Minnesota sales of electric, gas cars collide

A messy, behind-the-scenes battle is underway in Minnesota over the way the electric car and its gas-powered adversaries are sold.

Tesla Motors, the California-based electric car manufacturer, said Tuesday that for the first time it will sell its cars directly to Minnesota consumers through a retail store in Edina slated to open in August, bypassing traditional car dealerships. A Mall of America store is scheduled to open in 2014.

But Tesla's pending arrival has outraged the Minnesota Automobile Dealers Association, which has threatened to sue over the company's plans. The group already fought a losing battle in the Minnesota Legislature last week when it tried to strengthen the state's 1970s dealership law to prevent Tesla and other car manufacturers from selling cars directly to consumers.

"We think everybody should play by the same rules,"said Scott Lambert, executive vice president of the Minnesota Automobile Dealers Association in St. Paul. "Tesla is trying to sell cars on the cheap, and it's just not fair because they don't have the cost of running a dealership."

Tesla sells the $57,400 Model S electric car that it claims can go more than 300 miles on a single electric charge. It is the first production automobile to use lithium-ion battery cells, which the company claims makes it twice as energy-efficient as a Toyota Prius.

Although Tesla has yet to turn a profit, it already has sales or service locations in 19 other states, and says it sold 2,650 cars in the United States last year. For now, Minnesota customers can only order a Tesla car by calling the company in California or using its website.

The car dealers argue that Tesla would have an unfair cost advantage over auto dealers, who must maintain lots full of cars and advertise while also complying with recalls, warranty work and the state's "lemon law" that deals with defective cars.

Tesla says it simply has a different business model.

"We're cutting out the middleman," Diarmuid O'Connell, Tesla's vice president of corporate and business development, said in an interview. He compared the Tesla retail stores to Apple's direct-to-consumer electronics stores.

Tesla Motors of Palo Alto, Calif., was founded in 2003 by South African entrepreneur Elon Musk, the inventor of PayPal and founder of a private space program. An earlier Tesla "proof-of-concept" roadster came with a sticker price of $109,000. Tesla says it hopes to sell a $30,000 electric car by 2016.

Tesla won the legislative battle last week when the auto dealers gave up on strengthening the dealership law after a House bill appeared destined to languish in a committee. A similar Senate bill was defeated in February.

And on Tuesday, the Minnesota Department of Public Safety ruled in Tesla's favor, saying the original dealer law still on the books "does not prohibit a [car] manufacturer from becoming licensed as a dealer in Minnesota," said Bruce Gordon, a department spokesman. As a result, Tesla's application for a car dealer license is being processed.

Undeterred, the Dealers' Association has threatened to sue to prevent Tesla from becoming a Minnesota car dealer, although it was unclear whether the group would sue Tesla or the state.

"We think the law is vague," Lambert said. "We don't think it's that cut and dried."

Tesla officials say its retail-store business model is unique in the automotive market.

"That can disturb the status quo because it can change consumer expectations, which can lead to more competition," O'Connell said.

"That sounds appealing at first," countered the Dealers Association's Lambert, "but when you get into what consumers and state regulators expected of a dealership, you realize [retail stores] are not such a hot deal for the public."

"We're not opposed to electric vehicles," Lambert added. "If consumers want to buy them, we'd love to sell them. We're opposed to electric vehicles not being sold by a franchised dealer, because if manufacturers run the market, it will be far less competitive for customers."

The original Minnesota dealer law was intended to prevent Ford or General Motors from selling the same car models in competition with their own dealers, and it worked, Lambert said.

The differences in Tesla's case appear to be that it has never had Minnesota dealers and would be selling cars that are completely different from those sold by existing dealers.

O'Connell said Tesla's retail business model reflects the fact that it is a small company that can't afford expensive dealerships or big advertising budgets. The publicly traded company lost $396 million last year on sales of $413 million, but is projecting its first profit in the first quarter.

"We sell cars directly because it serves our business purpose and supports new technology," O'Connell said.

Steve Alexander • 612-673-4553