Photograph by Andrew Harrer — Bloomberg/Getty Images
By Doron Levin
October 22, 2014

The political power of car dealer franchisees is front and center in Michigan, as its governor signed a bill, passed by the legislature with near unanimity, restricting manufacturers, including Tesla (TSLA), from operating company stores.

Rick Snyder, Michigan’s GOP governor, who is in a tough re-election fight against Democratic challenger Mark Schauer, waited until the deadline before signing.

“This bill does not, as some have claimed, prevent auto manufacturers from selling automobiles directly to consumers at retail in Michigan—because this is already prohibited under Michigan law,” the governor explained in a letter to legislators. The bill’s main purpose was to define costs that dealers could impose on retail buyers.

Tesla, co-founded by high-tech entrepreneur Elon Musk, has fought an uphill battle in Michigan and across the country against state dealer franchise groups that oppose direct vehicle sales to consumers by manufacturers. Sales of Tesla’s battery-operated cars are relatively small, though franchise dealers regard direct sales as a crack that could be widened by other automakers using the Internet and factory-owned showrooms.

In a blog post published last Thursday, Tesla called Michigan’s bill “a raw deal.” Hours before Gov. Snyder signed the bill, General Motors (GM) issued a statement in support.

“This anti-competitive behavior mirrors similar tactics in New Jersey and Missouri, where dealers have resorted to backroom political maneuvers to shore up their monopolies,” Tesla’s blog read. “The dark-of-night tactics highlight the dealers’ concerns that their arguments don’t stand up well to public scrutiny.”

The National Automobile Dealers Association, one of Washington’s most formidable lobbying groups, argues that franchise dealers competing against one another helps consumers.

“States are fully within their rights to protect consumers by choosing the way cars are sold and serviced,” Charles Cyrill, an NADA spokesman, told Bloomberg News. “Fierce competition between local dealers in any given market drives down prices both in and across brands. While if a factory owned all of its stores, it could set prices and buyers would lose virtually all bargaining power.”

Tesla already sells directly in 23 states, having run into dealer opposition in Texas, New Jersey and others. The automaker has asserted that franchisees add cost to the distribution network, which would be cheaper and more efficient if it relied on the Internet and company showrooms.

Franchise auto dealers, ranging in size from owners of single points to publicly-owned chains like Auto Nation, have ploughed billions of investment into real estate, showrooms and repair facilities. The Internet, meanwhile, is playing a bigger and bigger role in automotive shopping by consumers, who gather price and produce information at websites operated by Kelley Blue Book, Auto Trader, Edmunds.com and TrueCar.

Musk, who serves as Tesla’s chief executive officer, has been tenacious about selling directly to consumers. Might he be forced to back down and begin appointing franchisees to sell his cars? It’s conceivable. Reviewers love Tesla cars, owners are enthusiastic, and investors have bid up the company’s shares, raising its market capitalization to nearly $30 billion.

Daimler AG, the German maker of Mercedes-Benz and Smart cars, said on Tuesday it was selling its 4% stake in Tesla for $780 million. Daimler said a continued investment in the Palo Alto, California-based company wasn’t essential to continue its “successful” partnership with Tesla.

To grow to a size that supports a $30 billion market capitalization, Tesla must win more legislative battles in states where dealer franchises control the market. Otherwise, Musk may have to rethink Tesla’s retail strategy.

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