1
NEWS
Tesla deals direct
Fuel isn't the only fossil Tesla Motors is challenging in its battle against traditional dealersIts neighbours are Google, Facebook, Ebay and Apple in central California’s free-thinking Silicon Valley. Tesla Motors, located a continent away from Michigan and its century-old automotive industry, does business quite differently than the Big Three of GM, Ford and Chrysler.
From an abandoned boarded-up Toyota-GM plant repurposed by Tesla Motors to build the curvaceous Model S four-door sedan (pictured) and future designs such as an SUV due in late 2014 known as the Model X, Tesla Motors expects to deliver 21,000 dedicated electric vehicles this year. A few zeros shy of being considered a volume producer; yet as a fresh-thinking silicon-age company, Tesla Motors is creating a huge disruption in a way that few anticipated.
It is business as unusual at Tesla. The real breakthrough may not be the company’s innovative lithium-ion battery technology or its rapid recharging system. It’s the unique way Tesla has structured its national sales network which is producing considerable profits as well as considerable scrutiny and criticism from powerful US automotive dealer groups.
Direct to the point, Tesla doesn’t do dealers. Tesla sells directly to customers through a network of Tesla-owned stores. Or, you can order a Model S from the comfort of your sofa via the Tesla Motors website. Select PayPal or Visa to pay a deposit of $2500 and wait a few months for delivery (in the United States). So easy, so effective and so far direct sales allow Tesla to achieve juicy profit returns from each vehicle it sells, provide an extremely high level of customer service and maintain highly effective direct communications with potential customers.
Because dealers don’t exist in the sales system, a dealer never gets involved and a dealer never gets a financial cut. The strategy is more Apple than General Motors and not without its critics. Tesla Motor’s non-traditional sales strategy is receiving severe complaints from traditional car dealers who are screaming foul.
A few weeks ago the California New Car Dealers Association approached the state’s Department of Transportation asserting that Tesla is playing unfairly. Despite the pot-black-kettle scenario, the Association took exception to the fact that Tesla automatically deducts a $7500 federal tax credit for zero emission vehicles from the electric Model S purchase price. The same tax credit also applies to the Nissan Leaf and petrol hybrid-electric Chevrolet Volt, and Nissan and Chevy both deduct the full tax credit from the advertised purchase price.
The Association, representing more than 1000 new car and truck dealers, claims that a significant number of Model S buyers do not generate annual income high enough to take full advantage of the federal tax credit. Its petty stuff thrown at Tesla out of frustration by the Association bruised by brand closures such as Oldsmobile, Pontiac, Saturn, Hummer, Mercury and the US federal government shearing overgrown GM and Chrysler networks.
In the same way that Tesla’s electric drivetrain technology provides a viable alternative to the internal combustion engine, the company’s customer-direct sales strategy threatens dealers.
Texas isn’t messing about; it prohibits Tesla from selling directly to customers for reasons pivoting on state’s rights, consumer protection legislation, money and politics. JR Ewing would be proud, but the stakes are quickly escalating beyond soap-opera drama.
Texas is home to billionaire car dealers who have the cash and political connections to literally hang Tesla like an unwanted coyote on a barbwire fence.
Tesla does have a gallery in Austin. According to Tesla spokesman Patrick Jones, “The gallery resembles a store however does not offer test drives, pricing information or facilitate orders of our vehicles. If a resident of Texas wishes to purchase a Tesla they must order it online and then have a third party make the delivery. Again, we are actively taking measures to change this, but remain compliant under current state restrictions.”
Colorado politicians have acted to protect traditional dealers with legislation to stop Tesla from opening additional showrooms, but allow Tesla’s existing showroom in Denver to remain open.
State legislators in North Carolina, Minnesota, New York, Massachusetts and Virginia are being lobbied by Tesla and dealers to choose a side. According to Tesla Motors co-founder and CEO Elon Musk, in a discussion with Automotive News, he said that around 20 states have statutes that make Tesla's direct sales model difficult and half a dozen other states make it extremely difficult.
If the states tilt against Musk, his eventual option may be to petition the federal government to enact legislation specifically drafted to protect electric vehicle sales directly to customers. It would be a big ask for the feds to overstep the states.
Both sides fear for their own survival. Tesla as a niche manufacturer doesn’t have the production volume to afford the financial weight of dealer distribution with additional expenses of commissions and bonuses plus on-going buyer incentives and advertising campaigns often demanded by dealers.
By selling direct, Tesla generates high profits from each vehicle sale, amplified by USD $51.5 million in additional income during the second quarter this year generated from the sale of green-car credits to other auto manufacturers – Zero Emission Vehicle (ZEV), Greenhouse Gas Emissions (GHG) and Corporate Average Fuel Economy (CAFE) credits are sold.
