Tesla's Legislative Dilemma

| About: Tesla Motors (TSLA)

Tesla Motors (NASDAQ:TSLA) shares have skyrocketed to over $110 per share over the last couple months on the back of a slew of short term positives which in turn created an enormous short squeeze. As other authors have noted on Seeking Alpha, the legislation currently in the works in North Carolina is significant for the company going forward. While nearly all 48 states require automotive manufactures to sell through dealerships, the updated bill will prevent customers in the state from making electronic purchases directly through the manufacturer. Passed by the state senate already, the bill would effectively prohibit Tesla from selling its vehicles via online avenues. However, unlike some of my fellow authors, I believe it's very likely the House decides to pass this bill. In the coming months, I expect more states to consider similar bills as legislators realize the significance of dealership revenues for their states and as dealership lobbying groups apply more national pressure. Up to this point states have held their ground. Just last week a bill died in Texas which would have allowed Tesla to sell its cars in the state. Should the bill pass, I would expect renewed lobbying efforts from dealer organizations in New York, Colorado, Virginia, Massachusetts and Minnesota as previously these groups sought action against online auto sales.

Tesla has no reasonable defense. Up to this point the company has claimed it must be free from the restrictions surrounding franchised dealers, because its electric cars are unique and require the company to have much closer ties with its customers. Should the bill be ratified Tesla would be forced to franchise dealerships or decide to pursue company owned dealerships in the state. One could argue, due to the requirement of close ties with its customers, Tesla could only establish its own company owned dealerships. Typically, luxury car makers have avoided this business model as the expenses at these locations are higher on average as a result of higher employee salaries. The company's argument is complete bunk - everyone knows it's just a ploy to avoid the added expenses and commissions which follow the franchised model. At this point, Tesla avoids the middleman, saving its margins a few valuable percentage points.

Over the longer run however, wouldn't it be beneficial for the company to establish a strong presence via the dealerships model? Sadly, many people haven't even heard of the luxury sports car maker. As an array of competing automakers such as Mercedes, BMW, Ford (NYSE:F), General Motors (NYSE:GM), Fiat and Mitsubishi begin to inch closer to their own electric models Tesla's market power will suffer. Tesla's monopoly market will eventually transform into a large monopolistic competitive market. One of the primary drivers of differentiation in monopolistic competitive markets is advertising. What better advertising is there than people driving by a lot full of beautiful sports cars? In my opinion, if Tesla wants to cement its presence in the auto market, the company should bite the bullet now and give in to the legislation.

Conclusion

Its seems likely legislators will begin to clamp down and limit the online sales of automobiles. Tesla should quit whining and play by the rules for its own benefit. By creating a dealership presence, the company would have the infrastructure ready to compete when the industry giants eventually launch their own electric vehicles. Going forward, I would advise investors to proceed with caution as shares have become very volatile and any news in the near future, positive or negative, could cause sharp moves.

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.