Tesla’s Michigan dealership application at a standstill

Michigan has given Tesla Motors Inc. an ultimatum: Sell its electric cars through franchised dealers or don’t sell them at all.

The standoff between Tesla and the state marks the highest tension yet in the automaker’s multi-year battle to sell cars in Michigan. Tesla says if it cannot influence a change in the state’s laws, it has one alternative: Take Michigan to court.

“It is a very important state,” Tesla general counsel Todd Maron told The Detroit News in a phone interview Tuesday. “Whether it’s through the Legislature or the courts, one way or another, we’re determined to do whatever we need to do in order for justice to prevail and serve our customers in Michigan.”

Documents and emails from 2014 through early 2016 obtained by The  News through the Freedom of Information Act detail a back-and-forth between Tesla and the state that started three years ago.

In the most recent development, the Secretary of State’s Office put the automaker’s applications for dealership and service facilities at a standstill by requesting two weeks ago that the applicant submit proof it is a franchised dealer. If it doesn’t, the state will not rule on Tesla’s applications.

That is at odds with Tesla’s entire business model of selling directly to consumers. Maron said selling its vehicles through a franchised dealer “is not an option.”

Michigan laws blocking Tesla from selling its current Model S sedan and Model X SUV — as well as any future cars, including the highly anticipated Model 3 — were originally established to prevent unfair competition between vehicle manufacturers and affiliated dealers. They also prevent arbitrary closings of dealerships by automakers.

Secretary of State spokesman Fred Woodhams in an email Wednesday confirmed the state asked for a “a bona fide contract with the manufacturer that shows the applicant may sell the manufacturer’s vehicles at retail,” saying it’s “an explicit requirement in state law.”

The state has required Tesla to resubmit dealership and service applications as well as additional information at least four times since the company submitted its initial application in November. The state spent nearly six months reviewing the applications even though the company said from the start it wanted to directly sell to consumers.

Documents and emails show that information requested by the state has mainly been procedural, such as the company having to apply for a minimum of two dealership licenses and having all applicants submit fingerprint scans and five-year employment histories.

Woodhams said the state “considers each dealer license application, and will not approve or deny one until all relevant information has been provided.”

“It is not uncommon for some applications to take longer than others, which is partly due to the speed with which the applicant responds to the department with the information that is sought,” he wrote in an earlier email this week.

Multi-year battle

Tesla’s efforts to sell cars or even offer test-drives in Michigan has been a battle met with resistance by some public officials, the state’s dealership association and others.

Before an amendment to Michigan law in October 2014, Tesla believed it had a right to not just open a retail store but a full dealership. It argues the previous law involved car manufacturers with franchised dealers, which Tesla does not have.

“We don’t harm any franchised dealers by selling directly; we have no relationships with any franchised dealers we would be unfairly competing against,” Maron said. “Unlike if General Motors opened up their own store-owned dealership across the street from a franchised dealer that they gave rights to.”

GM and Ford Motor Co. supported the so-called “anti-Tesla” bill that was initiated by the Michigan Automobile Dealers Association in 2014.

MADA Executive Vice President and Secretary Terry Burns said Wednesday: “The barrier to entry is very low, and all the other manufacturers in the world have been able to easily meet that.

“They’ve had no problems; it’s functioned very well for them for years and years and years … We think that the law is very clear, if somebody wants to come in, they should follow that law.”

Some states — including New Jersey, New York, Ohio and Pennsylvania — have passed legislation that clarifies Tesla’s ability to operate, but at the same time limits the number of dealer licenses or stores Tesla can operate.

In other states, including Texas and Virginia, Tesla has worked with regulators to open “galleries,” or stores, without dealership licenses. Buyers can get information and see or test-drive Tesla vehicles but not purchase them.

Those in Michigan wanting to purchase a Tesla may do so through the company’s website, and either pick it up at a certified  Tesla  store or have it delivered. The closest stores to Detroit are Cleveland and Columbus.

Michigan store

Michigan has not allowed Tesla to even offer test drives as long as it is “dealing in vehicles” without a dealership license.

Russell Smith, a manager with the Michigan Office of Investigative Services Business Compliance and Regulation Division, sent an email in January 2014 requesting that Tesla immediately discontinue test-drives after the state “learned” Tesla was “advertising appointments to test drive vehicles through a Tesla Product Specialist in Detroit.”

“This activity is in violation of Michigan law. Accordingly, we are requesting you discontinue such activity immediately,” wrote Smith, who through a department spokesman declined to be interviewed.

Tesla first showed an interest in opening a Michigan gallery in late 2013. Emails between Tesla representatives and the state from April 2014 — six months before Gov. Rick Snyder signed more-restrictive legislation — show the company submitted information that used Virginia as an example of how its galleries operate without dealership licenses.

