Tesla is not able to sell its cars in many States in the USA. Their law requires automakers to distribute their vehicles through dealers and Tesla does not use them. It refuses to do so and has gone through a lot of trouble because of this. There are dealers eagering to sell Tesla vehicles, but they will never get the chance. Such attitude, which may seem as just a lot of stubbornness, has very good reasons to support it. If it was under the scrutiny of Dr. Spock, he would have only one thing to say:
Todd Maron, general counsel for Tesla, had a chance to explain the company’s decision at the event “Auto Distribution: Current Issues & Future Trends”, held by FTC (Federal Trade Commission). You can see his participation at the panel “Direct Distribution of Motor Vehicles”, which starts at 34:50. Todd starts to speak at 40:40. If you do not want to watch, don’t worry, we’ll resume it to you.
The most meaningful part of what Maron says is this one: “Any discussion of why Tesla sells directly comes back to our mission. Our mission is quite specific. It is to accelerate the world’s transition to sustainable transportation. You can say we’re true believers and it wouldn’t be an unfair characterization. That’s our mission because we fervently believe that transitioning to electric vehicles is critical to the health of our planet and simply because we believe that electric vehicles are superior vehicles to their gas-powered counterparts. They’re higher-performing, they’re more efficient and they’re safer than gas-powered cars. All of our actions track back to this mission and our decision to sell directly is certainly no exception”. But why, you will certainly ask, it is a bad idea to let dealers sell Tesla cars? He gives 7 main reasons for that, but always with what he has stated as Tesla’s mission in mind. And also with a little background.
He first says something that may seem obvious, but that is not. “Starting a new car company is hard. Putting Tesla aside, there have been zero new car companies in generations. We are selling a new product, with a new technology, under a new brand to a public that is unfamiliar with all of it. In order to achieve our mission, we need to be the ones evangelizing for it, not outsourcing that responsibility for someone else.” And this is only the background. A fair one, we should say. The 7 key reasons are the ones that follow:
1st – “Traditional dealerships are in large out-of-the-way locations. Tesla stores are small and often in high foot traffic areas such as shopping malls. You need to bring the new technology to the consumer. You have to make it convenient to people.” This reason links directly with the next one.
2nd – “Traditional dealerships are large in size because they carry a lot of inventory, which is their lifeblood. We do not have inventory in the same way. Our cars are custom-built. They do not get built until they’re ordered. This is unworkable for the traditional franchise dealer.” No Tesla car is produced without being ordered. Not even one. It has also to do with use of natural resources and not wasting them.
3rd – “The franchise dealer model is based on a high volume and fast pace sales with customers that already have done their shopping and know what they want. Sales people are paid by how quickly they can close the deal. The longer it takes, the worse it is for the sales person and for the dealership. There is an important education process for our customers. They do not come already knowing what they want. They have many questions. Our customers take a long time to study the car. It takes hours. Hours of a patient education process that only we can afford and a traditional dealership model cannot.” This shows the stores are not really aimed at selling, but actually at presenting the products. Besides the Model S, now Tesla also sells the Model X.
4th – “It is well known that traditional franchise dealerships drive relatively little profit from new car sales. Instead, most of their profits come from other parts of the house: service and part, trading old cars, financing, insurance and other add-ons. We can’t offer that to any franchise dealer because we only profit one way: from new car sales and new car sales alone. We can’t make profit from service because our cars have far less parts than gas-powered cars. We do not make money out of financing programs. We do not have insurance products or add-ons. Franchise dealers would just look at this and scratch their heads. They would not know how to make money in this model.” This is one of the main reasons, in our opinion. Electric cars do not use oil, nor spark plugs, nor filters and so on. They do not demand so much maintenance, so dealers lose an important source of income to keep a huge structure.
5th – “Traditional dealerships rely on manufacturers to fund their advertising. We don’t advertise and we surely wouldn’t allow, let alone subsidize, someone else to advertise for us. What franchise dealer is going to accept not being able to advertise?” Word of mouth is not something other automakers can live of. Tesla claims it can.
6th – “Franchise dealers could not make money selling our cars. And there is a simple reason why: if we hypothetically used a franchise dealer in a certain State, we would still be selling online. Franchise dealers make money marking up the price of the cars sold by the manufacturer. If a franchise dealer marked up the price of our car, no customer would buy from them. They would simply go to us and buy for less online or in a neighbouring State.” In short, Maron says they are cutting the middlemen out of the business. How could they partner with them?
7th – “There is a clear conflict of interest. We don’t simply believe EV cars are a nice complement to gas-powered cars. We believe it is imperative that they are replaced entirely by electric vehicles. This is a knock on them! Traditional dealerships make 99.% of their revenues of gas-powered cars. If you are opening a Yankee’s team store, are you going to ask a life long Red Socks fan to manage it? What if he’s still selling Sock’s gear out of another store down the road? Or even worse, in the same store?” There is really no way of franchising someone to something that aims to cut these people’s other sources of income. Offering no revenues whatsoever.
Maron says nowhere else in the world he would have such restrictions other than in the USA. He is not correct. If Tesla tried to sell its cars in Brazil, it would probably have to name dealers as well. And not only in some States, but nationwide. Protectionism, unfortunately, is more widespread than we would like to believe.
The counsel also names Tesla’s current oppositions: primarily from dealers groups and secondarily from General Motors. “The dealers are driven by protectionist interests. GM voluntarily chose, generations ago, to use a certain business model and everyone else that comes after should be required as a matter of law to use the same model. That’s code. That’s code for Tesla is able to sell the product to consumers for a lower price than we are able to through a franchise system and we don’t think that they should have that advantage and be able to serve customers that way”, he states in the video.
Maron also seized the chance to give Mary Barra, GM CEO, an adequate response to the provocation she made on Tesla at the Chevrolet Bolt presentation at the 2106 CES. Check what she said there at the video below, from 3:00 on:
Barra goes a long way in defense of the dealerships model, saying confidence is a matter of scale and so on, but Maron quotes the exact moment she shoots: “Unlike some EV customers, Bolt EV customers never have to worry about driving to another State to buy service or support their vehicles”. For this, we have prepared the video below:
If you did not watch it, here is what Tesla has to say about that: “This shows their interest is purely competitive. They are actually touting their ability to try to block us from selling directly and them compare the fact that our customers can’t buy our cars as easily as theirs”. Mary Barra could have avoided this one. Expect things to escalate between Tesla and GM from this episode on. This is a discussion in which all car buyer should be very interested. We are.