There’s NADA Stopping Tesla from Direct Sales

An odd quirk of US special interest law is proving to be a substantial road block to Tesla marketing their electric cars.  Nearly every US state has enacted so-called “franchise laws” that prohibit manufacturer direct selling of automobiles, and require that a third party car dealership serve as an intermediary in the transaction [1].  These laws prevent manufacturers from adopting a “Dell Direct” type model wherein potential buyers could use online tools to craft the exact auto package they wish and have it delivered directly to them.  Franchise laws also undercut the Tesla business model of operating company showrooms in high foot traffic areas as a way to “reach people before they make a decision on a new car” rather than having stock sit in a dealership lot that typically only draws already committed buyers [2].

Car dealerships have initiated several lawsuits against Tesla for violating franchise laws with their company showrooms, and in some states have even begun lobbying to strengthen the prohibition on manufacturer direct sales.  Colorado, for example, passed a new law in 2010 aimed directly at preventing Tesla from selling vehicles in the state [3].  Fortunately, however, some states have responded by attempting to loosen the restrictions on manufacturer direct sales.  Texas HB 3351 and SB 1659 are aimed directly at allowing Tesla to continue with their business model, though the bills do not grant other manufacturers the same leeway as they provide only for US based companies selling 100% electric vehicles [4].

While Tesla has thus far been relatively successful in fending off the court cases thrown their way, the legal challenges have proven costly and difficult [5].  Due to the mounting challenges, Tesla CEO Elon Musk is considering moving the fight into the federal realm by pursuing congressional legislation on the matter [6].  Such a move is sure to create a contentious fight as the US government is likely keen to recoup the $465 million loan granted to Tesla by the US taxpayers, but the National Automobile Dealers Association has vowed to combat any changes to existing franchise laws [7].  As a major lobbying group that spends millions per year on political campaign contributions, NADA should be able exert significant influence on the congressional leaders tasked with resolving the dispute [8].

Although Tesla seems to be a champion for manufacturer’s rights, it appears their priority is not to nullify the legislated restrictions placed on all car manufacturers, but rather, they seek to obtain special consideration. Tesla wants legislation limiting the bounds of direct sales to car manufacturers without any existing franchises [2]. Perhaps Tesla views this as a compromise with NADA, as this would close the door on virtually all other manufacturers because they have established franchises.

 [1] http://www.justice.gov/atr/public/eag/246374.htm

[2] http://www.teslamotors.com/blog/tesla-approach-distributing-and-servicing-cars

[3] http://www.greencarreports.com/news/1080001_auto-dealers-fight-against-tesla-stores-elon-musk-weighs-in

[4] http://www.latimes.com/business/autos/la-fi-hy-tesla-ceo-takes-dealer-fight-to-texas-says-he-can-sell-more-cars-20130410,0,1676772.story

[5] http://www.roadandtrack.com/go/news/go-news-tesla-wins-dealership-lawsuit

[6] http://www.autonews.com/apps/pbcs.dll/article?AID=/20130415/RETAIL07/304159943/teslas-musk-ill-take-store-fight-federal#axzz2RliwqJ00

[7] http://www.bizjournals.com/pacific/stories/2009/06/22/daily33.html

[8] http://www.opensecrets.org/orgs/summary.php?id=D000000080

Elon Musk’s Guide to the Galaxy

Over the past month, I’ve had the distinct privilege and opportunity to attend two of Elon Musk’s keynote presentations where he discussed his vision for a sustainable energy future, electric vehicle technology, and humanity’s multi-planetary quest.  As a way of background, Elon Musk is considered to be a modern day visionary, inventor, and innovator, and he is often compared to legendary inventors such as Nikola Tesla, Thomas Edison, Richard Branson, and Steve Jobs.  Elon Musk founded and runs companies such as PayPal, Tesla Motors, SpaceX, and SolarCity [1].

