Will Tesla Finally Bring the D2C Revolution to the Auto Industry?

by HSG on Aug 09, 2013 in Brain Candy

Another blanket article about the pros and cons of Direct to Consumer (D2C) isn’t needed, I know. By now, we all know the rules for how this model enters a market: its disruption fights any given sector’s established sales model, a fuzzy compromise is temporarily met, and the lean innovator always wins out in the end.

That’s exactly how it played out in the music industry when Apple and record companies created a digital storefront in iTunes to usher music sales into the online era. What now appears to have been a stopgap compromise, iTunes was the standard model for 5-6 years until consumers realized there was no point in purchasing and owning digital media when internet speeds increased and they could listen to it for free through a music streaming service.  In 2013, streaming models are the new music consumption standard. Netflix is nearly parallel in the film and TV world, though they’ve done a better job keeping it all under one roof. Apple mastered retail sales so well that the majority of Apple products, when bought in-person, are bought at an Apple store. That’s even more impressive when you consider how few Apple stores there are in the U.S. (253) compared to big box electronics stores that sell Apple products like Best Buy (1,100) Yet while some industries have implemented a D2C approach to great success, others haven’t even dipped a toe in the D2C pool, most notably the auto industry.

What got me thinking about this topic is the recent flurry of attention Tesla Motors has received for its D2C model. It all came to a head at the beginning of July when a petition on whitehouse.gov to allow Tesla to sell directly to consumers in all 50 states reached the 100,000 signatures required for administration comment. As you might imagine, many powerful car dealership owners armed with lobbyists have made a big stink about Elon Musk, Tesla’s CEO and Product Architect, choosing to sidestep the traditional supply chain and instead opting to sell directly to their customers through their website. These dealership owners say that they’re against the idea because they want to protect consumers, but the real motive is that they want to defend their right to exist (and who wouldn’t?). They essentially have a monopoly at their position in the sales process, and they want to keep it that way. More frightening for the dealerships is the possibility that once Tesla starts selling directly to consumers, so will the big three automakers, and they fear that would be the end of the road for their business. Interestingly enough, the big three flirted with the idea of D2C in the early 90’s before they were met with fierce backlash from dealerships. I’m sure the dealership community has no interest in mounting a fight like that again. 

To say that the laws preventing Tesla from selling online are peripherally relevant would be a compliment. By and large, the laws the dealerships point to fall under the umbrella of “Franchise Laws” that were put in place at the dawn of car sales to protect franchisees against manufacturers opening their own stores and undercutting the franchise that had invested so much to sell the manufacturer’s cars.  There’s certainly a need for those laws to exist, because no owner of a dealership selling Jeeps wants Chrysler to open their own dealership next door and sell them for substantially less. However, because Tesla is independently owned and isn’t currently selling their cars through any third party dealership, this law doesn’t really apply to them. Until their cars are sold through independent dealerships, they’re incapable of undercutting anyone by implementing D2C structure.

How is it working for Tesla right now in the states that do allow this sales model? If you live in a state that permits Tesla to sell online, then you go onto their site, build your car, pay for it, and it is delivered to your house on a flatbed truck 2-3 months later. Even if Tesla can’t legally deliver to your address, you can meet them in a nearby state that allows it and drive back to your own. The benefits of this for consumers are many. For one, they don’t have to hassle with the traditional sales process of haggling and worrying they’re getting ripped off. Secondly, they get to build their car just how they want it.  Third, at this relatively early point in Tesla’s existence, they are not manufacturing cars at nearly the same rate other auto companies do. If or when the time comes for them to produce in mass, the costs will logically decrease, which makes a dealership’s commission a lot easier to stomach for consumers. If Tesla vehicles were sold through independent dealerships right now, which the U.S. Department of Justice’s Study “Economic Effects of State Ban on Direct Manufacturer Sales to Car Buyers” cites as increasing the price of a car by up to 30%, their price (the Model S ranges from $52,400 – over $100k) would be even more out of reach for the majority of consumers, gas savings or not.  

