Editorial: Why Tesla Needs To Sell Cars Through The Franchised Dealer Network

Tesla founder Elon Musk recently announced that it was feasible to build a giant vacuum tube from Los Angeles to San Francisco and transport people the 400 miles between the two cities in 35 minutes. There is a better chance of this so-called “Hyperloop” ever happening than Musk being allowed to sell his electric vehicles directly to the public through his own stores in more than a handful of states. Musk must face reality and stop trying to change franchise dealer laws if he wants Tesla to sell cars through a dealer network that has a true presence in the marketplace. He must embrace the current system and start signing up existing stores.

Let us be clear: we are rooting for Tesla to succeed. The $70,000 to $100,000 Model S electric car is a ground-breaking automobile and has won about every award extant today. Musk is the darling of the analysts and the media, and who wouldn’t root for a man who is a combination of P.T. Barnum, Soichiro Honda and Bill Gates, producing the most politically correct green machine ever, and hates car dealers? What’s not to love?

I am also not shilling for automobile dealers, I simply do not see an alternative. Musk is trying to overturns state laws that prohibit manufacturers from selling cars directly to customers. Other carmakers, including Porsche and Ford, have tried and failed at this mission in the United States. Say what you will about American car dealers, but they have lobbied for and won state laws that will be nearly impossible to change. Musk has other pressing problems to occupy his time – possible battery shortages, and a nationwide charging network to establish – and even if he could build a dealer body, it would cost a half a billion dollars to construct and staff 100 dealerships.

Musk wants to sell 40,000 cars a year worldwide by 2015. We say he can sell 80,000 annually in the US alone through established dealers, particularly with the lower priced X Model arriving in 2014. As Tesla’s units in operation grow, customers will start to have problems that the salaried kid in the Tesla kiosk at the mall and his service center down the street and a voice on the phone from Fremont will not be able to solve. Transaction prices will certainly drop and the fickle public may move on to other brands. Crises will occur, like this week’s possible first sudden-acceleration claim against the company. What if Tesla’s bold promise of a guaranteed future value of their cars start costing them $10,000 a unit? You need experienced car dealers to help take care of these problems, nurture the customers and move the iron.

Tesla vehicles need to be on sold on showrooms alongside other luxury makes. The company could choose to hook up with select dealers of the same brand, preferably Lexus, BMW or Mercedes-Benz, or simply choose the best dealership in each market in terms of having genuine long-term success in customer satisfaction. Being a new car company, they could write a dealer agreement with teeth, as Lexus did back in 1989, mandating facility and client handling standards. Musk will certainly have to share some of his 25% markup with the chosen stores which will be painful at first, but better than a factory parking lot full of unsold Teslas.

Word came this week that Tesla has been quietly selling vehicles to rental car companies Hertz and Enterprise, indicating their retail sales may be softening and thus the need for dealerships to be established sooner rather than later.

Elon Musk must concentrate on what he does best and let car dealers do what they do best. Without a dealer network, Tesla is setting themselves up to fall short in important areas like after-sales service and distribution. While Musk currently has the tech-obsessed media wrapped around his pinky with talk of “disruption” and emissions-free motoring, few have examined the downsides of forgoing the traditional franchise dealer model. It’s one worth exploring.