Elon Musk and DOE Secretary Steven Chu speaking at 2013 ARPA-E Energy Innovation Summit, Washington, D.C. – 2.26.13

Photo: Michael Belfiore

The first keynote speech I attended was on February 26, 2013 in Washington, D.C. while attending the 2013 ARPA-E Energy Innovation Summit.  This particular conference brings together some of the brightest energy minds in the world to discuss energy policy, energy technology innovation, energy security, and funding opportunities and successes through the ARPA-E program [2].

Mr. Musk’s presentation focused primarily on the process he went through to secure a low-interest $465 million loan through the Department of Energy’s Advanced Technology Vehicle Manufacturing (ATVM) Program [3].  The ATVM program was authorized by President Bush in 2007 under the Energy Independence and Security Act and later appropriated in the Fall of 2008.  The ATVM was already authorized and funded before President Obama’s American Recovery and Reinvestment Act (ARRA) stimulus program was enacted in 2009.  The ATVM program was geared towards helping the private sector accelerate the advancement and production of alternative fuel technology vehicles such as hybrid electric vehicles (HEVs), plug-in hybrids electric vehicles (PHEVs), and full electric vehicles (EVs) in order to reduce America’s dependence on foreign oil.

Mr. Musk was joined by Secretary of Energy Steven Chu on stage for the keynote session.  It was interesting to learn that both General Motors and Chrysler were both ineligible to apply for the ATVM program since both companies were going through bankruptcy proceedings at that time.  The two largest loans that were approved under the ATVM program went to Ford ($5.9 billion) and Nissan ($1.6 billion) to accelerate the development of their advanced vehicle technology platforms.  As Secretary Chu pointed out during the session, the most attractive piece of Tesla Motors’ application for an ATVM loan was that the company is vertically integrated and all of Tesla’s vehicle components and systems are designed and built here in America.  According to Secretary Chu, Tesla designs and builds everything from their battery systems, electric drive trains, suspension systems, chassis, and even the test and evaluation equipment to ensure that the vehicle is performing optimally.

The major announcement that Mr. Musk revealed during the session is that the production and sales of Tesla’s new Model S electric sedan was going so well that Tesla will be repaying their ATVM loan within 5 years instead of 10 years, which is in half the time than what was stipulated under the ATVM program terms.  Mr. Musk ended the session by reminding the audience that the DOE’s efforts to fund and support advanced energy technology research and development have produced many major successes similar to Tesla.  He pointed out that these successes all too often go overlooked due to the failure and over politicization of Solyndra.

Tesla and SpaceX founder and CEO Elon Musk, speaking at SXSW 2013 – 3.9.13

(Credit: Daniel Terdiman/CNET)

The second and most recent keynote address I attended was during SXSW Interactive in Austin on March 9, 2013.  Mr. Musk touched on the challenges of running multiple companies at the same time and cautioned entrepreneurs to not make the same mistakes that he has made.  When Musk was asked what was the biggest mistake and lesson he’s learned so far about being an entrepreneur and innovator, he explained to the audience that he has learned the hard way that you can’t hire someone simply because they are the smartest person available to do the job.  Musk said that you have to hire someone who is capable of doing the job and who also has their heart in the right place and a personality that you can easily get along with.

Musk also discussed his SolarCity venture and how the company is providing cheap solar power to customers who previously could not afford it through a full service community solar-based business model.  He also went into detail on SpaceX’s recent successful test launch of their new vertical take-off and landing vehicle (VTVL) called the Grasshopper.  SpaceX is taking a private sector approach to space flight by focusing on fully recoverable rockets in an effort to minimize the cost of each launch and mission.  SpaceX recently completed a successful text launch and docking mission to the International Space Station (ISS).  NASA subsequently awarded SpaceX a 10-mission contract to deliver supplies to (ISS).  Musk believes that humanity will be a multi-planetary species in the very near future due to private sector innovation and efforts like SpaceX.  Musk concluded the keynote session by saying, “I’d like to die on Mars, just not on impact.” [4]

References:

