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Regulations Could Harm Texas' Bid for Tesla Plant

Tesla, a manufacturer of high-end electric cars, has named Texas one of four finalists to house its planned $5 billion lithium-ion battery factory. But the state's strict auto dealership laws could hurt its chances, company officials say.

A Tesla Model S. The California-based electric automaker had considered Texas for its $5 billion lithium-ion battery factory. The company is also hoping to sell cars in Texas but does not have required franchise dealerships, as state law requires.

Gov. Rick Perry, far from shy in his efforts to reel in jobs from other states — especially California — often declares Texas “wide open for business.”

But one company in the Golden State has found Texas decidedly closed: Tesla Motors, which cannot sell its upscale electric cars directly to consumers in Texas because of long-standing state laws protecting and regulating auto dealerships.

Now, those restrictions, which rank among the country’s strictest, could harm Texas’ chances of landing the $5 billion lithium-ion battery plant Tesla plans to construct by 2017

In late February, the company announced that Texas was one of four states — along with Arizona, Nevada and New Mexico — in the running to house the wind- and solar-powered “gigafactory,” which Tesla says would span as many as 1,000 acres and employ about 6,500 people.

The announcement excited Texas lawmakers like state Rep. Jason Villalba, R-Dallas, who this month penned a letter to Elon Musk, the company’s CEO, listing Texas’ business-friendly ways, including a lack of corporate or personal income taxes and “low regulations and limited government interference.”

“I can attest to you that there is no better state in the Union to begin, grow and expand a new and thriving business such as Tesla Motors,” Villalba wrote.

Tesla officials, however, have indicated that Texas’ tough restrictions on the company’s sales do not help the state’s case.

Alexis Georgeson, a company spokeswoman, said she could not specifically address how Tesla would weigh various factors in its selection process, but she said comments from Diarmuid O’Connell, Tesla's vice president of business development, properly sum up Tesla’s view of Texas’ restrictions.

“The issue of where we do business is in some ways inextricably linked to where we sell our cars,” O’Connell told Bloomberg this month. “If Texas wants to reconsider its position on Tesla selling directly in Texas, it certainly couldn’t hurt.”

Texas laws prevent car manufacturers from selling directly to Texas consumers, and they require manufacturers to sell their cars through tightly regulated franchised dealers. The Texas Automobile Dealers Association and its supporters say the rules protect consumers and ensure the livelihood of Texas auto dealerships, and that the state shouldn’t make an exception for Tesla.

The dealership laws “promote a wide network of dealers across the state and create competition in vehicle prices and services that consumers can expect,” said Rob Braziel, CEO of legislative affairs at the dealers group. “There’s nothing that we find special or unique here that justifies an exemption for Tesla.” 

Tesla, however, calls the Texas system antiquated and a threat to its livelihood. The company's business model, it argues, is more efficient than traditional ones because it bypasses middleman dealers. Tesla says the electric car market will struggle to gain a foothold in Texas without exemptions to the laws because dealerships are too focused on selling gasoline-powered vehicles to tout the merits of the more expensive alternative models.

Tesla currently showcases vehicles at "galleries" in Austin and Houston, but state law prohibits employees from discussing the price or any logistical aspect of acquiring the car. That means prospective buyers in Texas must order the car from Tesla’s headquarters in Palo Alto, Calif. The cars are then delivered in a truck with no company markings, per Texas law, and customers even have to unwrap their new automobiles themselves, because the law prohibits Tesla's in-state representatives from doing, saying or touching anything related to selling or delivering cars.

“It’s incredibly inconvenient,” Georgeson said. “Really what they are doing is making it tougher for customers.”

Though a handful of other states — including Virginia, Maryland and most recently New Jersey — have restricted Tesla sales through franchise laws, only Arizona, which is also jockeying for the battery plant, has a regime as strict as Texas’, Georgeson said.

Texas, nonetheless, remains a strong market for Tesla sales, with more than 1,000 of the company’s Model S cars sold inside its borders, she added.

This is not the first time that Texas’ anti-trust laws have sparked debate. Last legislative session, Musk visited the Capitol, urging lawmakers to loosen the restrictions, but the dealers group quashed several such proposals in their early stages.

In an interview last April with The Texas Tribune, Musk called the state’s auto franchise laws “very un-Texan.”

It is unclear whether opponents of the anti-trust laws can change it next session — or whether that would affect Texas’ chances for landing the factory anyway. Tesla says it will probably choose a location before January, when Texas legislators will next convene.

Perry, who will be exiting office then, supported legislation last session — House Bill 3351 — that would have allowed manufacturers of 100 percent electric cars to sell them directly to consumers. A spokeswoman for his office said she could not comment on any current negotiations with Tesla.

State Sen. Wendy Davis, the Democratic nominee for governor, said a Tesla battery factory would present a “tremendous opportunity” for the state and “keep Texas leading economically,” but in a statement to the Tribune, she indicated that she would stop short of pushing for an overhaul of the auto dealership law.

“As governor, I’d promote these kinds of initiatives while making sure that we also takes steps to retain existing businesses – like car dealerships, in this case – that contribute to and make a huge difference in the local and state economy.”

Campaign staff for Texas Attorney General Greg Abbott, Davis’ Republican opponent in the race, did not return repeated requests for comment.

Villalba, who last session proposed what he calls a “middle ground” solution — a committee substitute for HB 3351 that would allow electric car companies to sell 5,000 cars in Texas before the existing auto franchise rules applied — said he would try again in 2015, regardless of whether Texas lands the battery factory.

But he said he doubted that the auto franchise system would deal a significant blow to the state’s hopes because it is just one of many factors Tesla will consider.

“I think it’s just a matter of time before we get our regulations in line with what Tesla is doing,” he said. 

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