There are a number of additional benefits on Tesla’s end for not yet selling through independent dealerships, and according to Tesla’s own blog post on the matter, chief among them is that they don’t want their electric vehicles mixed in with traditional gasoline cars on the showroom floor, thus losing their key differentiating selling point. Musk also believes that it would be impossible for salesmen to sell an electric car without simultaneously undermining gasoline models, something that would be damaging to the dealership’s long-term interests. Given that, he doesn’t believe salespeople would advocate for Tesla cars as fiercely as traditional ICE (Internal Combustion Engine) cars. Secondly, Tesla wants to control the selling experience and focus on supreme customer service. Third, there’s no inventory, which leads into point 4: Perfecting product market fit. By allowing customers to build their ideal Tesla car online, the company is learning a ton about their consumers’ desires before scaling, which is sure to benefit them in the long run. If they were to start mass-producing the wrong kind of vehicle, it could kill them.

Is there any truth to dealerships’ claim that they want to protect consumers by forcing them to buy in-person at their brick and mortar location? Maybe a shred. Though Tesla cars are billed to not need many repairs due to their lack of moving parts, they do have the occasional break down or accident. When this happens, you have to take or have towed your damaged Tesla to a specialized Tesla service center, of which there are only a few dozen in the country. This can take months. Dealership mechanics won’t work on these vehicles because they don’t sell them, and independent mechanics probably won’t be educated on how to repair such a futuristic car, if they’re even willing to fix something made by a company that hasn’t invested in their businesses like the big three auto makers and their dealership partners have. Furthermore, as is the case with many internet-based companies, getting in touch with a human being is difficult should you have any questions that aren’t answered on their site. Finally, as was mentioned above when discussing how the purchase and delivery process works, it takes months for you to receive your car. Most customers are accustomed to walking into a dealership and leaving with a car, regardless of how unpleasant the purchase process is. It is possible for a customer to walk into a Tesla showroom and leave with a car, but rare due to the fact that they don’t hold traditional inventories.

At this point, no one can really say if selling cars directly to consumers is a good idea or bad idea, and that’s ok. The free market should be the ultimate authority in discovering the answer, and in time, it will be. But that’s only if politicians get out of the way. There’s only so many times Elon Musk can give politicians joy rides in the Tesla Model S before it just doesn’t become a viable persuasion model anymore, and most important in the bigger picture is the fact that it makes no sense to stifle innovative companies like Tesla for the benefit of dealerships that are, for lack of a better term, tenured. Plus, if history is any sign of what the end result will be, it would be smart for dealerships now to at least begin exploring sales from their own websites so that they have a skin in the game and credibility when this industry dives full bore into digital D2C sales in the decades to come.

 

 

 

Notes:

 

Brief overview of the situation:

 

http://arstechnica.com/gadgets/2013/06/white-house-petition-for-tesla-motors-to-sell-direct-to-consumers-needs-help/

 

Actual Petition:

 

https://petitions.whitehouse.gov/petition/allow-tesla-motors-sell-directly-consumers-all-50-states/bFN7NHQR

 

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http://online.wsj.com/article/SB10001424127887324049504578541902814606098.html#articleTabs%3Darticle

 

Should the Free market decide the fate of Tesla’s ability to sell D2C, or should the government step in?

 

Tesla says that it doesn’t want to go through the dealership model because there’s less of a profit margin for dealerships when selling their expensive cars. Their cars are expensive because at this point, they’re essentially handmade. They don’t look to be getting cheaper any time sooner. This and that he doubts salesmen will advocate for Tesla as vigorously as Tesla itself would.

 

In the states where this D2C model is permitted, Tesla customers order their car online and it is delivered to their door on a flatbed truck.

 

Cheaper for the consumer this way, and more painless for Tesla.

 

Dealers contest that if D2C sales are allowed for Tesla, they will pave the way for more major car brands to go D2C, which would put thousands of car dealership owners out of business.

