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House Committee Gives Tesla Motors a Chance

UPDATED: A bill that would allow Tesla Motors to circumvent the state's franchise dealer system and sell cars directly to Texans is advancing to the full House.

Elon Musk of Tesla and SpaceX urges Texas lawmakers to pass a bill permitting him to sell his all-electric cars through franchising on April 10, 2013.

Updated April 23, 6:25 p.m.:

The House Business and Industry Committee advanced a bill on Tuesday that would allow Tesla Motors to circumvent the state's franchise dealer system and sell cars directly to Texans, giving a shot in the arm to the company's efforts to operate in the state.

Tesla says an exemption from the franchise dealer system is the only way the company can operate successfully in Texas, but the owners of state auto dealer franchises have objected, saying the effort weakens a business model that has been key to their success.

House Bill 3351, by state Rep. Eddie Rodriguez, D-Austin, was replaced by a committee substitute that offered auto dealers another layer of protection: If Tesla ever sells more than 5,000 cars a year in the state, it will become subject to existing regulation and must start to franchise its operations.

With Tesla projecting sales of only a few hundred cars a year in the state, the bill's supporters, including Diarmuid O’Connell, the vice president of business development for Tesla motors, called this a workable approach.

"This would give us the space we need to introduce our technology in the state," he said.

HB 3351 now heads to the full House. Senate Bill 1659, by state Sen. Craig Estes, R-Wichita Falls, which employs a similar strategy, could come up for a vote in the Senate Transportation Committee as early as Wednesday. 

Original story: 

Electric car maker Elon Musk wants to bet big on Texas – but he’s having trouble getting his chips on the table.

Musk, a South African-born entrepreneur and the CEO, chairman and co-founder of Tesla Motors, wants to sell Tesla’s electric cars directly to Texas consumers. But to do so, the company must win an exemption from state antitrust laws that regulate the relationship between car dealers and manufacturers.

State laws prevent car manufacturers from selling directly to Texas consumers and require that manufacturers operate through a tightly regulated franchise system. Texas’ protections for car dealers are among the strongest in the country. The Texas Automobile Dealers Association says the rules protect consumers, and ensure the livelihood of Texas auto dealerships. Tesla and its supporters say the laws are an antiquated legacy, and that the ability to sell directly to customers is crucial to the company’s livelihood.

“Everyone told us when we were getting into this that we’d get our ass kicked,” Musk told reporters at a press conference on Wednesday. “Well, I guess there's a good chance that we will get our ass kicked. But we’ll try.”

Two bills — Senate Bill 1659, by state Sen. Craig Estes, R-Wichita Falls, and House Bill 3351, by state Rep. Eddie Rodriguez, D-Austin — would carve out narrowly tailored exemptions from state franchise law for Tesla. Under the measures, American manufacturers of electric cars that have never previously had franchised dealerships could sell cars directly to customers.

But the bills’ critics, including some legislators, ask why Tesla can’t conduct business like other, established car companies.

“There’s nothing prohibiting this company, in the future, from finding a dealership to represent them,” said state Sen. Dan Patrick, R-Houston. He argued that weakening the dealer model would hurt car owners.

“I would be wary, as a consumer, of buying a car from a manufacturer that may or may not be here in six months.”

Diarmuid O’Connell, the vice president of business development for Tesla motors, said that to be successful, the company must be able to sell directly to customers.

“Our customers need a no-pressure environment to come in and learn about the technology. We’re not interested in negotiating prices or moving people quickly through the process,” he said. “Historically, when electric vehicles have been sold side by side by gasoline vehicles, they’ve suffered. What salesman wants to spend hours educating a customer about electric cars?”

Currently, Tesla has "galleries" in Austin and Houston. Employees there are legally prohibited from discussing the price or any logistical aspect of acquiring the car. Consumers who want to purchase the vehicle have to order the car from Tesla’s headquarters in Palo Alto. 

The cars are then delivered in a truck with no company markings, per Texas law. Once delivered, Musk said, the customers even have to unwrap their new automobiles themselves, because under the law no representatives of Tesla's in the state are allowed to do, say or touch anything related to selling or delivering cars.

John Zwaicher, chairman of TADA, told the Senate Transportation Committee last week that there was no reason to grant a single company an exemption from state laws if that exemption would weaken the whole system by creating a potential for future exemptions to the franchise structure. He also questioned Tesla’s credibility and durability in the marketplace. 

“The primary beneficiary of this bill would be Tesla, a California-based company reliant on government loans,” he said. “There’s no reason an exception should be given to a single manufacturer.”

State Sen. Robert Nichols, R-Jacksonville, chairman of the Senate Transportation Committee, interjected.

“I believe General Motors got some government loans as well,” he said, referring to the 2009 federal auto bailout.

Musk said the proposal wasn’t intended to confer privilege on Tesla, but was tailored to the concerns of TADA.

“We’re definitely not trying to write a bill to just benefit us,” he said. The intent was to “narrow the bill so that it was the least threatening to the auto dealers.”

The House Business and Industry Committee hearing Tuesday on HB 3353 generated more skepticism from legislators, who spent part of the hearing formulating ways to curb Tesla’s proposed exemption even further — including a limit that would make Tesla subject to the franchise system once it reached a certain level of sales.

More than 40 witnesses registered in favor of the bill, including two Tesla employees along with Tesla owners from around the state.

“For us, this is life or death,” Musk told lawmakers. “If we can’t go direct, we will not be able to sell cars.”

But Musk told the Tribune in an interview that the bills seemed unlikely to succeed this session.

“The consensus among the auto industry is that we’re not going to succeed,” he said. “But if we don’t succeed this session, we’ll come back again.”

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