Will Tesla have to franchise?

November 19, 2014, 4:39 PM UTC
Photograph by Andrew Harrer — Bloomberg/Getty Images

This post is in partnership with Entrepreneur. The article below was originally published at Entrepreneur.com.

By Kate Taylor, Entrepreneur.com

From Georgia to New Jersey, states have attacked Tesla’s direct sales model, in some cases banning sales of the company’s electric vehicles entirely. Through it all, founder Elon Musk has stayed committed to the dogma that franchising would destroy its business model.

Soon, that may change.

In an interview with Autoline Daily last month, Musk implied that the company might be easing up on the anti-franchising policy. The industry publication quotes him saying, as the company grows, “we may need a hybrid system, with a combination of our own stores and some dealer franchises.”

Coming from the CEO of the company that has referred to the direct sales model as “vital,” this is a big deal. Tesla has faced off against auto dealers associations across the country who have argued that the company’s direct sales model violates state laws. Since every state has slightly different laws to deal with auto franchises, every time a new state takes up the cause, the issue can seem more convoluted.

In October, Michigan became the fifth sate to ban direct sales of Tesla vehicles, as all new-car dealers are required to provide a franchise agreement. Auto dealers in states including Georgia, New York, Pennsylvania, Ohio and Missouri have argued that Tesla’s direct sales model undercuts the franchise model and threatens consumers’ ability to utilize dealers as advocates separate from manufacturers. As Tesla is forced to tangle with more and more state, it looks like Musk may have to temper his dedication to direct sales.

“I think eventually they will have to [franchise],” says Lou Chronowski, a Chicago-based attorney with Dykema who has worked on automotive and franchise industry cases. “I think that the powers of the dealers and the dealer bodies are so strong, they can keep them at bay for a while, but eventually, they will need to have franchise dealers.”

Chronowski says that dealers are worried that Tesla and other potential entrants in the auto industry using a direct sales model could provide major competition, with the ability to sell cars at lower prices than the competition. Plus, some dealers would like the opportunity to own a Tesla franchise themselves.

“I think that this has always been just a timing issue. I think the reality is that Tesla did it the way they had to do it, being in the startup mode,” he says. “They really couldn’t start a dealer network and then start selling cars. There just isn’t enough money in the world to do that.”

A Tesla spokesperson emphatically denies any franchising rumors (“There are no plans to franchise in any capacity”), but says the car maker may be open to a different, “hybrid” model.

What could that mean? The spokesperson maintained that there are “no details at this point,” and that it would be inaccurate to say that the company was considering franchising.

Industry insiders posited a hybrid model could mean franchising on a state-by-state basis, focusing on states with the strictest pro-franchising policies, like California and Texas. Or, it could mean adjusting to meet some aspects of existing auto franchising regulations, while continuing to fight other aspects of state regulation.

“The fairy tale is going to have to evolve,” says Nick Powills, a member of the International Franchise Association Board and CEO of public relations firm No Limit Agency. “The critics are going to hate it for a moment, but as long as the general public or those that are willing to buy a Tesla support it and the demand is there it won’t matter.”

If it’s inevitable, then why is Tesla still denying claims that it will franchise? Powliss says brand reputation has something to do with it. “[Tesla not franchising] probably matches the brand perception… of up-class, upscale, state of the art, everything else that comes with a Tesla vehicle.”

In other words, for now, Tesla has to keep fighting against franchising and auto franchises because its brand as the alternative to the traditional auto industry depends on it. However, don’t be surprised if, once Tesla wants to ensure its national presence, a “hybrid model” emerges that looks a lot like franchising.

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