[1] http://elonmusk.com/

[2] http://www.arpae-summit.com/

[3] http://www.teslamotors.com/blog/clearing-air-our-doe-loan

[4] http://news.cnet.com/8301-14013_3-57573439/elon-musk-at-sxsw-id-like-to-die-on-mars-just-not-on-impact/

Tesla and the (Potential) Rise of the Electric Car

The future of the electric vehicle is here … maybe.  Tesla Motors is a Silicon Valley based automaker whose part-time CEO, start-up extraordinaire Elon Musk, hopes to revolutionize the auto industry by selling high-performance electric vehicles that are, in Musk’s words, “the best car[s] in every dimension that matters.” His Model S sedan seats seven, can go zero to 60 in 4.4 seconds and can achieve up to 300 miles per charge.

Last June, the company delivered their first Model S luxury sedans to customers including Jeff Skoll, eBay’s first president, and the current governor of California, Jerry Brown. However, at a staggering base price point of $52, 400 (even after the $7,500 federal tax credit), many of us will not have the opportunity to drive one of these vehicles anytime soon. But, hope may exist. Plans are already underway for Tesla to build an electric car that will cost less than $30,000, and Musk’s long term goals are to make these electric vehicles more affordable to the mass market.

Whether or not the company will successfully follow through with those plans, though, is still up in the air.  In the third quarter of last year, Tesla suffered losses of $110.8 million which can be compared to losses of $65.1 million in the third quarter of 2011 and have yet to release a positive earnings report since they ceased production of their Roadster back in 2011.  Nevertheless, even after hearing about such losses, investors remained optimistic due to increased production of Model S vehicles at the end of last year, up from 100 cars per week to 400 cars per week, the tipping point for Tesla to reach a positive cash flow.  Furthermore, news that more than 13,000 orders are out for their Model S and that a marketing push is planned for Europe is also good news.  While 13,000 is not immensely significant compared to the 14.5 million cars sold in 2012, it still means a rising importance for electric cars.

But, what are the long term implications of an electric car fleet? Wide adoption of cars like Tesla’s Model S,  Nissan’s Leaf, and  Chevy’s Volt pose interesting questions that relate to the future of the electric grid.  If we move away from the dominant transportation fuel of gasoline, will the electric grid be able to handle it?  Furthermore, even if the electric grid could sustain such a large increase in energy demand, would this switch mark a significantly more environmentally friendly transportation system?  These are some of the questions that will need to be answered.

To start, existing power generation in Texas has been struggling to meet the rising electricity needs of the continuously growing population.  A report published last December describes some of the growing concerns of ERCOT, the state’s chief grid operator.  Projections show that Texas’s reserve margin, a percent calculation representing the state’s peak power demand  compared to the state’s total power-plant capacity, is going to shrink from a desired 13.75% to 2.8% by 2022.  Although this number only relates to the time when peak power demand is highest, a time when electric vehicles might not need to be recharged, increased electric vehicle deployment could still increase the strain on grid operations. The bottom line is that the strain on grid operations depends on when electric vehicle users decide to recharge their car batteries and without significant electric vehicle deployment today, the time when an average person recharges their car can only be estimated.

To comment on my second question discussed above, the environmental impacts of the supply of the electricity for electric vehicles may also be a concern.  Does an electric vehicle that boasts zero emissions truly contribute zero emissions to the environment?  Since roughly 42% of US electricity production comes from coal, there is a good chance that your electric vehicle will be running off coal as well, at least indirectly. Hopefully, as the grid continues to transform to cleaner fuels through cheap gas and wind energy incentives, more efficient and clean power plants will come online.

Nevertheless, while electric vehicles are an exciting opportunity, hard questions need to be answered surrounding their feasibility and their potentially large scale impacts.

First, the business model has to be proven, and new updates from Tesla in the next year should provide insight into this issue.  Second, more studies need to be performed that determine how a fleet of electric vehicles affect the grid and what improvements need to be made in order to prepare for a future of electric cars.  And last, cleaner electricity sources are needed in order to truly realize the environmentally beneficial aspects of electric vehicle technology.

Who knows, maybe even Tesla and Elon Musk can solve these problems too.