By on July 27, 2010

Have we scrutinized all the issues behind what they’re doing? Not really. My feeling is that a manufacturer-owned store as a business model violates the spirit of the state law here. But not a single person is complaining about it, and it’s kind of a back-burner thing for us. I imagine that if we start getting complaints from our membership, we would move it up to a front-burner thing

Tim Jackson, President of the Colorado Automobile Dealer Association tells Automotive News [sub] that Tesla’s non-franchise dealership in Colorado is not a long-term strategy, despite the company’s avowed desire to do without dealers. Well, franchised dealers, anyway (state law allows one OEM-owned dealership, and lots of EV tax breaks). Tesla admits (in its prospectus, no less) that wanting to own its own dealers will cause problems in Texas, but in the unlikely event that Tesla becomes a viable automaker, it’s easy to imagine a number of states putting up barriers to the franchise-free strategy. Especially since what we do know about Tesla’s dealer model plan is… highly irregular.

Having hired George “the brains behind the Apple Store” Blankenship, Tesla’s dealer expansion plan is still under review. Regardless, another Automotive News [sub] piece has the rough outlines.

Tesla’s approach probably will involve a small real estate footprint, with pedestrian access wherever possible, the company says. Stores will carry only a few display cars in inventory — three or four, in some cases, with no sales lot. And the company intends to continue selling cars directly over the Internet.

Sales employees are compensated with a combination of salary and sales commissions.

Tesla envisions that its EVs will create less service-related income than cars powered by internal combustion engines because oil filters, mufflers, radiators and air hoses needn’t be replaced. Initially, stores will not have a service department.

Instead, service technicians travel from Tesla headquarters in Palo Alto, Calif., to customers who have vehicle problems.

And though Tesla estimates its car’s running cost as two cents per mile, the company charges $1 per round-trip mile for a service technician to come to your recalcitrant Roadster from Palo Alto, California. And you wonder why the cars are so rare… well, anywhere outside of California. But hey, software diagnostics can be done over the internet, and remember, electric cars don’t really break. Right?

In perfect fairness, this is not the worst-ever service program for a $100k sportscar that’s sold just over 1,000 units. But what about when the Model S comes to market, and 20,000 annual units must be sold and serviced? Tesla’s new Regional Sales Manager figures

It’s working for now. If we need to change in the future, I’m sure we will…. We recognize that there are some challenges out there in some states, and we plan to work around those land mines

No biggie. It’s not like car dealers are an insanely well-connected political bloc, able to achieve such feats of political manipulation as exempting themselves from financial reform regulations… right?

Like all good revolutionaries, Tesla believes that the only barrier to a new, better business model is a lack of imagination. But by trying to explode the franchise-dealer model, Tesla is picking at a scab that covers one of the deepest fault lines in the business of automobile. As long as it only sells the Roadster, Tesla can fly under the radar as it has in Colorado, but as soon as the Model S hits projected production volumes, the game will change. Tesla will have to fight state-by-state against well-connected dealers, and faces an insane ramp-up on the service front by pursuing its “gallery” model. The franchise-dealer model is hardly perfect, and this is in no way a defense of it as the best way of organizing the business. But the fact is that the system will defend itself, and Tesla’s crusade will earn it few friends in the industry it’s trying to conquer.

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23 Comments on “Quote Of The Day: Doing Without Dealers Edition...”

  • avatar

    Sure would be nice to have your car serviced by somebody whose interest in keeping it running with minimal cost and hassle aligned with yours, instead of avoiding the lower warranty-work hourly rate and gouging you with hydraulic-fluid flushes, BG Oil and other ripoffs.

  • avatar

    …and remember, electric cars don’t really break. Right?

    Now that’s some funny shit.

  • avatar

    Dealerships tend to be large establishments with multiple departments for new and used sales, service, etc. and large staffs to go with them. It doesn’t have to be that way.

