Tough times for Tesla

Tesla's global corporate headquarters in Palo Alto, California
Tesla’s global corporate headquarters in Palo Alto, California.

New kid on the block Tesla has looked to cut out the middleman in American car sales by attempting to sell directly to its potential customers. US dealerships, predictably, aren’t too happy about this, and have filed suit across multiple states to avoid having to compete with the electric brand. Tesla has since been battling dealers and their friends in political places to allow them to sell their cars without having to set up a dealer network – at the moment, Tesla operates stores or galleries in 22 US states, though consumers can’t actually buy a Tesla car from these locations as they might from a conventional dealership.

Tesla insignia. Photo: Wikicommons/User Norio Nakayama.
Tesla insignia. Photo: Wikicommons/User Norio Nakayama.

There are arguments for and against direct sales. Dealerships in America, for example, are going with the argument that such a move would leave the poor, defenceless consumer at the mercy of the automaker, in the event of anything going wrong. Those in favour of Tesla selling directly to consumers take great glee in poking holes in such arguments. And you can’t really argue with them. Anybody who has bought a car knows that while there are some salespeople out there who are genuine these are, unfortunately, few and far between, and a great deal too many seem only interested in squeezing as much as they can out of your wallet before you leave. In a report published by the Consumer Federation of America in July 2013, complaints about car sales topped the top ten list of consumer complaints for the country in 2012; including misrepresentation in new/used car advertising, faulty repairs and the sale of ‘lemons’ i.e. cars which have only been found to be defective after they’ve been bought.

Tesla, meanwhile, maintains it wants nothing to do with the dealership model, for a number of reasons. Firstly, it views this system as a way of extracting more money from consumers, particularly in relation to servicing and maintenance. Secondly, it remains wary of the risk it might run in putting its new technology on sale beside conventional combustion engines. As Elon Musk said in a recent blog post: “The reason that we did not choose to do this is that the auto dealers have a fundamental conflict of interest between promoting gasoline cars, which constitute almost all their revenue, and electric cars, which constitute almost none. Moreover, it is much harder to sell a new technology car from a new company when people are so used to the old. Inevitably, they revert to selling what’s easy and it is game over for the new company.”

Tesla's Roadster, its first production vehicle. Copyright Tesla Motors.
Tesla’s Roadster, its first production vehicle. Copyright Tesla Motors.

It has to be said there’s a certain irony in such restrictions being placed on Tesla in what has been known as ‘the Land of the Free’, particularly as the US has long been a capitalist nation, with many politicians and commentators lauding the benefits of a free-market economy. Most recently, the state of New Jersey blocked the automaker from selling directly to the public, something which Tesla has vowed to fight. In early March, NJ Governor Chris Christie addressed a conservative convention saying: “We need to talk about the fact that we are for a free-market society that allows your effort and ingenuity to determine your success, not the cold, hard hand of the government,” a contradiction which has not gone unnoticed.

Dealers in Ohio have also been campaigning against Tesla’s expansion in their state, arguing that their prospects for success will be damaged if a line isn’t drawn between manufacturer and dealer. Basically speaking, dealerships in America are protected by laws dating back decades, which were brought in to protect auto dealers from the likes of Ford and General Motors from moving in and taking a slice of the profits. The only problem is that there aren’t any Tesla dealerships for them to hurt by selling directly to the public, yet they remain bound by those laws, or those which have since been updated.

One solution, according to the dealerships, is for Tesla to change their business plan, and adopt the third-party dealership route used by other car manufacturers. So why can’t Tesla simply do this?

Part of it has to do with simple arithmetic. The reason Tesla’s two models have come into being is a result of their development of a battery which could offer similar performance to fossil fuel-powered cars in the same class. Unfortunately, the lithium cell batteries are expensive, and add quite a lot to the cost of the car to the consumer, factoring in Tesla’s cut. Add in the cut for a third-party dealership and you’ve got a car which could be prohibitively expensive for a new technology. That may be alright for a BMW or Mercedes running on petrol or diesel, but Tesla’s battery-powered offering is still leaving consumers undecided. Tesla officials have also stressed the point that with a new technology the process would run much smoother with direct interaction between manufacturer and consumers.

A Tesla showroom in Tokyo. Photo: Wikicommons/User Harani0403.
A Tesla showroom in Tokyo. Photo: Wikicommons/User Harani0403.

And, in cases where the dealership sells more than one car, issues could arise around a mix of electric and fossil fuel vehicles – dealers may be less inclined to sell an electric car which would need a great deal less servicing when compared to a petrol/diesel car, as Musk referred to in his blog post.

This is a new technology, and Tesla will unsurprisingly do whatever they can to make sure it takes off, and to make sure that it doesn’t become another Fisker or Coda. Selling directly (and by doing so, eliminating the middlemen and a chunk of the price) is one way of doing it. In the future, the price of the batteries should decrease, thanks to Tesla’s upcoming investment in their ‘Gigafactory’ where the company will work with battery manufacturing partners to cut costs through creative manufacturing processes. The company expects that the cost per kWh will be reduced by 30 per cent by 2017, and the benefits to consumers from such reduced costs will only increase, something the auto industry is fully aware of.

Perhaps some compromise could be reached down the line, or perhaps the fighting will only get more fierce. While dealers are up in arms about Tesla selling selling to their customers with a brick-and-mortar shop, many perhaps don’t realise the fact that many people buying a Tesla are doing so online. It’s a simple process – you can choose your model, colour scheme, alloy wheels and a variety of optional extras when it comes to the trim or technology. Then it’s simply a matter of paying – through financing, leasing or simply buying outright. You’re given an estimated delivery date and your car added to the production queue, generally around the 2-3 month mark.

A Tesla Model S juicing up. Copyright Tesla Motors.
A Tesla Model S juicing up. Copyright Tesla Motors.

This mightn’t simply be some Tesla-hate by car dealerships across the US however – word is that dealerships are afraid that should Tesla be allowed to sell directly to the consumer, other auto manufacturers such as Ford and GM would seek to do the same, leaving their dealer network in a very uncomfortable place.

To get around this sticky issue proposed legislation in Arizona, one of the proposed sites for the Gigafactory, would allow only electric cars to be sold directly to the consumer. There is some light at the end of the legislative tunnel, however, highlighting that a career in politics doesn’t necessarily have to mean getting in bed with the big boys. In New Jersey, for example, a lawmaker has reacted to the state’s recent direct-selling ban by introducing legislation which would allow such activity – pointing out that sending consumers to a different state to buy electric cars isn’t exactly the smartest move for the state economy.

In any case, the dealership model is an outdated one, and one which many consumers are frustrated with, to varying degrees. The up-and-coming generation is one which wants to buy products with as little fuss as possible, and may simply turn to Tesla’s online stores and buy from there, avoiding dealerships altogether. Still, when it comes to cars, you really need to see them in person, to get a feel for them and whether they’re the right fit for you. In terms of a much more transparent process, direct selling on the part of the manufacturer is the logical next step, for Tesla at least. The dealership model has operated for the best part of a century, and though it doesn’t necessarily have to be abandoned wholesale, just because we’ve become used to something doesn’t make it the best and only option.

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