24 Oct 2012

Tesla - Why U.S. Auto Dealers Are Blowing a Fuse

This is an article by Max Prince, who is currently studying for his masters degree in auto journalism.  It deals with Tesla in the US, the way they sell their cars and their current battle with American car dealerships. 

"Tesla has never been profitable." 

Those were the first words from Edmunds.com senior editor John O'Dell's mouth during an interview this summer. He's right. That's not to say that the company will never be financially sustainable, or that their electric car aspirations are some naïve apparition. But at this point, Tesla is running on United States Department of Energy loans and CEO Elon Musk's checkbook, along with hopes and dreams. To offer some perspective, Tesla happily sold 89 Roadster models in the entire fiscal Q2 of this year; General Motors sold 210,245 vehicles in September alone.

Saying that Tesla is getting closer to being a major automaker is true...in the same way that finding a nickel makes you closer to being a billionaire.

Yet, according to a report from Amy Wilson on October 8th:

"In Illinois, the Secretary of State's office told Tesla officials in a meeting on Sept. 28 that the EV manufacturer is breaking Illinois law...

In New York, the association representing New York City metro dealers is exploring options to challenge Tesla's store in Westchester, which opened in May...

In Massachusetts, the state dealers association will continue to challenge the legality of a store that opened in the Boston suburb of Natick on Sept. 28...

In Oregon, the state dealers association informally asked the Oregon Department of Transportation's Driver and Motor Vehicles Services Division to review the validity of the dealer license granted for Tesla's Portland store..."

Musk responded via blog post on Monday, and now dealerships in Montana are joining those in New York to fight Tesla's retail scheme.

These roadblocks are being put up by the National Automobile Dealers Association because of the strict rules concerning auto franchises in the United States, struggled over in court numerous times. Essentially, auto manufacturers can't operate their own dealerships. If allowed, this scenario would undermine competition as dealers pay wholesale for their stock, while manufacturers could sell their product at cost, effectively undercutting any profit margin for franchises. Legally, car dealers are entitled to a fair amount of autonomy, in some cases not even having to comply with manufacturer standards of building appearance and logo representation. Each state has it's own state auto dealers association, packed with lawyers, to protect their interests.

These associations are challenging Tesla on the grounds that their shops are, technically, owned by Musk, the CEO of the manufacturer, and therefore illegal.

When I initially looked over a few reports on the story, I was shocked to find that nobody is pointing out the writing on the wall. Something here doesn't add up.

Tesla stores have no way to jeopardize auto dealer sales. Employees in the shops are not trained salesman, nor working on commission. They are modeled from the early tech boutiques, as George Blankenship, a former executive at Apple, is now in charge of building Tesla's retail network. And if you've never seen a Tesla store, you're not missing much – they're merely small showrooms, wedged in shopping malls, to attract attention to the brand. In fact, these suites don't even carry stock because, that's right, every Roadster is made-to-order and, if the past is any indication, will take several decades to actually arrive. So why on earth is Tesla being sued by car dealerships in the United States over their retail practices?

Because they're gearing up for a war.

Flying under the radar of this story is a different, more important one. It began unfolding last year, when BMW reported that sales of their new electric i3 and i8 models would be sold online, direct-to-consumer. They added that the i-line will be available to dealerships, with the caveat that they meet manufacturer imposed criteria for sales participation. As of two weeks ago, only twenty percent of dealerships will be able to carry the new electric models. Even in Germany, where the company has domestic oversight, only forty-five of the two hundred BMW dealerships qualify. Selling over the internet allows BMW to cut their traditional distribution costs by over fifty percent, allowing them to price the i3 or i8 online at between five and seven percent less than a dealership. Presumably, BMW is doing this to recoup the cost of developing the i-line, which has been estimated at an elephantine $3 billion. Considering the financial and brand image stakes, getting the i3 and i8 profitable as soon as possible is their chief objective. As such, they're willing to bypass dealerships.

Even more intriguing than the complaints in New York, Massachusetts, Illinois and Oregon is where the other states will stand. Nineteen states offer financial incentives for buying an electric car, such as the i3 and i8. For instance, California offers a $2,500 tax credit in addition to the $7,500 United States federal government credit for the purchase of a hybrid or electric vehicle, making it by far the most incentivized state in America. By law, manufacturers can also own dealerships in California, provided they're outside a ten-mile radius of all privately owned, same-brand franchises. How in the world do you go about defining a ten-mile bubble if the manufacturer-operated dealership is an internet browser? Is it a percentage of sales from certain areas? The proximity to the nearest BMW server?

I don't have the slightest clue where even to begin, and there is a lot dealership money to be lost on the new BMW i3, which will be priced around $50,000.

Really, it's a shame that Tesla is quickly becoming the sacrificial lamb in this scenario. It's obvious that the NADA and various state dealership associations are securing precedent for future battles with BMW when the i3 launches next year, as the Bavarian's internet strategy could actually damage franchise profit margins. While I root for Tesla to succeed from an undying love of the underdog, I have no illusions about the company. They're a well-intentioned organization with a young CEO doing the best that they can. If they succeed in convincing fashion, the impact on automobiles in our society could be historical. But for now, to most people, Tesla is a single hair on the English Mastiff that is the auto industry. Is it really necessary to pick on them over retail permits? Why not take a stand against BMW internet sales now, instead of hassling Musk and his whopping seventeen dealerships? The state dealer associations are being childish, and this story is getting more and more absurd by the day.

Specialist automotive dealership lawyer Leonard Bellavia said this summer, “The idea that they’re [Tesla] reinventing automotive retailing is somewhat laughable.”

Meanwhile, eight months prior, UK BMW managing director Tim Abbot stated, "I don’t think the car industry has changed very much at all in the last 30 years... Electric vehicles give us [BMW] an opportunity to look at the way we sell cars and do it completely differently."

Now you tell me who's really threatening the NADA.

Copyright © Max Prince 2012. Max Prince asserts the right to be identified as the author of Tesla under section 77 of the Copyright, Designs and Patents Act 1988. First British Serial Rights offered, unless otherwise agreed. All other rights reserved.

Copyright © Max Prince