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Tesla Motors Inc Texas Sales Ban: Bad Economics Explained

Tesla motors inc (NASDAQ:TSLA) Tesla Model 3

Tesla Motors Inc (NASDAQ:TSLA) isn’t allowed to sell its cars to customers in Texas. It has to send them through an intermediary. The legal harness, which is forcing the company to lobby legislatures across the country, is bad for Tesla, it’s bad for Texas and it’s downright bad economics.

Tesla Store

That’s the position held by Timothy Roth, an economics professor at University of Texas at El Paso. He spoke before the Texas legislature on Monday and outlined why the state government’s law should be change in order to give Tesla, and its direct distribution model, a fair chance at competing with other auto companies.

Bad economics in Tesla’s Texas

Roth, who was allowed just 180 seconds to make his case before the House Committee on Licensing and Administrative procedures said “State bans on direct sales by auto manufacturers hurt both consumers and producers.” He said that dealers were a “protected class of competitors” and alleged that their legal power constituted an acquisition of property rights.

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The committee was exploring House Bill 1653 which would allow Tesla Motors to open 12 of its own stores in the State of Texas. The bill would not allow automakers that already operate through franchised dealers from doing the same.

The current law has resulted in “a market in which special interest groups demand regulation to protect their own profit margins, and government supplies regulations in exchange for political support.”

Roth summed up his testimony by saying “The car dealerships have effectively lobbied for a discriminatory, protectionist ban on direct manufacturer sales of automobiles.”

Tesla tries to overturn retail power

Car dealership exert great legal and political influence in many states across the union, and that influence has been used to block alternate, unlicensed retail methods out of the market. Tesla Motors wants to cut down on overhead by selling the Model S directly to customers, but many states have laws that explicitly block companies from selling their own products.

Auto dealerships have argued that their position is a vital one in protecting the consumer and competition. Bill Wolters, head of the Texas Automobile Dealers Association, tole the University of Texas  El Paso in an email that “what Tesla is seeking are special rules applicable only to new market entrants.”

House Bill 1653 is exactly that, a law that would let new car manufacturers sell their cars directly, but not allow established auto makers to do the same. Similar laws have been passed by legislatures in West Virginia and New York.

The reason those laws bar established car manufactures like Ford or Toyota from selling directly to customers could be argued to descend directly from the political power of the dealerships. There are relatively few new carmakers, and they don’t regularly appear. The new law would, for the time being, apply to Tesla Motors and almost nobody else.

Tesla sets itself against economic constraints

The testimony of Timothy Roth in front of the Texas legislature mirrors the statements of Elon Musk, the Chief Executive of Tesla Motors. The executive has said on many occasions that laws like that being enforced in Texas today result in rights being extracted from consumers, and higher prices being paid for cars.

Texas could be a massive market for  Tesla Motors. The state is large, and its gets its fair share of sunlight. That means that a coming Tesla home energy storage kit, which would allow users to store their own solar electricity to run their Model S, would be at home in the state, and the car may be more attractive to the region’s denizens than those of the Northeast.

The El Paso Times said that word in the State legislature was that, in spite of Mr. Roth’s testimony, House Bill 1653 will not make it out of committee and Tesla Motors will not be able to sell its cars directly to consumers any time soon.

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Paul Shea

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