Expert: Auto dealers not an issue for Tesla factory

Mar 20, 2014, 5:00 AM | Updated: 9:56 am
LISTEN: Expert: Auto dealers not an issue for Tesla factory

SCOTTSDALE, Ariz. — Tesla Motors’ announcement that it will seek to build a massive battery factory in late February has led to much speculation about where the plant will be built.

In a short matter of time, four states — Arizona, Nevada, New Mexico and Texas — became finalists for the company’s $4 to $5 billion investment in its Gigafactory, which would create roughly 6,500 jobs.

The plan is part of the company’s lofty goals of propelling Tesla into mass production of its fully electric, zero-emission car. The company has expressed expectations of reaching production levels of 500,000 vehicles per year by 2020, a big jump in production from the roughly 20,000 produced in 2013.

Each of the four finalists has expressed interest in Tesla, with Arizona being one of the most aggressive.

On Tuesday, the state’s House of Representatives delegation, led by Rep. Paul Gosar (R-Prescott), signed an open letter inviting Tesla’s CEO Elon Musk to visit and consider Arizona for the factory. They cited the state’s large solar power infrastructure and workforce, which Tesla said it wants to power its factory with, as some of the state’s strengths.

The House delegation letter came on the heels of Tucson Mayor Jonathan Rothschild and the Maricopa Association of Governments, spearheaded by Mesa Mayor and gubernatorial candidate Scott Smith, each writing open letters of invitation to Musk.

“We’re just one part of a very good team and a large team that wants to let Tesla know that we’re here in Arizona and we’re open for business,” Smith said.

Challenges facing Arizona and Tesla

One of the biggest obstacles in Arizona’s courtship of Tesla, though, is the state’s requirement that cars can be sold only through dealers, not directly by the company. Musk has been strongly opposed to that mandate.

“When has an American startup auto company ever succeeded by selling through auto dealers?” Musk wrote in a letter to the people of New Jersey, after a decision there to bar direct sales by manufacturers. “The last successful American car company was Chrysler, which was founded almost a century ago, and even they went bankrupt a few years ago.

“In recent years, electric car startups, such as Fisker, Coda, and many others, attempted to use auto dealers and all failed,” he continued, citing that auto dealerships have a conflict of interest in protecting higher profits from the sale of gasoline cars rather than electric.

At Scottsdale’s Fashion Square, Tesla has a show room where consumers can learn about Tesla’s Model S, view and test drive the model and customize a vehicle but cannot purchase the car. All orders are placed online and the car will be manufactured in California, then shipped to them.

Many have speculated that Musk will not choose to do business in a state where he cannot sell his cars directly to consumers and that could be the reason behind an Arizona State Senate committee narrowly passing a bill on Wednesday that would make exceptions for electric vehicle manufacturers.

While the bill still has to pass full Senate and House votes and then be signed by Gov. Jan Brewer, Triple-A Arizona spokesman Jim Prueter said he isn’t convinced that the state not allowing direct sales would put a halt on a potential deal.

Prueter said he believes the economic incentives that a state is willing to offer Musk will be more of a determining factor for where the factory lands.

“I think he (Musk) knows where the end game is,” Prueter said. “Musk is a very savvy negotiator and he will partner where he can and I doubt that they’d really come in without huge incentives from whatever state.”

Prueter said he is not as concerned about the auto dealers being an issue for Musk, because battery production is a separate part of Tesla’s business from the sale of its finished product. Since the factory is not slated to produce completed Model S vehicles, wherever the location, the batteries will still be shipped back to Fremont, Calif., for installation.

Prueter also said he believes that at some point the company will have to work with the dealerships if it wants to reach the kind of production levels Musk is gunning for.

“There is no way — no way — he can do what he wants to do without the infrastructure,” he said. He’s going to have to cave into the dealers or he is just ultimately going to sell out to someone like GM.”

Infrastructure is Tesla’s biggest challenge, not auto dealers

Musk faces a unique situation that a regular auto startup would not normally have to deal with, since fully electric cars are not supported by the infrastructure that has been built around gasoline cars for nearly the last century.

Reaching production levels of 500,000 vehicles will require a vast network for repairs and service, but it will also require a major network of charging stations across the country, much like gas stations, to make consumers feel comfortable with buying electric cars, Preuter said.

“There are already long waits for people at supercharges and each of those supercharging stations costs $200,000 to build,” he said.

Tesla has begun installing superchargers across the country that can provide a half charge in 20 minutes, according to the company’s website. So far, Tesla has 80 stations in North America and is expecting to open more, which will be needed to provide long-range coverage of the United States.

There are other companies that are working to improve the infrastructure for electric vehicles, such as GoE3, a Mesa company that seeks to provide sustainable tourism by providing a network of charging stations across the country.

But Greg Lutowsky, a board member at GoE3, said compatibility between cars is an issue for electronic car manufacturers. For example, the plug that charges a Nissan Leaf does not work for the Tesla Model S.

“Remember the battle between Betamax and VHS? Now we have DVD and Blu-Ray,” Lutowsky said.

Lutowsky said the chargers being built by GoE3 are universal and work across different models, including Tesla, but a universal system will be needed to reduce “range anxiety” by consumers looking into electric cars.

“There will be a battle of the plug and we’re not entirely certain who is going to win,” Lutowsky said.

Currently, the Tesla supercharging stations are only compatible with Tesla cars and only available to owners who purchase an additional package.

Prueter said he has reservations about the financial and logistical capabilities of Tesla to expand the way the company wants to, without having to make some compromises.

Currently buyers can receive a $7,500 federal tax credit after purchasing a Tesla, and some states even offer additional credits, but those credits may run out or be suspended, which could reduce the appeal to buyers.

Additionally, Tesla has said that of the $4 to $5 billion needed to create the Gigafactory, it will invest $2 billion of its own while the rest of the capital expenditure will come from partners.

“When the credits run out and the investors really, truly see what’s happening — you know I could be wrong — but I just can’t see how he (Musk) is going to overcome all the things that he’s facing,” Preuter said.

A look at the other suitors

Besides Arizona, Texas also has laws restricting manufacturers from selling cars directly to consumers and has expressed interest in working with Tesla to bring the company to the state.

Austin, Texas has had an aggressive stance toward luring businesses into the city through economic incentives, and in just the last month secured deals with Dropbox and Websense. Furthermore, rumors have circulated about one possible site for the plant, located about 20 miles outside the city.

However, the Austin Business Journal reported those claims could be “premature” and that the city of Hutto, Texas, does not have the available land to offer Tesla.

New Mexico Gov. Susana Martinez announced Tuesday that her office is considering calling a special session to discuss an economic incentive package to offer Tesla, according to the Associated Press, but no details of what those incentives might be have emerged.

In Arizona, no information has become available on what types of incentives the state would be willing to offer Tesla either, but Prueter said he believes if the deal is right, then it would not matter that Arizona does not allow direct sales to consumers.

“If they don’t sell the cars here, but he (Musk) gets the best incentive for building batteries (here), he’ll do it,” he said. “Investors would demand that he do it.”

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(Mark Remillard/KTAR Photo) (Mark Remillard/KTAR Photo) (Mark Remillard/KTAR Photo) (Mark Remillard/KTAR Photo)

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Expert: Auto dealers not an issue for Tesla factory