    In the late 1960s, my mother bought a new Datsun 510 from a gas station. In addition to selling gas and doing repairs, they were the franchised Datsun dealer in town. Sales were handled by one guy. The service department was the station’s mechanic.

    Tesla could do the same using independent shops.

  • avatar

    Great, because I’m sick of having to go to the dealer to get the air hose replaced on my Honda. A lot of the expense is related to having to disconnect the conniption shaft to get to it, of course.

  • avatar

    Can someone explain to me the history of franchise dealership in the USA and why so many states have laws to prevent manufacturer ownership?

    • 0 avatar

      Becuase manufacturers ask for tax breaks from state governments, while dealers give pies with hundred dollar bills baked in them to members of state governments.

  • avatar

    The mentality behind franchise law must be similar to why New Jersey won’t let you pump your own gasoline. Absurd claims about safety and a misguided notion about ‘creating’ jobs.

  • avatar

    The sooner the dinosaurs known as the Car Dealer go extinct, the better off we’ll all be.

  • avatar

    If someone can find their way around the dealer requirement, it will be a break through. For so many of the cars-as-appliances buyers out there, direct internet sales could really help.

    Hyundai’s Equus idea is interesting, and works at a similarly low volume as Tesla currently sells. Even with a franchised dealer, that dealer will dispatch people to come to you for test drives and service. It helps keep the real estate footprint down for sure, and might be an interesting hybrid approach.

    I wonder – how much business does E-bay motors do? I’m curious how the inability to test drive plays into the consumer’s willingness to drop huge cash.

  • avatar

    Horrid dealership experiences (sales AND service) are THE main reasons I stay away from buying a new car. Dealerships are the deterrent, and with powerful state laws and organizations, it’s doubtful in my opinion that the manufacturers can do much about them.

    If I could buy a car right from the manufacturer, from someone honest that isn’t a chain-smoking mouthbreather with almost no knowledge of the product, who actually CARES that I buy the vehicle, well, I might consider a new car again one day.

  • avatar

    I stopped in that Tesla shop in Boulder a couple of weeks ago and checked out the cars in the show room. Thinking about going back to take one on a test drive. Interesting Tesla set up a factory shop in The People’s Repubic of Boulder to sell $100k electric toys.


  • avatar

    Keep in mind that franchised dealers help customers get better prices through competition. Let’s say that you want to pick up a brand new 2010 Fusion. Right now it is likely that you have more than one Ford dealer within an easy drive from your house, and the dealers know that, so you can use that in your negotiations to help get the best price.

    If those dealers were corporate owned it would be easy for Ford to lay down the law and say that all dealers must sell vehicles at MSRP for so long after release, then drop down to maybe $500 off a couple months after, then maybe to $1,000 off right before the new model year comes out. As all dealers would have the same owner essentially, there would be no competition on price, and you would pay whatever the corporate office said you should pay. Yes, you could play a different brand off of them, but if they were corporate owned they would likely keep the pricing up as well.

    • 0 avatar

      My sense (and experience) is that competition among dealers on new car prices is next to non-existent. There are so many rebates, kickbacks, incentives and other transactions hidden from the buyer that it’s almost impossible to know what the real price is, even without a trade-in. They’ll never sell a car for less than they paid for it, so in effect the manufacturer does control the price.

      Wasn’t Saturn’s greatest period of success was in the early days when they didn’t haggle on price?

    • 0 avatar

      Customers liked the Saturn model, and Saturns sold for higher prices than they would have had there been haggling involved.

      I’m not against corporate owned dealers, it would make my job easier if all I had to do was help the customer find the car that met their needs and then just show them the price on the windshield instead of having to deal with mind games and haggling, but the current way certainly lets customers get better pricing.

