Why You’re Wrong About Tesla
You do know you’re wrong about Tesla, right?
I don’t even need to hear your opinions about the electric carmaker to tell you that you’re wrong about Tesla. You’re dead wrong.
How do I know you’re wrong about Tesla (NASDAQ: TSLA) without even hearing what you have to say? Because, if you’re like 99% of people with an opinion about the automaker (which is actually a pretty small percent of the population – most people simply don’t care), that opinion includes some version of one or more of the following six incorrect assumptions:
Incorrect Assumption ONE: Tesla’s Direct Sales are Anti-Competitive
In probably the most naïve view of what Tesla’s direct sales model means to consumers is the thought that without a dealer network competing against each other for the consumer’s dollar, that the direct sales model must be anti-competitive.
It’s no surprise that the New Jersey Coalition of Automotive Retailers (NJCAR) thinks Tesla’s sales model is anti-competitive. Do they mean as anti-competitive as, say, a coalition of retailers banding together to keep outsiders out? Now that would be anti-competitive (as if anything that ludicrous ever happened in real life).
In a recent op-ed titled State just wants Tesla playing by the rules, James Appleton, president of NJCAR, wrote that Tesla’s direct sales model “creates a vertical monopoly and limits competition.” And that it “places the fox in charge of the chicken coop” and limits consumer access.
I can’t help but smile at that part of the letter, of course, because the only limiting of competition and consumer access going on here is a state law that forbids Tesla’s sales model.
If Tesla was the only seller of cars, or even electric cars, one could argue that their efforts reduced competition, but since there are literally thousands of companies already selling cars in and around New Jersey, Tesla’s direct model is no more anti-competitive than an Apple store, a Dairy Queen restaurant or any other vertically-integrated manufacturer.
Incorrect Assumption TWO: Tesla’s Direct Sales Lower Prices Because They Remove the Middleman
In the Pro-Tesla camp, you get the equally naïve opinion that (1) the average car dealer is just a non-value-add middleman; and (2) that you would somehow be able to buy a Tesla cheaper without this alleged middleman.
Let’s be clear: Tesla’s Model S ain’t cheap… and it’s not inexpensive either. There are no discounts – the price, like an Apple Mac, is take-it-or-leave-it.
Tesla’s gross margins are around 25% and Apple’s are above 35%. Franchised car dealers, on the other hand, scrape by on gross margins near 4% for the average new vehicle. When you add that paltry dealer margin to their manufacturer’s (like Ford, for example), you’re still well below 20%. The dealer network, more than anything else, creates fierce competition that drives prices down.
For the uninitiated, like Elon Musk and his defenders, there is a belief that competition only exists in a brand-vs-brand world; when, in fact, the greatest competition for any franchised dealer are his fellow dealers selling the same brand.
Incorrect Assumption THREE: Strong Dealer Organizations Can Stop Tesla
As Cliff Banks wrote in The Banks Report last week: In the Case of Tesla, Dealers are Winning the Battle but Losing the War; and Cliff’s analysis is 100% on the money.
While the NADA and strong state dealer organizations employ fantastically effective lobbyists, the fact is that Tesla currently has issues in only 3 states (Arizona, New Jersey and Texas); though others, like Ohio, have said they are looking into Tesla’s model.
Moreover, there are Tesla owners in all three of these states. You see, so long as there is one state that allows Tesla to sell its vehicles, there will be Tesla owners in all 50 states.
Tesla is selling every car it produces today. Every car. Banning Tesla’s sales model in your state will not stop Tesla from selling every car they can manufacture for the foreseeable future. Tesla cannot be stopped by state dealer organizations.
Of course, you’re naïve if you think dealers really care about stopping Tesla… they don’t. Dealers are waging these battles to stop their own manufacturers from emulating the Tesla model and competing directly with them. They’re not afraid of Tesla; they’re afraid of what the Tesla direct sales model could mean should their own franchisor suddenly decide to go that route.
Instead of fighting Tesla, state dealer organizations should be working to enact even stronger laws that protect current territories for franchisees; and allow any automaker to sell directly to consumers, provided the automakers’ stores do not operate within the protected territories of their existing franchisees. Laws such as these won’t make headlines for companies like Tesla; and, thus, won’t show the dealers in a bad light the way the New Jersey decision has done.
Incorrect Assumption FOUR: Tesla is the Victim of ‘Mafia’ Tactics
Musk, mad about the recent New Jersey decision, insinuated that Tesla was somehow the victim of Mafia-like tactics.
Nope, Elon, you just got a good old-fashioned New Jersey ass whooping.
The lines between Mafia, politics and business have been blurred for so long that it seems more than naïve for Musk to outwardly express this opinion. Perhaps Tesla is the only multi-national company that never greased any wheels or twisted any arms. If that’s true, then their success is even more amazing.
There will be more challenges to Tesla’s sales model in the coming months, and unless Elon puts his big boy pants back on, he’s going to be outmaneuvered again and again.