 

Many consumers say that it should be up to them to decide whether they buy online or off. Many Apple consumers go to the Apple store to buy products because they’re more comfortable testing them out in person than they are buying more blindly online.

 

The auto industry and the liquor industry are the two behemoth industries remaining that haven’t been affected by the online D2C revolution due to laws that were put in place before it all happened.

 

Car dealerships also say they’re protesting tesla’s model because they’re “protecting the consumer.”

 

A shred of truth in this because when you buy a car from tesla online and it breaks down, it can take months for a repairmen to come to your house, take it back to the nearest tesla dealership, fix it, and then return it to you. There aren’t many tesla service centers around right now, and many normal service shops are unwilling to work on them because tesla hasn’t invested in the local car business community like the dealerships have. That, or the dealerships don’t know how to work on these futuristic cars.

 

Tesla says that their cars never need work, but there are stories online of this not being the case. Also, accidents happen. Accidents suck worse when your car is in the shop getting fixed for months at a time.

 

WSJ commenter says TESLA cars only need windshield wiper fluid and tires in terms of service. Research if this is true. Also says they have very few moving parts.

 

Tesla has won court victories in Massachusetts and New York, but lost them in Southern states where legislators are “more attuned” to local businesses and their political donations. Musk himself has taken legislators in joy / test rides in Tesla cars.

 

Plenty of car buyers detest the traditional car sales process.

 

“Playing by the same rules" is a classic cry of Luddites.” – from WSJ commenter.

 

Research specific laws that bar this kind of sale. Are under the category of “Franchise Laws” “many of which go back to the auto industry's earliest days when industry pioneer Henry Ford began turning to eager entrepreneurs to help sell his Model T.”

 

This is hugely important due to the market size in question.

 

D2C (offline) was flirted with by Ford and GM in the early 90’s before they retreated due to backlash from dealers.

 

Dealerships currently have a monopoly and they want to maintain it. - Diarmuid O'Connell, Tesla's chief of business development

 

Many industry insiders think it will be difficult for Tesla to make progress through the legislative process. Most lawmakers are more concerned keeping their constituents employed and economies afloat than they are allowing a single car company to make more money. Until Tesla cars become more affordable to the middle class, it is unlikely there will be more backlash from the purchasing side of things.

 

Right now the legal battle and court decisions are varying from state to state.

 

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http://www.forbes.com/sites/markrogowsky/2013/07/02/tesla-white-house-petition-crosses-finish-line-with-no-victory-in-sight/

 

Forbes writer says that dealers don’t like selling these kind of cars because they are expensive to service. Cites Volt as an example.

 

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http://wallstcheatsheet.com/stocks/will-this-white-house-petition-validate-teslas-business-model.html/?a=viewall

 

Preston tucker cars?

 

http://en.wikipedia.org/wiki/1948_Tucker_Sedan

 

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Make comparison to other industries that have gone through this process and point out that the innovators always win. iTunes, Netflix, apple, etc.

 

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Proposed solution of teslas being available through dealerships websites but not at their storefronts? This solves problem of salesmen not pushing tesla as hard as other cars, and doesn’t break any existing laws. It is currently possible to buy a car online from a dealership’s website. Similar to what has happened with iTunes and Netflix. The middle man moves online, commissions are received.

 

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http://tv.msnbc.com/2013/06/28/tesla-vs-the-auto-dealers-of-america/

 

Long-existing laws state that car sales have to go through a licensed third party. North Caroline tried to pass a law that forced all car sales to go through a franchised third party.

 

“A dealer who has invested a significant amount of capital in a community is more committed to taking care of that area’s customers.” - Bob Glaser, head of the North Carolina Automobile Dealers Association

 

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From commenter on MSNBC:

 

http://tv.msnbc.com/2013/06/28/tesla-vs-the-auto-dealers-of-america/

 

If you believe that Tesla should have the right to sell the product that they have designed and produced, please sign the following White House "We the People" petition... 

So, what are these Franchise laws?

