March 26 2014
“Live by government protection die by government protection,” might be a good lesson for Elon Musk, the CEO of luxury electric car manufacturer Tesla Motors. After all, the company that found favor with Obama’s Department of Energy and used that favor to raise money from private investors, is now getting shut out of selling direct to consumers in states like New Jersey and Ohio that are protecting their local car dealerships from outside competition. Rather than enjoy the irony, though, politicians, and especially New York Gov. Andrew Cuomo whose legislature is considering a similar anti-Tesla bill, ought to be taking the opportunity to rethink their support for the status quo.
In 2010, Tesla Motors got a $465 million loan from the federal government. The feds argue that it was worth every penny. “The Department of Energy’s investment in Tesla supports the commercial-scale deployment of advanced technologies that help keep American auto manufacturers competitive in the growing global market for advanced vehicles,” declares the DoE website.
As Mother Jones’ Josh Harkinson reported last August, Tesla needed the cash infusion because its first product, the Roadster, was failing and the company had burned through millions trying to get that car ready for prime time. “Tesla would have survived without the DOE loan,” Tesla co-founder and former CEO Martin Eberhard explained to Harkinson. But according to Eberhard, “it would have been difficult, and it would probably have required Tesla to raise more capital. This would likely have diluted [Musk’s] share of the company: Loans are nondilutive, whereas selling stock is dilutive. This is perhaps why Elon was so enthusiastic about pushing for the loans.”
In 2013, Tesla paid back the DoE loan (nine years early) and Musk has since decided that government handouts are a bad idea. He tweeted that a carbon tax would be better, while acknowledging, “Yes, [I] am arguing against subsidies and in favor of a tax on the end bad created. Market will then achieve best solution.”
Now, however, Musk and Tesla are being kept out of the “market” because politicians in various states have decided to protect incumbent franchise dealerships against the competition. Traditionally, cars are sold through a middle-man, the dealer, rather than direct from the car manufacturer. Modeling itself more like Apple than Ford, Tesla sells direct to the car buyer.
Opting to protect their existing car dealers, Maryland, Arizona, Texas and Virginia allows consumers to view the cars in Tesla “stores” but you can’t discuss price, drive the car or place an order. (Arizona may change the law there to allow direct sales of cars.) New Jersey recently decided that Tesla could not sell direct-to-consumers and Ohio is considering a similar action. Meanwhile Gov. Cuomo of New York has signaled that he’ll sign similar legislation once it passes the legislature, which is likely, but not without some controversy. As A. Barton Hinkle explained at Reason.com, the dealers are just trying to protect their bottom line. “If Tesla succeeds in challenging the franchise model, other car makers might do the same — and then dealerships would be in for a world of hurt. They would still make money, but probably nowhere near as much as they do now,” Hinkle explained.
On Tesla’s side there are pro-clean energy activists like Mark Ruffalo and politicians like Democrat Assemblyman David Buchwald who argues that “we shouldn’t change the rules midstream just as a company is starting out.” Buchwald told The New York Post, “Tesla’s goal is to sell cars, not upend the rest of the auto industry.”
The restrictions on Tesla are confusing enough coming from Republican administrations like Chris Christie and John Kasich. But in New York, the fight is Democrat vs Democrat and makes no sense in light of the $140 million in advertising Cuomo has spent in neighboring states to gin up new business for New York. After all the ads say New York is “open for business” and that if you have a new business or want to create jobs “we’re open to it.”
Keeping Tesla out of New York amounts to more of the same old crony-capitalism, protectionism and just the latest business — natural gas drilling anyone? – to which Albany has said “we’re closed.”
Abby W. Schachter is a senior fellow at the Independent Women’s Forum.