How Tesla and new car technologies could make auto dealers obsolete

The electric car company's sales model poses an existential threat. Our days of price haggling may finally be over

Published October 11, 2014 12:00PM (EDT)

This article originally appeared on AlterNet.


Consumers hate the new-car buying experience. They hate the haggling and the cheesy sales tactics, and they hate leaving feeling ripped off, even if they drove off with a good deal. Car salespeople are the least trusted professionals in the nation, even beating out members of Congress for the dubious title.

But for 80 years, that’s been the only game in town. If you’ve ever bought a new car, you’ve had to do it at a car dealer and on its terms. Unless you recently bought a Tesla, that is.

The direct-sales model Tesla uses threatens the very existence of car dealers. The electric-car company markets its cars through stores called galleries and over the Internet. There’s no dickering, bait-and-switch or trade-ins, and no sales people if you don’t want them. All prices are set, you pick the features and options you want from a menu and your car is delivered to your door. The entire experience is often described as being as easy as buying from the Apple Store.

John Voelcker, editor of Green Car Reports, says that if Tesla’s direct-sales model catches on, it could be a huge “crack in the dam” for dealers as consumers will naturally gravitate to the better car-buying experience.

“The dealers are afraid that the public will find that this is a process that is vastly more appealing,” says Voelcker. “And if Tesla gets big and is selling 500,000 cars in 10 years, then people are going to talk about their experience, and others will demand the same when they buy. The dealers know this.”

Automotive analysts say that if Tesla’s model proves successful it could inspire other car makers like General Motors, Ford or Toyota to  once again try direct sales themselves (as they have, unsuccessfully, on a few occasions since World War II). The dealers believe this might doom them.

But the auto dealers — knowing their business model is flawed, antiquated and imperiled — are not going down without a fight. Dealer associations are aggressively protecting their turf using their powerful state lobbies to pump legislators and governors either to shut Tesla down or hobble it so it can't become a threat. Many states already have laws stating that automakers can’t sell cars directly to the public and compete with the independent dealerships that sell their brands. But now, dealers want statehouses to rewrite those laws to apply to automakers that don’t have dealers, like Tesla.

Last month, Iowa became the latest state to challenge Tesla Motors’ right to sell its cars directly to consumers. The state’s Department of Transportation told the electric-car manufacturer that it must stop offering test drives in the state, because it isn’t registered as an auto dealer there. The state's DOT ordered Tesla to halt its test drives only after it was tipped off by the state’s Automobile Dealers Association, according to the Des Moines Register.

Iowa joins Arizona, Maryland, New Jersey, and Texas in restricting the direct sales of Teslas. The only states to formally approve of Tesla's direct-sales model are California, Colorado, Massachusetts, Nevada, and Virginia.

Tesla’s ability to sell cars directly is being vigorously challenged across the country. According to the Alliance of Automobile Manufacturers, a trade group representing the 12 largest automakers, dealers have pushed 33 bills in 26 states so far this year. Auto dealers have also tried to challenge Massachusetts laws allowing Tesla sales operations there, taking their case to the state's courts; however, the state’s Supreme Judicial Court recently ruled in the car maker’s favor.

Why Are Dealers Afraid of Tesla?

It might seem curious that a state would prohibit an automaker from selling its cars directly to consumers, and that state lawmakers are so quick to act against Tesla. But the legal objections to Tesla’s sales model are rooted in states’ laws, some written decades ago, that forbid automakers from competing against franchised car dealerships.

Dealerships have been at odds with the concept of direct sales by the automakers since the Depression era. Back then, dealers were considered independent and therefore more accountable to their buyers, with whom they stayed in contact through the entire ownership experience. So regulations were put in place to stop the car companies from competing against dealers as they could have an unfair pricing advantage and could possibly shut them down. Consumers would suffer because they would be at the mercy of a large corporation, not a local proprietor.

Jim Ziegler, an automotive sales trainer, says that Tesla will eventually bust the dealer franchise laws on the books and allow for all car makers to sell directly to consumers. But he still believes that the laws, as they were written then, are a public benefit.

“Franchised dealers give consumers a competitive advantage with service and pricing. Factory-owned stores do not provide that,” argues Ziegler in an article in Ward’s Auto. “Politically, consumers might think the protected dealer franchise system is not in their best interest. Dealers generally sell their cars at a loss or break even. The manufacturers make the lion's share of the profit. With manufacturer control, margins and prices will increase.”

This Year's Model

One of the reasons Tesla gives for eschewing the dealer business model is that the service and maintenance on its cars is distinct from that of internal-combustion engine cars. The all-electric Model S (the only Tesla currently on sale) requires no oil, spark plugs, fuel filter changes, or tuneups. There are no emissions to be tested. If something goes wrong, it can often be fixed with a software update or patch sent over the Internet. If there’s a need for physical service, Tesla sends over a flat-bed to pick up the car and leaves a loaner, all for free. Thus, Tesla maintains it has no need for a service department, one of the most integral parts of a dealership.

While the Model S, introduced last year, may have fewer parts to service, it has had some dependability problems and glitches early on, though that’s not unusual for any first-year model, despite the drivetrain. And while Tesla says it won’t make servicing its cars a profit center, it doesn’t mean its cars are bulletproof.

“Tesla’s are still electro-mechanical devices,” says Voelcker, “Their mechanical parts will still wear out. They’re still going to need servicing over time.”

