Can the Texas Model Pass the Tesla Test?

Can the Texas Model Pass the Tesla Test?

Tesla Motors recently announced that it is planning to build a “GigaFactory” in order to manufacture batteries for its electric cars. Texas is among the finalist states (along with Arizona, New Mexico and Nevada).

In touting Texas as the place to live and do business, Governor Rick Perry recently concluded that “it all comes down to freedom: the freedom to create, the freedom to explore and the freedom to put more of your resources into producing the best possible final product…”

The “Texas model,” i.e., low taxes, reasonable regulation, and healthy civil justice system, has influenced the decisions of many companies that relocated from other states, especially California. The attraction of a freer economy than in most other states is that it encourages competition and fosters prosperity.

Tesla Motors decision to move to Texas, however, will likely be influenced by more than its ability to manufacture batteries here at a profit. Its business model includes the ability to sell its cars directly to consumers; which has Texas auto dealers up in arms. This is because in Texas, franchise laws for the automotive industry specify that the sale of new cars must go through an independently-owned, licensed auto dealer. Manufacturers or distributors are prevented from selling directly to consumers.

Tesla’s CEO Elon Musk is interested in the Texas model but he sees the franchise laws as a limitation to Texas’ principles, as he explained to the Texas Tribune: “Texas is a free-enterprise state that prides itself on being the freest in the nation — I think that’s a good thing. The laws that are in place to protect the big established auto dealer groups are very un-Texas.” Governor Perry agrees, saying, “We don’t need to be protected” by the franchise laws.

Historically, dealerships were born at the beginning of the 20th century. The first auto manufacturers needed a national market to support their mass market production. Some manufacturers opened branches in big cities, staffed with their own employees. But they quickly gave up what turned out to often be an inefficient model: salaried manufacturers’ employees had little incentive to sell as many cars as possible. Independent dealers had a more competitive mindset, and for a good reason. The dealers, often initially bicycle merchants and repairmen, could reap large profits from the large investment in facilities and an inventory of cars necessary for customers to see, test drive, and eventually buy. This market-driven arrangement worked to the benefit of all parties: manufacturers, dealers, and consumers.

A century later, many things have changed: transportation has become more affordable and efficient, while the Internet allows anyone to order a variety of products 24/7 from the comfort of their home. Because of this, Tesla believes that direct sales from the manufacturer to the consumer are now economically viable. Yet because the Texas Legislature changed a market-based arrangement into a government-granted right for dealers, manufacturers cannot sell directly to consumers.

Last year, Tesla backed two bills that would have exempted the company from complying with the franchise laws. Tesla gives two main reasons for selling directly to consumers: its cars are powered by a relatively new technology and they need salespersons to be able to effectively market this technology; they fear their cars would not fare well with auto dealers who would have an interest in favoring gasoline-powered cars, and heavily rely on services.

Auto dealers defend franchise laws, born of legislative acts to protect the market-developed dealerships, on the basis that protecting consumers and dealerships benefits the state.

“We would not change the law because the franchise laws of our state protect consumers statewide, said Bill Wolters, president of the Texas Auto Dealers Association. He added, “Dealers provide a much greater economic impact for Texas than Tesla would ever provide…”

But perhaps consumers should be trusted to make the right choice for themselves and the state. They might stick with the dealership model and manufacturer-to-consumer sales might not work. On the other hand, if consumers find their interest is in buying directly from the manufacturer, then let consumers’ sovereignty reign supreme. It might work; Tesla car owners in Texas have gone to great lengths to buy their cars, despite the absence of dealerships.

Although negotiations between the company and Governor Perry’s Office regarding Tesla’s GigaFactory are currently subject to a non-disclosure agreement, it has been suggested in the press that a large incentive package might help close the deal, despite the franchise law problem.

Wolters points out the conflict between the two incentives for Tesla being discussed: “It is very interesting that a company would come in and say give us your tax abatements, give us our incentives and change the law. You would think they would come to the state based on its own merits.”

Wolters is right that new investment for Texas should not be won by granting favors to companies. So whether it is Tesla or another company, ‘economic development’ incentives should be taken off the table. But the changes to the franchise laws are not about doing a favor to Tesla in order to “win” the GigaFactory for the Lone Star State. Tesla wants to change a sales model that might be out of date. The proposal should be judged by how well it comports with Texas’ model of a free market state, a model that has shown that competition, rather than government benefits, are the most effective in growing the Texas economy.

Carine Martinez-Gouhier is a research associate at the Texas Public Policy Foundation. A French national who immigrated to America to pursue her own happiness, she holds a Master’s degree in American Studies from La Sorbonne Nouvelle (specialized in business ethics and corporate social responsibility).


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