A Potential Roadblock For Tesla: Silly Legislation

| About: Tesla Motors (TSLA)

Tesla (NASDAQ:TSLA) has been soaring lately amidst considerable excitement regarding the future of electric cars, as the company reported excellent earnings and its primary car model (the Model S) currently faces no equal competition. Of some concern to TSLA investors now, however, is legislation that prohibits the company from easily selling their cars online in some states. A recent Republican-sponsored bill to prohibit new cars being sold online was recently passed by the North Carolina Senate, and the next step is for the bill to go to The House. TSLA CEO Elon Musk now plans to appeal to the House Transportation Committee to argue against the bill, as should the bill be passed, it would cause major problems for TSLA's ability to sell in North Carolina. And while the market in North Carolina is tiny compared to the rest of the USA, the mere creation of this bill is some indication that TSLA may face legal troubles in other states.

Of course, this bill (should it be passed) will have absolutely no effect on the auto industry in general, as all major auto manufacturers have their cars sold through dealerships. The bill would only really affect TSLA, as TSLA sells its cars online rather than through dealerships (there are TSLA showrooms around the USA, but customers cannot order through these - they are merely to get people interested in TSLA's electric cars). TSLA's strategy of cutting out the middleman and selling online allows them to cut costs significantly, and these savings can then be passed on to the customer. This is the same approach that PC giant Dell (NASDAQ:DELL) took to initially accelerate itself as one of the leading computer manufacturers - it could offer an equally good product for less than its competitors by selling online and eliminating the costs of running a physical brick-and-mortar store, just as how TSLA has an advantage over major auto manufacturers selling through dealerships.

Why Shouldn't New Cars Be Sold Online?

It is my view that introducing legislation to prevent new cars being sold online is absurd, and that this bill should not have managed to pass the state senate of North Carolina. As race car driver Leilani Munter reasonably states, "I find it horrifying that North Carolina would make it illegal for me to buy a car from Tesla." It seems reasonable that TSLA should be able to sell new cars online just as other high-ticket items can be sold online. Even though TSLA's online sales of new cars are just a drop in the bucket for the auto industry, franchised car dealerships (many of which already struggle with slim profit margins) would feel their business threatened by a trend towards new cars being sold online, and it should be fairly obvious that this is the main cause of support for a new anti-TSLA bill (Jerry Maccioli, a TSLA customer, amusingly calls the bill a "Save the Car Dealers Association Bill").

An argument that TSLA cars must be sold through normal dealerships so that customers can get warranty repairs and service isn't valid, as TSLA has shown that it's easily capable of giving proper service to customers themselves. Being that TSLA has a specialized product, I believe that providing their own service to customers is perfectly sensible (Dell and Apple (NASDAQ:AAPL) are both examples of companies that provide excellent service by keeping everything under their own roof). Another argument that cars should be sold through dealerships so that customers can be better informed is also not persuasive, as TSLA customers are perfectly capable of researching themselves.

What Are The Chances Of This New Bill Being Passed?

Perhaps campaign contributions and lobbying may put pressure on lawmakers to pass a bill preventing cars being sold online by TSLA, but given the lack of logic behind such a bill, I do not believe it will be passed by the House. Consumers have no reason to be against new cars being sold online - it is only businesses that may feel somewhat threatened that are in support of this new bill. It is my hope that a reasonable decision is made and no such bill is passed.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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