TESLA'S FLAWED DEFENSE OF DIRECT SALES
Tesla has sought relief or exemption from franchise laws in various states where the laws prohibit direct sales by automakers. The company's sole argument so far -- until its recently added constitutional challenge in Michigan -- has been that Tesla's unique technology deserves such an exemption.
In every judicial proceeding and in the court of public opinion, Tesla and its academic supporters have claimed that a franchised dealer (independent of Tesla) cannot represent the brand properly. Tesla claims there would be conflicts with a dealer's other franchises, that the sales staff would focus on "easier to sell" gasoline-powered vehicles.
The company insists that it alone must educate potential buyers on the benefits of the Tesla electric vehicle. Tesla also claims that dealers prefer to sell cars from inventory on large lots away from the high-traffic retail areas, such as malls, that Tesla prefers.
But the arguments that Tesla uses to defend its position are wrong. Tesla's claims have gone unchallenged by judicial representatives who sometimes don't want to be seen as standing in the way of technology. Unfortunately, the automotive press has dutifully repeated those claims without examining their validity.
Recently, I served as an expert witness on behalf of the Virginia Automobile Dealers Association in an administrative hearing in which Tesla sought to open a second point in Richmond, Va. Despite existing state law, which requires new vehicles to be sold through a franchised dealer subject to certain exceptions -- one being that there are no independent dealers willing to take on the franchise -- Tesla chose to challenge the law rather than appoint an independent dealer for its second point in the state.
The state dealer association so far has prevailed against Tesla's attempt to circumvent state law and open the second point -- mostly by the hearing officer's finding that Tesla made no attempt to find an independent dealer to open the point despite numerous dealers expressing interest in doing so.
As in Virginia, in Michigan, Utah and elsewhere, Tesla paints a false narrative: that dealers would have its vehicles sitting alongside another brand in a single showroom and sold and serviced by the same employees. For starters, does anyone seriously think that Mercedes-Benz, Audi, BMW, Cadillac or Jaguar Land Rover executives, for example, would tolerate Teslas being sold and serviced within their dealers' exclusive brand-imaged stores? Certainly not!
Over the last 20 years the majority of dealerships are exclusive to a single brand (or to brands from a single automaker). So a Tesla franchisee could only be exclusive to Tesla thus eliminating the silly brand and product conflicts used to argue against franchises.
Although many existing dealers would be interested in building a store to suit Tesla and operating according to its standards, a Tesla franchisee would not even have to be an existing dealer; it could be anyone who meets Tesla's criteria. Tesla, like any other automaker, would get to choose its dealers and would do so based on its assessment of individual candidates. The store would be sized to the planning volume assumed by Tesla, would be established in a location approved by Tesla and would not have to sell from inventory.
The financial success of a Tesla franchisee would depend on selling and servicing Teslas only. There would be no in-store competition or distraction from another brand, gasoline-powered or not, that would divert the dealer's resources or the sales staff's attention.
Tesla could require that the cars be sold at fixed prices (even though recently Tesla has been discounting). It could require that a store be built to Tesla's specifications.
The used-car question
As the number of Teslas in operation increases, Tesla must add to its service capacity. Moreover, unlike franchised dealers, Tesla inconveniences its buyers by not taking trade-ins. That will be a huge issue for Model 3 buyers, most of whom will trade an existing car for the mass-market Tesla.
Putting in the capability to appraise trade-ins, remarket them and handle complex retail finance transactions -- including paying off existing loans and matching financing to the Model 3 customer's monthly payment goals -- will require that Tesla replicate the physical scale, expertise, staff and expenses found in every franchised dealership.
In establishing its direct-sales model, Tesla ignored the question of where owners would go to dispose of their used cars. Every other automaker relies on its franchised dealers to support wholesale and retail markets for its brand. Dealers facilitate the orderly redistribution of same-make used cars that, in turn, supports residual values and provides owners with immediate cash for their trade-in vehicles.
However, without a dealer network to make a market in used Teslas, owners are relegated to listing their vehicles on autotrader.com, cars.com, Craigslist, etc. (unless they trade a used Tesla for a new Tesla). On Monday, Oct. 17, 226 of the 562 Teslas listed for sale on autotrader.com were posted by private sellers.
But even among the "dealer" listings, a high percentage appear to be consignments at resellers rather than dealer-owned inventory. On Oct. 17, Tesla had 439 used vehicles (off lease and trades taken on the purchase of a new Tesla) for sale at its service centers.
The vehicle purchase transaction is often complicated. The need to accommodate the customer's financing needs and lifetime services is a function of the product, irrespective of the method of distribution. If Tesla were to provide those same services, it would incur the same costs as a dealer.