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March 18 2014

The Tesla Dilemma: Two Wrongs Don’t Make a Right

Abby Schachter

“Live by government protection,die by government protection,” might be the lesson Elon Musk, CEO of luxury electric car manufacturer Tesla Motors, is learning. 

 After all, Tesla found favor with Obama’s Department of Energy and used that favor to raise money from private investors, but the company is now being shut out of selling its cars directly to consumers because of state laws aimed at protecting car dealerships from competition.

In 2010, Tesla Motors got a $465 million loan from the federal government. The feds argue that it was worth every penny:

The Department of Energy’s investment in Tesla supports the commercial-scale deployment of advanced technologies that help keep American auto manufacturers competitive in the growing global market for advanced vehicles.

According to Mother Jones’ Josh Harkinson, Tesla needed the cash infusion because its first car, the roadster, was failing and the company had burned through millions already. Tesla co-founder and former CEO Martin Eberhard explained to Harkinson why the DoE loan was so important:

Tesla would have survived without the DOE loan, but [Eberhard] writes, "it would have been difficult, and it would probably have required Tesla to raise more capital. This would likely have diluted Elon's share of the company: Loans are nondilutive, whereas selling stock is dilutive. This is perhaps why Elon was so enthusiastic about pushing for the loans."

Unlike Solyndra and other “green” energy loan failures, however, Tesla actually has a new product to sell, the Model S, which Car and Driver and Consumer Reports both like. And, in 2013, Tesla actually paid back its loan, nine years early.

Now, Tesla wants to sell its cars directly to consumers, but aside from California, where the company is based, Tesla is being blocked in many places. In Maryland, Arizona, Texas and Virginia, for example, you can look at a Tesla, but you can’t discuss price, test-drive the car, or place an order. As A. Barton Hinkle explained at Reason.com, Maryland auto dealers aren’t going to let Tesla undercut their business without a fight.

The dealers contend they are simply trying to protect local jobs and the welfare of the consumer. But their motives are not solely altruistic. If Tesla succeeds in challenging the franchise model, other car makers might do the same — and then dealerships would be in for a world of hurt. They would still make money, but probably nowhere near as much as they do now.

Just last week, New Jersey announced that Tesla couldn’t sell there without going through third-party dealerships. Ohio is thinking of doing the same thing, and Tesla is fighting hard to prevent that from happening. As Tesla vice president Diarmuid O'Connell explained to some Ohio legislators:

The bill would shut down our ability to grow in the Ohio market and, frankly, it's just a first step to them shutting down our existing businesses…This is the pattern we see in other states.

It might seem as if these prohibitions on Tesla Motors are karma coming back and biting the company for taking the federal loan. But the restrictions and threatened restrictions on Tesla are instead particularly confusing coming from the Republican administrations of Chris Christie and John Kasich, both of whom speak highly of free markets and against crony capitalism.

This point about conservative politicians stifling competition was not lost on Michael Shermer writing at the Los Angeles Times:

Consumers should be free to buy any product they want from any manufacturer without the consent of the government. And if anyone should understand this simple principle, it should be conservatives.

There is a principled argument to be made against government subsidies and loans for private businesses. It was an argument that Mitt Romney made again and again on the campaign trail in 2012. It is troubling to see that some Republican politicians are too afraid of their donors to uphold such a basic value.

If Republicans are savoring the irony of Tesla’s being blocked after receiving federal loans, they shouldn’t be. Instead, they should take this opportunity to support the free market over the status quo.

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Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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