The state automobile franchise laws are what is called an “economic rent”.  An economic rent is some type of barrier or restriction that limits competition in an otherwise free market.  The opposite of an economic rent is unfettered, completely free competition.  Not all economic rents are bad.  Patents for example, providing protection for a limited time only, allow businesses to recoup R&D expenses as well as make a profit that would often not be possible if completely free competition were allowed immediately upon a product's release.

The automobile franchise laws originally made sense.  They protected dealerships that were enticed by automobile manufacturers to make large investments in facilities, inventory, and people specifically for the sale of the manufacturers’ products.  It would have been unfair to allow the manufacturers to immediately follow-up after these investments were made and try to undercut the new dealerships that were created at the manufacturers’ behest.

But like patents, this protection should not be extended forever. And, they never should have been applied to automobile manufacturers that never engaged in the enticement of an independent dealership.  That is completely outside of the original intent of the franchise laws.

Unfortunately, the current state and national dealership associations are trying to do just that with Tesla Motors. Furthermore, they believe that their franchise protection should be perpetual.  They never want to be forced to face truly free competition.  This is completely understandable – it’s in their self-interest.  However, it is a terrible economic policy.

With the current franchise laws, we have seen a rash of dissatisfied customers that complain bitterly of both their sales and service experiences.  We also have evidence that the current structure, in general, adds significant costs to automobile purchases.  See the U.S. Department of Justice Study “Economic Effects of State Ban on Direct Manufacturer Sales to Car Buyers” at 

I don’t believe that all franchise dealerships are bad.  In fact, I believe that many dealerships add real value to the purchase process as well as maintenance and service.  The many very successful dealerships that are currently providing this true value have already established good relationships with loyal customers and will continue to succeed with or without the franchise laws.  They are competitive now, and will continue to be competitive in a free market.

So, who truly benefits from the current franchise laws?  Obviously, it is only the dealerships that would provide an inferior service in a competitive market.  Does it make any sense at all to hobble new businesses for the sake of second-rate dealerships?  Of course not.

The franchise laws are long overdue for repeal.  Any state legislature that doesn't see this is in the thrall of the dealership lobbyists.  Recall the National Automobile Dealers Association Chairman’s (Mr. William Underriner’s) now famous saying that NADA "has 'a whole mess of lawyers in Washington' who work on state franchise laws."

Public opinion appears to be overwhelming in favor for the repeal of these outdated laws.  If your state representative or state senator votes to keep them instated, you will know whom he/she is working for.

Please remember to vote.

 

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http://www.justice.gov/atr/public/eag/246374.htm

 

See the U.S. Department of Justice Study “Economic Effects of State Ban on Direct Manufacturer Sales to Car Buyers” at 

The cost of the auto distribution system in the United States has been estimated as averaging up to 30 percent of vehicle price

 

Built to customer specs like DELL?

 

The most comprehensive estimate of the savings in the vehicle order-to-delivery cycle from build-to-order, direct manufacturer sales is set out in a 2000 report by a Goldman Sachs analyst.(10) Based on an average vehicle price of $26,000, total cost savings in the order-to-delivery cycle were estimated as $2,225 or about 8.6%.(11) The components of those savings were as follows: $832 from improvement in matching supply with consumer demand; $575 from lower inventory; $387 from fewer dealerships; $381 from lower sales commissions and $50 from lower overall shipping costs, since fewer dealerships would reduce the number of distribution points. The Goldman Sachs report identified other possible build-to-order savings of about $1,000 per vehicle in product development, manufacturing flexibility and procurement and supply but the lion's share of the benefits were attributed to improvements in the order-to-delivery cycle. In a nutshell, the current auto industry make-to-stock sales model takes a lot of money, much of it tied up in inventories and devoted to discounting to clear lots of less popular vehicles, to try to sell cars that can come up short of what customers would really prefer.

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http://www.forbes.com/sites/quora/2013/06/04/why-doesnt-tesla-use-dealerships-to-sell-their-vehicles/

 

 

 

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http://www.teslamotors.com/blog/tesla-approach-distributing-and-servicing-cars

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