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Everyone Loves Tesla. Except California Car Dealers

A California trade association complains, saying Tesla's ads understate the price of the new Model S.
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Elon Musk's Tesla Automotive has weathered big debt, bad press and consumer resistance to electric cars. Now the company finds itself on the wrong side of its home state's car dealers.

On Monday, the California New Car Dealers Association submitted a nine-page complaint to the state's Department of Motor Vehicles, claiming Tesla's advertising related to pricing is deceptive.

Tesla, of Palo Alto, is the darling of the green energy world, demonstrating to consumers that cars can be environmental and beautiful, though Tesla's vehicles are still prohibitively costly for the average car buyer. Tesla also has garnered glowing reviews from industry publications, including Consumer Reports, which gave its new Model S nearly a perfect score during its test drive this year. Nevertheless, Tesla has faced a state-by-state battle with car dealers since it rolled out its new sedan.

"Dealers are feeling threatened by Tesla's business model and being perhaps fearful that other electric vehicle manufacturers will say, 'Tesla did this, we can too,' and bypass the franchise dealer system and sell directly to the customer," says Mike Omotoso, an automobile industry analyst with LMC Automotive, in Troy, Michigan.

Tesla falsely claims on its website that consumers can purchase a new Tesla S, which retails for around $70,000, for as little as $114 a month, after gas savings, government incentives, and various financing options, CNCDA says in its letter. (State and federal government incentives can range between $7,500 and $15,000 for fuel-efficient cars). While the oganization did not estimate a correct monthly payment, it asserted that $114 a month was highly unlikely, since it comes to $25 less per month than the least expensive new car available to consumers today, the Nissan Versa.

CNCDA complained that Tesla’s advertisement did not include any of the required data about how the  monthly payments were arrived at, including down payments, finance charges, and number of payments involved, as well as qualifiers about advertised rates and gas savings.

"This is about Tesla making claims that if one of our dealers made, everyone would be up in arms and calling for an investigation," Brian Maas, president of the New Car Dealers Association of California, of Sacramento, says. "We feel it is appropriate that Tesla, which is dealer too, has to comply with adverting laws like our members."

Tesla was unable to respond to questions from Inc. before deadline.

CNCDA represents 1,100 new car and truck dealers in California. Generally, each state sets franchise laws for automobile sales, Omotoso says. California lets manufacturers sell their own cars directly. California's DMV enforces dealer and manufacturer advertising regulations, Maas says.

Tesla operates somewhat like Apple does, through an independent retail network of 31 dedicated dealerships in the U.S. Other car brands, by contrast, sell through dealer franchises that sell multiple car brands simultaneously.

Other state car dealer associations have tried to prevent Tesla from selling its cars in recent months, with varying degrees of success. Texas forbids Tesla dealers to sell its cars in the state. North Carolina's new car dealers association also tried to hamstring Tesla there, but the group had its challenge defeated by state representatives in June.

Though Tesla's overall car sales are still small--it sold 10,650 cars through June, 2013 and is on track to sell about 20,000 through the end of the year, according to Omotoso--its strategy of selling through a direct dealership has definitely boosted sales. If it participated in the typical franchise system, it would be lumped together with traditional car brands that are cheaper and whose features the typical dealer understands better.

Tesla went public in 2010, and it has struggled for years with profitability, only eking into positive territory in May, simultaneously paying off a controversial Department of Energy loan of nearly half a billion dollars. Tesla has seen its stock price soar to about $183 from $23 three years ago.

Last updated: Sep 20, 2013

JEREMY QUITTNER | Staff Writer | Staff Writer, Inc. and Inc.com

Jeremy Quittner is a staff writer for Inc. magazine and Inc.com. He previously covered technology for American Banker and entrepreneurship for BusinessWeek.




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