Tesla’s willingness to repay a USD $465million Department of Energy loan many years ahead of schedule while also investing in future product development and tooling confirmed its business model is working very well. Tesla’s share price increased by more than 560 per cent in the past 12 months, and Tesla continues to enter new markets in Europe, Asia-Pacific and China.
While money remains the focus in the battle between Tesla and traditional dealers, let’s not overlook the incredible control Tesla has over its brand and brand messaging by talking and selling direct to customers. Musk does not want dealers messing with his brand’s messaging, diluting the brand’s values and undermining the company’s reputation for outstanding customer service.
“Assuming a consumer is shopping Tesla against the traditional brands, the best way for a dealer to compete is for them to leverage their strengths: choice [multiple brands/options], the purchasing experience [hassle free, haggle free], and economics,” says Kyle Dickie, Sewells Group CEO based in Shanghai, China. Sewells Group is a global consulting firm specialising in the retail automotive business.
Dickie continues: “Of course this is exactly what auto manufacturers don’t want dealers to do, as they see dilution of their own brand in the process. Therein lays the question: Is Tesla as a disruptor brand going to cause the OEMs or their dealers to try changing their sales model first? I don’t think that we should for a moment believe that Tesla poses any risk to traditional dealers right now. The risk lies in how the direct sales model influences future retailing strategy.”
Tesla Motors is yet to launch the Model S in Australia, despite stating more than 12 months ago that deliveries would begin mid-2013. The revised timing is now mid-2014. Why the delay? Tesla spokesman Jones offered no reason. Higher than expected homologation cost for Australia, China, UK and Europe are believed to be the reason for the delay.
From our brief test drive of a Model S Performance a year ago, the car is uniquely quiet, quick and very responsive and the technology under its aluminium shell is impressive. However, early-production quality issues were obvious.
Early adopters also like its environmentally green hue reinforced every time they drive past a petrol station.
“I am convinced Tesla’s direct sales approach will work extremely well in Asia-Pacific,” said Dickie. “The novelty factor, the brand factor and the hassle-free approach will appeal to early adopters. If we put aside the fact that it is an electric car, I suspect the most notable aspect of the direct sales model is that it will be – simply – a far better experience all round.”
Tesla Model S owners simply love their cars. James Grothe from Oregon received the keys to his silver Model S Performance with Signature options in November 2012. He paid a $40,000 deposit a year prior and waited hoping reality exceeded promise. “The technology in the car drew me in,” he admits. “It was primarily technology and secondarily performance. Quite frankly, green didn’t really factor in, which I know is odd for an electric car purchase, especially since I live in Oregon.”
He applied for and received the $7500 federal tax credit in what he described as an easy process. “I filled out the forms and filed them with my federal tax return. That was it.”
The state of Oregon provided an additional rebate reducing the installation cost of a 100amp home recharging station which repowers the Model S’s lithium-ion 85kWh battery pack at the rate of 1.6km/minute.
In 13,000km clocked during his weekly commute, Grothe has suffered a few minor glitches but each has been handled immediately by Tesla by sending a technician to his home or to his business.
Grothe previously owned Honda-made luxury Acuras. “I’ve always had great service from Acura, but Tesla customer service is in another league,” he said. The Tesla convert is Number 26 in the queue for the Model X SUV.
Tesla Motors certainly presents an alternative and proven business model that rubs against the traditional dealer network. Quietly watching from the sidelines are the auto manufacturers. A cliché but appropriate, the gloves are about to come off. And perhaps it will be the consumer that ends up with the bloody nose once the dust settles.
Read the latest news and reviews on your mobile, iPhone or PDA at carsales' mobile site...
Don't forget to register to comment on this article.
Share this article
Written byTodd Hallenbeck
See all articlesOur team of independent expert car reviewers and journalistsMeet the team
Stay up to dateBecome a carsales member and get the latest news, reviews and advice straight to your inbox.
Subscribe todaySell your car with Instant Offer™
Like trade-in but price is regularly higher
1. Get a free Instant Offer™ online in minutes2. An official local dealer will inspect your car3. Finalise the details and get paid the next business day
Get a free Instant Offer
Looking for a family car?Get the latest advice and reviews on family car that's right for you.
Explore the Family Hub
Related articles
Disclaimer
Please see our Editorial Guidelines & Code of Ethics (including for more information about sponsored content and paid events). The information published on this website is of a general nature only and doesn’t consider your particular circumstances or needs.
Please see our Editorial Guidelines & Code of Ethics (including for more information about sponsored content and paid events). The information published on this website is of a general nature only and doesn’t consider your particular circumstances or needs.
Love every move.
Buy it. Sell it.Love it.
®Contact
Advertise with us
Local marketplaces
International marketplaces
Scan to download the carsales app
Want more info? Here’s our app landing page
App Store and the Apple logo are trademarks of Apple Inc. Google Play and the Google Play logo
are trademarks of Google LLC.