New Jersey Bans Tesla to Ensure Buying a Car Will Always Suck

New Jersey is banning Tesla.

No, you won’t get pulled over for driving your Model S on the Turnpike. But if rules passed yesterday by New Jersey regulators and backed by GOP Governor Chris Christie take effect, you won’t be able to visit a Tesla store in the state. In an effort to protect traditional car dealerships, New Jersey is trying to shut the electric car maker down before it ever gains traction.  

This isn’t the only place where Tesla is battling such bans. Across the country, powerful car-dealer lobbies with their hands in politicians’ pockets are fighting the Silicon Valley company, trying to hold on to monopolies protected by outdated laws. But there is some solace to be taken in the New Jersey decision: It calls attention to the hypocrisy of supposed free-market politicians propping up an unloved industry at the expense of real competition.

Unlike typical car dealerships, Tesla showrooms aren’t surrounded by parking lots filled with vehicles and high-pressure salesman trying to get you to drive off in one. The stores are typically at malls, such as the two where Tesla operates in New Jersey. Customers can examine a floor model, learn about the design and engineering process, and schedule a test drive. One thing you don’t have to do at a Tesla store, however, is buy a car. Purchasing a Tesla happens online, straight from the company, which you can do from anywhere. In other words, they work the way retail should work.

Tesla is able to ensure the consistency of its retail experience because it sells directly. That’s exactly the tie that the car dealers and their political cronies want to sever. Under the status quo, dealers are powerful middlemen who enjoy serious leverage over carmakers and customers, as well as a decided lack of accountability thanks to the territorial monopolies created by the franchise model. If Tesla’s stores were allowed to stay in business, car shoppers might start to ask why the process of buying a car from the old guard has to be so lame.

The New Jersey Middleman

In New Jersey, as in other states, the law requires that auto sales happen through a middleman franchisee — the dealer. Yesterday, the state’s Christie-stacked Motor Vehicle Commission effectively found that Tesla’s model violated those regulations. The Christie administration has argued that the law is the law: “This administration does not find it appropriate to unilaterally change the way cars are sold in New Jersey without legislation and Tesla has been aware of this position since the beginning,” Christie spokesman Kevin Roberts said, according to Bloomberg.

Tesla says it was railroaded in the process after assurances from the Christie administration that it wouldn’t be. But whatever the case, this is a startling inversion of political stereotypes: Northern Californian capitalists quashed by East Coast Republicans defending the use of government regulations to keep competition out of the marketplace.

To understand how this strange mirror world came to be, you have to go back a century. In the early days of the U.S. auto industry, carmakers had all the power. The automakers relied on local dealers to distribute and service the vehicles they made. But once those dealers had invested in inventory and facilities, Ford and General Motors could force those dealers to take cars they couldn’t sell or face the possibility that the car companies would find another dealer, as recounted in a great Planet Moneyepisode last year on why the process of buying a car still sucks. If that happened, dealers would lose all the money they had put in to setting up their businesses. States began to enact franchise rules that gave dealers exclusive sales rights in local markets to prevent automakers from extorting dealers with the threat of underwriting a competitor across the street.

But as any free-market fanboy will tell you, monopolies come at a serious cost, especially to consumers. By giving dealers exclusive territories, car manufacturers lost not only the leverage they had over dealers to force inventory on them, but also much ability to enforce standards of pricing or service. Yes, dealers still had to compete with other brands in the neighborhood. But otherwise, they lacked accountability. They could be as sleazy as they wanted to be.

In the ensuing decades after franchise rules became widespread, dealers became politically savvy operators who ingratiated themselves to the politicians who could protect their uniquely cushy arrangement. Henry Ford may have twisted the arms of dealers a century ago. But today, it’s the dealers and their lobbyists who ensure that alleged free marketeers like Chris Christie and the Republican-controlled state of Texas keep actual innovation out of their states.

Tesla Stands Alone

This time around, however, the automakers are also complicit. Tesla is battling a bill in Ohio, for instance, that would force it to go through franchise dealers in the state. According to Bloomberg, General Motors submitted written testimony to an Ohio Senate panel supporting the plan that would limit Tesla to the two stores already open in the state. “Tesla is an automobile manufacturer, they compete with our vehicles in the market, and they should compete under the same laws we do,” the not-so-long-ago bankrupt automaker said.

Fair enough, except that the real-world consequence wouldn’t be to level the playing field. It would be to crush an upstart competitor before it even establishes a foothold in Ohio. General Motors may sell many more cars than Tesla, but you can bet new CEO Mary Barra is deeply aware that investors are growing increasingly confident in Tesla as the future of U.S. car-making.

A year ago, GM’s stock closed at $28.07. Today it’s hovering around $35 per share — a 25 percent return, which isn’t too bad. Compare that to Tesla: $39.12 a year ago, more than $241 today. That share price values Tesla — a startup just a few years old, that still numbers the cars it’s sold in the thousands — at more than half the market cap of GM, once the biggest company in the world. For now, GM doesn’t have to worry. Tesla still only makes luxury vehicles. But if it succeeds in mass-producing an electric car that the average American family could afford, as it aspires to do, the U.S. auto market could look a whole lot different.

The New Apple

Dealers understand this too, not just in terms of the cars that customers buy but how they buy them. If Tesla stores were allowed to flourish, customers might see that buying a car doesn’t have to suck. The reason that this suckiness is sustainable owes everything to the outdated franchise model that allows car dealers to wallow in complacency. And these dealers are right to worry.

Tesla stores are often compared to Apple stores, and the similarities are more than just aesthetic. Like Apple, Tesla runs its stores on its own, and it’s wholly motivated to give customers what they want. Apple stores have set the 21st-century standard for selling gadgets in physical stores. If Tesla is allowed to do the same, car dealers will actually have to make fundamental changes to compete.

That competition would be good for consumers, but it also explains why dealers won’t let state franchise laws die anytime soon. The sad truth is that most of them don’t have what it takes to compete against any company with Tesla’s future-facing sensibility. If regulations protecting middlemen go away, these dealers will go the way of CompUSA. And as with barn-like big-box stores for selling computers, no one would miss them.