Can Tesla pull the plug on America’s dealerships?
Tesla (NASDAQ:TSLA) just scored an important victory in its long-running feud with America’s auto dealerships, convincing Indiana’s state senators to shelve legislation that would have banned the firm from selling its high-end electric vehicles directly to the state’s consumers. That’s a big deal for Tesla: the automaker is already banned from selling its cars in West Virginia, Connecticut, Michigan, Texas and Utah, and many other states have bowed to pressure from dealership trade groups and from other automakers, and passed regulations limiting Tesla’s ability to open showrooms or to run its own service centers. That regulatory blowback is a disincentive for potential Tesla buyers, and constitutes the EV-maker’s single “greatest market entry challenge”, argues University of Michigan legal scholar Daniel A. Crane.
In selling directly to consumers, Tesla is seeking to sidestep dealership franchising laws that date back to the 1930s, when it was feared that automakers like Ford (NYSE:F) and General Motors(NYSE:GM) would drive local dealerships out of business and gain a monopoly on auto sales. Some dealerships and automakers — including General Motors, which played a key role in pushing Indiana's anti-Tesla legislation — say that’s still a real risk, and that allowing Tesla to bypass franchising rules, which in some states don’t cover alt-fuel vehicles, would give the EV-maker an unfair advantage.
Others, however, see existing dealership protections as an anachronism, on a par with laws passed to spur demand for horse-drawn buggies. It’s been estimated that current distribution networks adds 30 percent to the cost of a new vehicle, and free-market economists argue that there are now enough automakers around to guarantee healthy competition without an artificial layer of competing dealerships. Government regulators have expressed similar concerns: the Federal Trade Commission last year called blanket direct-sales bans “an anomaly within the larger economy”, while a Justice Department study argues that the spread of direct sales “should be determined by the preferences of consumers … rather than being precluded by fiat.”
For Tesla, this isn’t just a philosophical debate: bypassing the messy, dealership-driven distribution networks upon which America’s major automakers currently rely is a key part of the company’s business strategy. By selling and servicing its cars itself, Tesla can hold down costs and keep more of each vehicle’s sticker price, while also creating a lucrative side-business in after-sale servicing and maintenance. By one estimate, the company’s popular multi-year service packages could generate almost $1 billion in additional revenue if the company meets its 2020 sales targets.
Tesla chief Elon Musk also argues that existing dealerships are too invested in the status quo, and too reliant on revenues from servicing conventional cars, to give Tesla’s EVs a fair shake. In a 2014 blog post, he argued that existing dealerships have “a fundamental conflict of interest between promoting gasoline cars, which constitute virtually all of their revenue, and electric cars, which constitute virtually none.”Recent reports back up Musk’s claim, with EV-buyers complaining of dealers pressuring them into picking less eco-friendly options.
Tesla has been pushing back hard against dealerships’ lobbying efforts, and has started to make headway. “Tesla’s wins are becoming more and more common. It is clear from this trend that Tesla … will be selling its cars in every state within the next few years,” argues LearnBonds analyst Mvusi Ngubane. In Connecticut, legislation is under consideration that would give EV-makers the right to sell directly to consumers, while in Michigan, Tesla is testing the limits of legislation barring it from pursuing a direct-sales strategy. In Texas, the automaker just sidestepped a direct-sales ban by opening a “gallery” allowing users to view its cars before completing purchases online. And in New Mexico, Tesla owners have been directly lobbying lawmakers for changes in laws that currently force them to ship their cars out of state for servicing.
Tesla has also been getting creative, experimenting with a referral-based sales strategy, and even pop-up stores aimed at wealthy vacationers. One thing’s clear: the company is committed to testing the limits of existing auto-sales rules. "They're really the rebel child, and they love that," says Kelley Blue Book analyst Rebecca Lindland. "They are an incredible industry disrupter, and that has its pros and cons.”
Still, America’s dealerships are equally invested in fighting to preserve the status quo: left unchallenged, they fear, Tesla’s direct-sales strategy could lead to a broader deregulation of the $1 trillion auto-dealership sector. That could lead to other automakers shifting to a direct-sales model, or spark a wave of consolidations and mergers, according to a recent Morgan Stanley report. “We cannot rule out a consolidation from over 10,000 dealer groups today to ultimately as few as tens of groups in the future,” the report notes.
That sets the stage for plenty more legal and political brawling in coming months. Investors should keep an eye on how the scattered, scrappy fight plays out: Tesla’s long-term viability and profitability could depend in large part on its ability to keep winning state-level fights like the one that just played out in Indiana.
Companies to watch
* Apple (NASDAQ:AAPL) is thought to be working on an electric vehicle, and some experts believe the tech giant would use a direct-sales strategy for its hypothetical “iCar”. That could give a major boost to Tesla’s nationwide lobbying efforts, argues Evan Niu.
* From the if-you-can’t-beat-‘em-join-‘em department: General Motors has tested a direct-sales model in Brazil, and last month launched a web portal allowing U.S. shoppers to buy ex-fleet vehicles without setting foot in a dealership — a step towards Tesla-style online sales.
* Toyota (NYSE:TM) has similarly been experimenting with online sales for its Scion marque, while Lexus — whose U.S. manager, Jeff Bracken, has previously offered praise for Tesla’s “clever” sales model — is testing a no-hassle, no-haggle sales model for its high-end autos.
Ben Whitford is the US correspondent for The Ecologist. He has written for the Guardian, Newsweek, Mother Jones, Slate, and many other publications.