From the November 2015 issue
In the seven years since it delivered its first EV, Tesla has managed to circumvent legal barriers to direct factory-to-consumer sales in state after state, despite concerted opposition from established dealer groups. Backed by surveys showing strong public support, Tesla chairman Elon Musk mobilized acolytes through social media, even summoning them to a public demonstration in New Jersey’s capital when that state banned sales of Teslas at company stores. The effort paid off when the state Senate passed, and Governor Chris Christie signed, a bill allowing Tesla to sell cars at four locations in the state. Similar exemptions to franchise requirements, often limited to Tesla alone, were carved out in other states.
Tesla currently owns and operates 102 retail outlets in North America, almost half of which are full sales and service centers. The others are mostly retail stores, often in malls, and a few are “galleries,” where discussing prices, taking orders, and offering test drives are all prohibited. The company also sells online and by phone.
Tesla insists that its desire to cut out the middleman and deal directly with customers is something noble, part of spreading the electric-car gospel. Tesla owners are often champions of the carmaker, and the company offers incentives for referrals, another practice that troubles regulators.
Even so, other Silicon Valley innovators and free-market advocates enthuse over Tesla’s retail approach, a sentiment represented by a May editorial blog post from three Federal Trade Commission directors titled “Direct-to-consumer auto sales: It’s not just about Tesla.” In it, they argue that “states should allow consumers to choose not only the cars they buy, but also how they buy them.” The piece also notes that Elio Motors, a startup with plans to manufacture enclosed three-wheeled vehicles, intends to conduct direct sales.
Nobody knows better than the carmakers how thin today’s profit margin is on new-car sales.
But don’t expect the automotive establishment to line up behind the newcomers. Analysts say there is little chance of the big car companies resuming direct sales after the withering results of their past experiments. In 1998, Ford established Ford Auto Collections in five mid-size markets, and a year later General Motors stunned dealers with a plan to set up its own network, which was to own and operate up to 10 percent of its 7700 dealerships.
In reaction, dealers rushed to state legislatures, where friendly lawmakers strengthened franchise protections in 22 states. But the company-owned networks encountered problems beyond franchise laws. Suburban dealerships undercut Ford Auto Collection’s fixed prices, hurting sales at some company stores. By 2001, Ford announced that it was getting out of the retail business, and by then GM had already reversed course under pressure from its dealers.
Nobody knows better than the carmakers how thin today’s profit margin is on new-car sales. It’s typically a single-digit percentage of a dealership’s profits, which are mostly made in service, finance, and used-car sales. Factory stores would require huge investments in land, buildings, and salaries in order to establish choice locations in the best markets. Even Tesla’s hard line against independent ownership seems to be softening. Musk has said that he would consider a hybrid dealership model in the future, with the company sharing control.
Then why have dealers so doggedly fought Tesla’s intrusion? Some analysts bring up the specter of China, whose car companies have threatened to export vehicles to the U.S. The present overcapacity in China’s auto plants has analysts wondering where those cars will end up and how the necessary sales networks would be developed. With Tesla’s foot in the door, could China’s invasion with factory stores represent the ultimate existential threat to the franchised dealer? Perhaps.
But even this scenario has an analogue from the past. Daewoo, once one of South Korea’s largest automakers, tried to launch its brand here in 1998 using a direct-sales model. GM acquired Daewoo after it failed, in 2002. Daewoo’s demise had many causes, mainly its terrible cars. Which brings us back to Tesla’s retail success, which is really based not on its distribution model but on selling what has been widely regarded as a remarkable car.
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