      Amongst domestic dealers at least pricing is pretty straightforward. Ford posts all rebates on their website, or you can find them at edmunds or number of other third party sources, but Ford mandates that available rebates be given to customers regardless, so whether you know about it or not, you are getting it. Toyota likes to do unpublished dealer cash that the dealer doesn’t have to give to the customer if they can get away with it, and Ford and other domestic dealers have that occasionally, but it isn’t as common. I hear about special factory kickbacks for buying or selling X many of a certain thing, but I haven’t seen it myself, it could be that it’s part of car sales past, or maybe that’s just above my paygrade.

      Regardless, if you come into my dealership with a signed buyers order from another Ford dealer, we are going to undercut that price. Our general policy is that we do not sell cars under invoice, but if we need to dip into holdback to beat an invoice deal from the guys down the street, we’ll do it.

    • 0 avatar

      Hmmm. any chance that the manufacturer now having the pulse of it’s real customer base (end users), and not having to provide subsidies to broke-dick dealerships, that the cost of vehicles would actually be below the true cost that dealers currently pay? The genuine competition would be between the actual products, not typical dealership hucksterism…just saying…IMO, dealers by and large, add no value and plenty of cost…not only to end users, but also to the manufacturers.

    • 0 avatar

      dartman –

      I hadn’t really thought about it before, but the dealers provide a huge benefit to the manufacturer. With franchised dealers the OEM doesn’t have to wait for a customer to buy the car, as soon as the dealer has it on the lot, the car is sold as far as the OEM is concerned. The OEMs also charge floorplan interest to the dealers, so the longer the car sits on the lot, the more interest goes into the OEMs’ pockets, which offsets any increased incentives further down the line.

      Could the OEM charge less for the product to the dealer? I’m sure they could, but as long as they have the dealer network, they will charge the dealers as much as they can for the cars. Profit margin on new cars has plummeted over the past ten years. It used to be that you had an easy 10% to play with invoice to MSRP, now you are lucky if there is half that.

      The OEMs also like to play games with allocations. If a dealer wants a certain number of a hot new car, that dealer has to take a certain number of another vehicle that might be slow selling on the dealer lot, but on which the OEM makes a healthy profit selling to the dealer. While in general a car with a lot of options has a greater profit margin to the dealer, the difference to the OEM is an order of magnitude larger. A car whose base model has an MSRP of $20,000, and whose fully loaded version goes for $30,000 might cost the dealer $19,000 for the base, and $28,000 for the fully loaded, but might cost the OEM $15,000 to make the base model, and $18,000 to make the fully loaded.

    • 0 avatar

      “It used to be that you had an easy 10% to play with invoice to MSRP, now you are lucky if there is half that.”

      What would be a decent profit margin in good times at an OEM …. 1% … 2%? … 3%?

    • 0 avatar

      Y’all are forgetting that as soon as a used-car trade-in comes into play, all bets are off. Even in the “no haggle” scenario, the used car is a significant pricing variable.

  • avatar

    No argument that the present game is set-up such that dealerships play a key role for high-volume OEM’s. But … could they be replaced with a more winning model wherein customers would acquire the vehicles they want for less AND the OEMs would make more? Servicing would be by independents (ones authorized by the OEMs perhaps).

    Are customers capable of picking the right vehicles for themselves without a salesmans’ knowledgable input (humor or truth?)

  • avatar
    Rod Panhard

    I could be wrong, but there probably is a great business case for dealers. Can anyone name a brand of car or motorcycle in the U.S. that seems successful and is sold out of gas stations? Or auto parts stores? I know pawnshops and such in North Carolina seem to do a decent trade in the drunksicle business, but that’s an entirely different situation.

    • 0 avatar

      Motor vehicles are a product that does need a dealership/distrubtion network. The thing that I find pathetic is the fact that manufacturers can’t directly distribute their own products. I do believe that this is the only instance where this is the case. Also it’s pretty pathetic that bad dealerships can’t be cut by a manufacturer. Companies and not government should be the only ones to determine the proper distributors for their products.

  • avatar
    M 1

    “Can anyone name a brand of car or motorcycle in the U.S. that seems successful and is sold out of gas stations? Or auto parts stores?”

    Er… come again???

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