When Snyder signed the bill into law in October 2014, he said it “clarifies and strengthens” the existing law that prohibited direct sales of new cars. In a letter to lawmakers he wrote, “This bill does not, as some have claimed, prevent auto manufacturers from selling automobiles directly to consumers at retail in Michigan — because this is already prohibited under Michigan law.”

Previous state law prohibited automakers from selling new vehicles directly to retail customers except through its franchised dealers; the revised law removed the word “its,” which Tesla executives said was a last-minute swipe at their company.

The language was added to a bill that had been introduced in May 2014 by U.S. Rep. Aric Nesbitt, R-Lawton, to deal with an unrelated issue: standardizing how much new-car dealers charge customers for documentation fees detailing the car-buying process.

Nesbitt this week said the bill as well as the legislation that became attached to it was never meant to be an “anti-Tesla” measure.

Sen. Joe Hune, R-Hamburg Township, who proposed the amendment, said all automakers should have to be subject to the same laws and regulations: “It was a matter of making certain all auto manufacturers are treated the same,” he said Wednesday. “They were looking for an end-around … and the amendment makes sure everyone is treated the exact same.”

Lansing allies

Former state Rep. Tom McMillin, R-Rochester Hills, cast the only “nay” against the final legislation that blocked Tesla. He said this week he opposed the bill because he didn’t think government should be involved in deciding contracts, adding he “certainly supports Tesla’s desire to sell however they want, direct if they want.”

Rep. Aaron Miller, R-Sturgis, in February introduced House Bill 5312. That proposal would allow Tesla and other companies to directly sell vehicles to consumers. Miller, one of a handful of Michigan legislators to visit Tesla’s massive production facility in California, said he doesn’t believe any company should be mandated into a franchised dealer setup.

“We have all these stores that supply direct, I think the same should apply to autos,” he said. “I advocate for them to sell by their business model. If it’s really a bad business model, let them fail.”

The bill was introduced Feb. 3, and referred to the Committee on Commerce and Trade that same day. There has been no hearing to date.

Tesla’s latest efforts to sell and service its vehicles in Michigan come as the company recently unveiled the Model 3, its first “mainstream” car that will start at $35,000. It is expected to go on sale by the end of 2017. CEO Elon Musk has set ambitious goals to increase annual production five-fold to 500,000 by 2018 — two years ahead of schedule.

Musk told financial analysts and news media during a conference call May 4 that he does not believe laws outlawing its direct-sale model will hinder its goals. However, industry analysts have been skeptical of the company hitting its production marks, even before they were accelerated from 2020.

“He has some pretty big and audacious goals out there,” Bank of America Merrill Lynch auto analyst John Murphy said during an event Wednesday in Detroit. “I don’t necessarily think it’s totally rational to have big targets and big dreams to drive a company like this; we all realize getting an auto company off the ground and to profitability seems like an almost impossible task and it may be, but you have to be pretty rash and brave to take this on.”

mwayland@detroitnews.com

(313) 222-2504

Tesla’s Michigan chronology

2014

January: Michigan tells Tesla to stop advertising test drives in Detroit, saying it’s in violation of Michigan law because the company doesn’t have a dealership license.

April: Tesla expresses interest in opening a Michigan “gallery” or store.

May 22: State asks for information about galleries.

May 28: Bill introduced by State Rep. Aric Nesbitt standardizes how much new-car dealers charge customers for documentation fees detailing the car-buying process.

Oct. 2: Amendment prohibiting sales by any company other than franchised dealers – so-called “anti-Tesla” legislation – is added before bill goes to final vote. It passes.

Oct. 16: Tesla blog calls bill “A Raw Deal in Michigan.”

Oct. 21: Gov. Rick Snyder signs bill into law, closing any hopes of Tesla selling without a dealership license.

2015

Oct. 16-Oct. 23: Tesla assistant general counsel Jonathan Chang contacts Michigan’s Office of Investigative Services Business Compliance and Regulation Division to set up call to discuss company’s options.

Oct. 26: Michigan officials tell Tesla during call that “a dealer license is required to buy, sell or deal in vehicles.”

November: Tesla submits dealership and repair applications used car dealership. Company later says application was meant to challenge the law.

December: State asks for more information.

2016

Mid-January: Tesla resubmits application for new and used car dealership license.

Feb. 3: State Rep. Aaron Miller introduces bill to allow ownership of vehicle dealerships by manufacturers, which would allow Tesla dealerships in Michigan.

May: State officials ask for additional information from Tesla for a fourth time, seeking a franchised dealership agreement. That puts application at a standstill, as Tesla refuses to sell through franchised dealers.