interest on that inventory costs the dealer money. The costs of the car include not only the salesperson's fee, but also fixed costs associated with the physical site, such as property tax, utilities, showroom maintenance, and so on. Those fixed expenditures do not change whether the dealer sells one car or none that month. These expenses are included in the car's price. The benefit clearly doesn't lean towards helping the consumer.

But it can backfire too for carmakers. They manufacture automobiles before anyone orders one, thus they are guessing what the market wants (well, after substantial marketing and research costs). But then we see discounts for less popular models towards the end of the model year when they guess wrong. 

Tesla's Sales Approach

Tesla produces electric vehicles and sells them direct. A salesman who gets a salary, not a commission, will manage a service center to answer questions and help set up a test drive if you want one. However, if you want to buy one, you go to the Internet where you place an order and include any optional extras. Only then will Tesla begin construction on your vehicle. It takes a month or two to arrive (depending on the model). 

Tesla points out “its prices are fixed, and its salespeople are paid primarily on salary, not commission. Customers will never be rushed into a purchase, haggle over the price of the car, wonder if they could get a better deal across town, or puzzle over confusing add-on products, like GAP insurance or rust-proofing.”

What makes Tesla so unique from traditional car manufacturers, is that it is about having a direct relationship with our customers.


Working Around Legal Obstacles

Tesla's way of selling automobiles is unlawful in some areas, and Tesla is not allowed to open showrooms. It's prohibited for Tesla staff to simply tell a consumer the facts about how to order a car over the Internet. It's also illegal if the employee tells the prospective buyer that they can cross the state line and buy an automobile in another state.

Tesla has figured out a way to get past a New Mexico regulation that banned them from selling and servicing its vehicles there. Until now, Tesla owners in New Mexico had to go out of state to get their vehicles serviced. In addition, there were no Tesla stores in the state. Why? Because, like a number of other jurisdictions in the United States, New Mexico prohibits direct car sales.

The prohibition derives from an outdated regulation intended to safeguard automobile dealers. Tesla's fundamental business strategy, on the other hand, relies around selling directly to consumers, without the use of a middleman vehicle dealer. Tesla has had no footprint in New Mexico until today. They attempted to join the state in 2019 with the help of a number of pro-business legislators, but were unsuccessful due to opposition from local vehicle dealer organizations.

Tesla, on the other hand, appears to have discovered a loophole. Tesla was permitted to setup their first service center in New Mexico by cooperating with a Native American group, Nambé Pueblo because their land is not subject to state legislation. As a result, Tesla could establish a new 7,000-square-foot service center and store north of Santa Fe in the ruins of a former casino.

Tesla could potentially exploit this loophole in a number of other jurisdictions where direct car sales are prohibited. It appears that finding the correct tribal location and then securing a separate arrangement with the tribe in question are all that is required. Clever Tesla.