Auto dealers sound alarm as Tesla pushes for second Virginia store

RICHMOND, Virginia — Don Hall, president of the Virginia Automobile Dealers Association, was making the hard sell.

Staring directly into the camera, using the language of war, he urged car dealers to unite against a force that he said threatened their livelihoods: electric-car maker Tesla.

“For the last 29 years, I have fought as a gladiator to protect the rights of Virginia auto dealers and their franchise system,” he said in a video distributed to dealers this past fall. “This system is under attack by the likes of Tesla and many others out there who believe the franchise system is a dinosaur and no longer works. … Let’s all strap on whatever it takes to win.”

The reason that Hall was sounding the alarm: Tesla, which sells its cars directly to consumers rather than through franchise dealers, is trying to open a second store in Virginia.

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Car dealers in Virginia and across the country have been fighting Tesla, seeing the company’s direct-to-consumer sales model as a threat to the franchise system that they say protects consumers as well as their own business interests.

In Virginia, as in most states, it is generally illegal for manufacturers to sell cars directly to consumers, partly to prevent carmakers from undercutting their franchisees. But there are exceptions to that rule. And Tesla says those apply, in part because its cars are so unconventional that traditional car salesmanship will not work.

Tesla, which already operates a retail showroom in Northern Virginia, is seeking the state’s permission to open a second in the suburban Richmond shopping mecca of Short Pump Town Center. A decision from Richard D. Holcomb, the Department of Motor Vehicles commissioner, is due by mid-December. But the matter is unlikely to end there. Tesla and the dealers’ association, known as VADA, have shown a willingness to take their fight to court – and possibly the General Assembly.

The battle pits a significant political donor – over the past decade, VADA has given Virginia politicians $4 million in campaign contributions and $27,000 in gifts – against the kind of green, emerging technology championed by Gov. Terry McAuliffe (D). Before running for governor in 2013, McAuliffe led GreenTech Automotive, a struggling electric car company.

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“The Governor supports the expansion of new technologies and high growth industries in Virginia,” McAuliffe spokesman Brian Coy said by email. “He has not announced a position on this particular issue as it is currently subject to the review of the Commissioner of the DMV, who will determine whether this proposal complies with Virginia law.”

Tesla has argued that dealers who are used to quick sales, price markups and profitable maintenance work could not shift gears to its cars. With new, highly sophisticated technology, Teslas are more time-consuming to sell. Tesla offers the cars at set prices whether they are purchased at a retail store or through the company’s website, leaving no room for markup. And with few moving parts or oil, they offer little opportunity to profit from service – an important source of revenue for many conventional dealers.

Holcomb was not persuaded by those arguments in 2013, when he rejected the company’s original plan to open a Northern Virginia store. But Tesla filed a lawsuit, ultimately winning the right to open its Tysons Corner store under a settlement brokered by then-state attorney general Ken Cuccinelli II (R). Tesla also operates a “gallery” in McLean, where potential customers can learn about the vehicles. But staff there cannot discuss sales or allow customers to test-drive a car.

Tesla, which is licensed to sell cars in 23 states and the District of Columbia, has stores in Annapolis and Bethesda, Maryland, and on K Street in the District. The company is free to open a gallery in Short Pump, but it needs the state’s permission to open another retail store.

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“Tesla wants to bring its award-winning vehicles and provide its industry-leading service to Virginia consumers – in particular the greater Richmond area, where we are experiencing increased demand,” Will Nicholas, a Tesla government relations manager, said by email. “Since the company’s inception, Tesla has directly sold its vehicles to consumers in over 23 states in the U.S. and around the world. We have never franchised our distribution in Virginia or anywhere, and are committed to an educational shopping experience that ensures consumers learn (and appreciate) the benefits electric vehicle technology and sustainable energy.”

State law allows manufacturers to sell directly to customers if no one is available to serve as a dealer in a certain area. No dealers expressed interest when Tesla sought its first Virginia store. This time around, 11 auto dealers sent the company letters expressing interest. In a court filling, Tesla dismissed those as brief form letters orchestrated by VADA – not serious expressions of interest.

Tesla questions whether anyone would be able to sustain a dealership if there is no room for markup.

“A dealer who cannot stay in business is not ‘available’ in any real-world sense,” company lawyers wrote in filings with the state.

Anne Gambardella, VADA’s director of legislative and legal affairs, said five of those dealers took the time to testify in hearings on the matter.

“They certainly expressed more than a form-letter interest,” she said.

She said the state law prohibiting direct sales protects not just franchisees but also consumers. She said prices go down and service improves when customers can shop around.

“There are consumer reasons you don’t want the distribution chain controlled from top to bottom,” she said. “You can go to any number of Honda dealers, competing on price and service.”

That would not be the case, she said, “if Honda controlled it all.”

In recent months, Tesla has invited lawmakers from across the state and the political spectrum to visit its Tysons Corner store, to learn about its cars and even to take them out for a spin. It was a soft sell, intended to convey just how fully electric cars differ from conventional cars powered by gas.

“It’s not a Ford versus a Toyota versus a Hyundai. It’s a whole different product,” said Del. Marcus B. Simon, D-Fairfax, who took a test drive in September. “There’s not many moving parts to the thing. It looks different, works different, smells different. … It’s more like buying a computer or electronic device than a car.”

So far, no one has filed legislation that might smooth Tesla’s way. But VADA, which also has been reaching out to legislators, is bracing for it.

“They’ve certainly been spending a lot of time with legislators,” Gambardella said. “I don’t know the reason to do that unless it’s to keep options open.”

Simon said he will keep an open mind about any legislation.

“I think there’s a lot of merit to the arguments that Tesla is making,” he said. “I think there’s a lot of temptation down in Richmond to stick with the one you know. … All they’ve asked for is that we keep an open mind, not reflexively adopt the auto dealer’s position.”

But Del. Jackson H. Miller, R-Manassas, though hugely impressed with the cars, was skeptical that they could not be sold through franchise dealers.

“If you want a carve-out, it better be such an incredibly compelling argument,” he said. “And I’m not sure Tesla has that.”