So, with a high-tech sales and service operation to go with its electric car, Tesla CEO Elon Musk says he found little need for the dealership-style business model.

“When Tesla came along as a new company with no existing franchisees, the auto dealers, who possess vastly more resources and influence than Tesla, nonetheless sought to force us to sell through them,” says Musk. “The reason that we did not choose to do this is that the auto dealers have a fundamental conflict of interest between promoting gasoline cars — which constitute virtually all of their revenue — and electric cars, which constitute virtually none.”

Voelcker agrees with Musk and argues that it wouldn’t be the best model for electric-car education or sales to pit electric cars against gasoline cars in the showroom. “Dealers will just want to continue to do what they’ve done in the past, because they understand gasoline cars. Also, it takes three to four times longer to sell an electric car, so there’s less incentive for them, too.”

Salespeople at Nissan dealerships have tried hard to talk buyers out of the all-electric Leaf in favor of the gasoline-powered Sentra, says Voelcker. They’ve reportedly gone as far as to convince buyers that the Leaf electric car, which has a very limited driving range, “could leave your wife stranded at 3am.”

State House Battles

Auto dealer lobbies have strong ties to state legislatures across the U.S. stemming from their political contributions. According to Open Secrets, the National Automobile Dealers Association, a lobbying group that represents car and truck dealers nationwide, spent $3 million on political contributions in 2012 and another $3 million on lobbying. This figure does not include the large amounts regional dealership associations and dealers contribute to state campaigns and lobbying efforts. Thus, when auto dealers cry out, it is sure to induce heart pangs in lawmakers.

In Texas, the automotive dealers have been successful in making sure the state’s current laws protecting dealerships are enforced. This bars Tesla from selling cars in the state. However, Tesla has kept its galleries in Houston and Austin open by prohibiting its employees there from discussing pricing and purchasing options or even offering test drives. Employees at the galleries are also prevented from referring customers to any outstate or online retailers. Tesla says that leaves Texans frustrated as they can’t even get the most basic information from the galleries.

Meanwhile, in New Jersey, Gov. Chris Christie’s administration has also been aggressive in barring Tesla from operating in the state, saying the company doesn’t have the right to unilaterally change the way cars are sold there. This prompted a legal challenge by Tesla and two versions of compromise legislation that would allow the electric-car maker to run four stores in the state as long as it opened two service centers, forcing it to forsake its business model. If Tesla wanted to open a fifth store in New Jersey, it would have to be operated by an independent franchisee.

In nearby New York, Gov. Andrew Cuomo and state legislators on both sides of the aisle have also threatened to end Tesla sales, but the car maker recently worked out a last-minute deal to keep selling there by promising not to open more than the five direct-sales outlets it now has. Tesla has worked out a similar deal in Ohio.

Georgia’s Department of Revenue is considering action against Tesla after the state’s Automobile Dealers Association filed a complaint saying Tesla sold 173 cars at its suburban Atlanta store, when it was only allowed to sell 150 cars.

Missouri’s efforts to ban Tesla sales might be the most pathetic. There's no law in the state barring direct sales of automobiles; instead, Missouri's laws only bar car makers from competing against their franchisees. Earlier this year, state senators tried to sneak anti-Tesla language into a bill originally pertaining only to off-road and all-terrain vehicles. The bill, HB 1124, passed the Missouri House earlier without any anti-Tesla language. However, the Senate version, which passed with no notice or public consultation, sought to limit the sales of all new cars and trucks only through franchised dealerships. The House balked at reconciling the two versions of the bill.

“This debate should be held in the full light of day with all sides being given an opportunity to make their case,” Musk declared on Tesla’s company blog. “Instead, the dealers are again trying to ram through a provision under the cover of darkness and without public debate. The people of Missouri deserve better from their elected officials.”

What’s Best for Consumers?

The Missouri bill also got the attention of the Federal Trade Commission, which came out in support of Tesla’s right to sell vehicles directly to consumers. In a blog post, the commission said: “Regulators should differentiate between regulations that truly protect consumers and those that protect the regulated.”

The FTC’s opinion follows the lead of the U.S. Department of Justice Economic Analysis Group, which is part of the department’s Antitrust Division. Back in 2009, before Tesla had opened a single gallery, it found that state prohibitions against direct sales from car makers may harm consumers. The paper on the DOJ’s website recommends “eliminating state bans on direct manufacturer sales in order to provide automakers with an opportunity to reduce inventories and distribution costs by better matching production with consumer preferences.”

The report argued further that direct-sales models might be more in sync with emerging consumer buying choices.

“Just as Dell has altered its distribution model in the personal computer industry to better meet evolving consumer preferences, car customers would benefit from elimination of state bans on auto manufacturers' making direct sales to consumers,” said the report’s author, Gerald R. Bodisch.

Separately, a letter signed by more than 70 leading economists dismisses every dealer argument against direct sales and concludes that bans are only motivated by “economic protectionism that favors dealers at the expense of consumers and innovative technologies.”

The government and economists are joined by consumer advocacy groups, including the Consumer Federation of America and the Center for Auto Safety, which contend that direct sales by automakers would benefit car buyers. Consumer Reports, which gives the Model S its highest score among the cars it’s tested, has yet to take a definitive stand on the issue of Tesla’s sales model. “Consumer Reports is closely observing Tesla and its efforts to sell vehicles through its own stores,” a spokesperson told AlterNet. “But the organization hasn't taken a formal position on the matter yet.”

By Cliff Weathers

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