Incorrect Assumption FIVE: Allowing Tesla to Sell Directly to Consumers Endangers America’s Dealer Network
While the issues facing America’s car dealers may include the possibility that their OEM (Original Equipment Manufacturer) will someday try to circumvent them and sell directly to consumers; that should be near the bottom of anyone’s Top Ten list of what should be keeping dealers up at night. For example, I see the following issues as much bigger threats to dealers’ short- and long-term survival than I do Tesla:
- An Absolute Leadership Void
- Salesperson Turnover
- The Knowledge Void
- Pricing Transparency
- Millennial Buyers
- The 4+ Hour Buying Experience
- Dealer Oversaturation
- Large Dealer Groups (with true Economies of Scale)
- Online Sales
The above weaknesses and threats are presented in no particular order (because we could argue all day on which is a greater immediate or long-term issue); but suffice it to say that the dealers I know should and do worry about these more than they do about Tesla and the ramifications of direct sales.
Incorrect Assumption SIX: Car Dealers Hold a Monopoly
Ugh, this one hurts because anyone with this opinion is sadly misinformed about both car dealers and the definition of a monopoly.
Apple holds a monopoly on the iPhone.
Dairy Queen holds a monopoly on the Dilly Bar.
Tesla holds a monopoly on the Model S.
The nation’s 17,000+ new car dealers have no such monopoly.
Provided there is enough perceived product differentiation, vertical monopolies are created that allow the manufacturer to price their products wherever they want (as Tesla, Dairy Queen and Apple do). Selling cars at retail in America is one of the most competitive of all product offerings, bar none, because there is no product differentiation between two identically-equipped Ford Fusions; and the market, not dealers, essentially decides how much a dealer will make on a particular unit.
Still not convinced? Consider this: in almost every market in the country, dealers of the same brand are often just a few miles apart. This makes the very thought of a monopoly so laughable I should have ignored it, but couldn’t given the multitude of poorly-researched opinions being presented as fact like this morning’s Tesla can topple the auto dealer’s monopoly from The Detroit News.
…and then there’s the Internet – just as it’s done for every other retailer in America – the Internet has undoubtedly brought additional competition to even the most secluded of car dealers.
Case closed. You, like nearly everyone else, are wrong about Tesla.
March 24, 2014 @ 8:57 AM
I agree with the author. There are many more pressing issues for auto dealers to be concerned about. The fact that our industry has a horrible trust issue with the public is where we need to start corrective efforts. Until we start to value dealership employees that will not change.
Dealers are spending over $1 billion a year on employee related issues. http://lovetheexperience.com/recruiting-training-cost-dealers-over-1-billion-a-year/
All dealer manager bonus or incentives must be tied to employee turnover numbers to change the status quo.
March 26, 2014 @ 4:05 AM
RE: “The fact that our industry has a horrible trust issue with the public is where we need to start corrective efforts.”
Dealers don’t care about the overall image of our industry. Why should they? They are concerned with setting themselves apart from other dealers. If everyone was equally good, no one would hold an advantage. Many consumers just can’t be satisfied. As a dealer my job is to do business with as many consumers as I can at a legitimate gross profit, with the understanding that I will have a personality conflict with at least 1 in 10 consumers and that a best case scenario is I close a third of prospects and am able to get most of those financed. The overall image of our industry isn’t important to me.
Satisfying consumers is mostly based on their perception. Most consumers are someone else’s employee. They don’t understand our cost and expense structures. They think our average transactional profit of about $3K is robbing them. Dealers who want to go transparent are free to do so. I’d want all of my competitors to be transparent. I’d even offer to pay their Mark Rikess bill if they are on the fence and can’t make a decision.
March 24, 2014 @ 7:54 AM
Middlemen are bad. Period. End of story. Tesla is eliminating the middlemen and that’s a good thing. Elon was right when he called them the mafia.
March 24, 2014 @ 7:58 AM
Pete12 – Assuming the car dealer provides no value as a Middleman (which is not true); how are these “Middlemen” bad? For whom are they bad? The consumers? Reread INCORRECT ASSUMPTION TWO above. Consumers benefit from the price competition created by these “Middlemen.” Tesla’s margins are double the average OEM on new vehicles, and when you factor in the dealer, the margins are still well below Elon’s.
Seems to me these “Middlemen” not only add value, but they REDUCE the price consumers pay.
My apologies, though; I only have facts and data on my side. You have emotion on yours.
March 26, 2014 @ 4:11 AM
Middle men are bad? If nothing else, Elon Musk knows how to play suckers.
But I support his effort to own his own dealership/sales points. It won’t last, but he should be able to try within the boundaries of the laws of the various states. When Musk doesn’t get his way he throws a fit. Tesla is free to open stores in NJ and other states as long as he does it the way other OEMs have done it for their own factory owned stores. People outside of the industry typically have no clue how this works. OEMs own sales points all over the country.
March 24, 2014 @ 7:33 AM
Certainly agree that the majority of Tesla arguments are misinformed. But even the pro-Tesla guys saying that Tesla will destroy the dealers network/franchise system is ridiculous. Or Silicon Valley will destroy Detroit. They are still a niche within a niche…so in scheme of things irrelevant. Had they just used the franchise system they would be bigger than Fiat in the US now. Instead they waste millions fighting a system they may eventually win but in short term lose potential profits, sales and scale. Having a few large/influential allies wouldn’t hurt them either.
March 23, 2014 @ 10:39 AM
I love all the Musk Lovers who act like he’s this great humanitarian David taking on the monopolistic Goliaths in the name of consumer protection. Bullshit. He’s a capitalist like the rest and shows no shame in setting the price quite high for his cars.
Tesla is the only automotive manufacturer/dealer who operates sans competition – and consumers (and taxpayers) pay dearly for it.