Disruptive Threat

Tesla Lost in Utah Court, but It’s Winning the Bigger Battle

The electric-car company may have been denied the right to sell directly to consumers in Utah, but it’s already gained the right to bypass the dealer networks in 20 other states.

Photo Illustration by Lyne Lucien/The Daily Beast

On Tuesday, Tesla Motors—the eclectic, aggressive electric-car company that is promising to upend the automotive industry—was in the news for two seemingly distinct but in fact related issues.

It surpassed iconic Ford Motors in its total market capitalization and it lost a case before the Utah Supreme Court to allow it to sell directly to consumers without going through dealers. At first blush, the latter would seem to undermine the former, but in truth, the attempts of states to prevent Tesla from upending the 20th-century auto-sales ecosystem is perhaps an even bigger sign of the disruptive threat that it and others pose than the technology the company is employing to make a new kind of car.

First, on sheer size, Tesla is now valued at about $48 billion compared to about $45 billion for Ford at press time. Next up would be General Motors at $51 billion. Tesla, however, sells only a fraction of the cars: Ford and GM each sold well in excess of 200,000 cars in March, while Tesla sold… 4,000. Of course, Tesla’s sales are growing far, far faster than any established company, which is easier from such a low base but explains why investors think it’s the future of transportation while the old Detroit companies—which barely survived the 2008-09 financial crisis and then only after aggressive government efforts—are the past. Ford remains the most innovative of the “Big Three,” especially with self-driving or computer-assisted cars, but Tesla has managed to convince the market that it is a cradle of innovation on everything from batteries to autopilots to the very economics of the auto industry.

And that is where things get even more interesting. Tesla’s technology gets the attention, along with designs seeming ripped from Back to the Future. It has, care of its founder and CEO Elon Musk, touted itself as both a car company and a battery innovator, using its own battery manufacturing to power longer-range electric vehicles and thereby addressing what has been the largest hurdle for electric-car adoption: range. It has also pioneered next-generation autopilot systems that aren’t quite the self-driving cars now being tested by Google et al. but are very much on that spectrum.

Tesla’s technology, however glitzy, may not be the thing that sets it apart. Many have noted that much like Apple in its earlier years, Tesla is adept at deploying innovations rather than being a source of many of them. One innovation, however, is both more basic and prosaic, and potentially more challenging to the status quo. It is determined to sell cars directly to the consumer and thereby bypass the dealer networks—and to some extent the finance and loan networks—that are such a key element of the U.S. auto industry.

Reflecting that sales ecosystem, most states currently ban auto manufacturers from selling cars directly. State laws tend to mandate that cars be sold by third-party dealers. Tesla and Musk early on were determined to break that hold, hence the recent Utah Supreme Court case ruling against Tesla and for the state’s dealers.

In its determination to alter the way cars are sold and bought, Tesla has more in common with Uber and Airbnb than it does with General Motors. Much like those disrupters, it has faced a regulatory thicket that once served a purpose of protecting businesses and consumers from unfair competition but now serve primarily to protect entrenched players and stifle competition. Dealers rely on state-sanctioned licenses to maintain a dominant market position, and while many states have indeed granted Tesla a license to sell directly, that has been over the vociferous opposition of dealer groups that have thrived for decades as the sole conduit of a vital good—cars—to consumers who need them.

Utah is only one battleground out of 50, not to mention a myriad of regulations dictating how cars are sold in the European Union and to a lesser extent in other parts of the world. Tesla has employed an army of lobbyists and lawyers in state capitals and has entered in similar suits in multiple states. So far it has gained the right to sell directly in about 20 states, with litigation pending in many others.

In Michigan, for instance, Tesla has challenged a longtime state prohibition against direct sales as unconstitutional and filed suit in federal court to have it overturned. The laws originally were designed to prevent the major auto companies from opening their own stores. Oddly enough, Ford, GM, and Chrysler are aligned with Tesla, insofar as being able to sell via company stores or online could be a boost to bottom lines that sorely need it. But the Big Three are also loath to support these suits and help what looks to be a formidable competitor in a market that is more zero sum than most.

Because Tesla is still so small, it’s hard to know if a different sales model will benefit consumers or just make companies such as Tesla even wealthier. If cutting out the middleman reduces the cost of cars and even leads to more servicing options, then people will benefit, just as they have from the price competition introduced by Uber against anti-competitive taxi and limousine commissions that maintained high fees and limited supply of rides. For now, however, Tesla is selling too few cars to reduce prices. A Tesla is a luxury item even at the low end and factoring in long-term gasoline savings. Will the company eventually pass on the savings of direct sales, or will it just enjoy the even fatter margins that such sales could bring it? It is too soon to know.

What does seem clear, however, is that even as a wave of “no” sweeps the country—no to globalization, no to continued disruption of local communities in the face of job-eroding technologies—the attempt to stand athwart history doesn’t appear destined for success.

In the long term, people may benefit from eco-cars running clean on efficient batteries and from savings that direct sales could entail, but those benefits will be less visible in the near-term than the harm. If Tesla leads to the erosion of dealer networks and if the Big Three join that party, local economies will indeed suffer in the short term as dealers close, local bank financing loses a market, and sales become even more detached from the local economy.

Get The Beast In Your Inbox!

Daily Digest

Start and finish your day with the top stories from The Daily Beast.

Cheat Sheet

A speedy, smart summary of all the news you need to know (and nothing you don't).

By clicking “Subscribe,” you agree to have read the Terms of Use and Privacy Policy
Thank You!
You are now subscribed to the Daily Digest and Cheat Sheet. We will not share your email with anyone for any reason.

Hence the effort of Utah’s legislators to stand in the way, however futile that resistance might ultimately be. It is easy to decry the anti-competitive antediluvian efforts to keep Tesla at bay, but such efforts are part of a larger “no” that sees the immediate harm with no commensurate benefit. Utah may be on the wrong side of history, but that doesn’t mean the concerns have no merit.

With Tesla’s bluster and conviction that its way is best, the company or its cousins may change the world for the better, but perhaps they could be more mindful that disruption isn’t just a catchphrase. Real lives and real communities and real jobs are being upended. Finding ways to cushion that transition are essential too, or else we may look back at the ascension of President Trump as a mild manifestation of a mood that could get even darker.