Tesla next called their accounting expert. I didn't catch his name. It was about what you'd expect from an accounting guy -- a pretty dry run-through of his spreadsheet calculating the maximum potential profit margin a dealership could make running a Tesla franchise. His primary take-away is that you can't concoct a scenario where a Tesla franchise would turn a profit. He looks at basically four primary revenue streams:
- Markup on new car sales. It is a given that Tesla will require them to pay full retail, so in the more realistic scenarios, he gives them no marginal revenue at all. In his other two scenarios, he permits them either 1k or 2k per car. He argues that 2k is pretty unrealistic, because you could just drive to Tysons and get it for the list price. I'm inclined to agree with him.
- Lease or financing revenues. He says that Tesla gets a nominal amount for referring loans out. I think he said it was $500 a car, although again I wasn't taking notes here. I believe he allocated 1k per car to a dealership, who is presumably better at getting kickbacks. Personally, I think they'd be better off insisting that it is part of the customer experience not to get these kickbacks, but I guess once they started taking some money, they lost the ability to do that.
- Service department. This one is interesting to me. At various points, I think O'Connell on direct asserted that Tesla operated service at cost and was committed to eliminating this as a source of profit. In the accountants presentation, he seemed to be showing typical service margins. The revenue available is pretty low because Tesla's installed base is quite low and their volume is also low. On cross-ex, the attorney was clearly going after the idea that dealers would be willing to invest and accept negative margins in exchange for higher revenue and profit later when the installed base gets bigger.
- Used cars. This one is primarily limited by Tesla's relatively low sales volume, but is subject to same line of attack as #3 -- more sales lead to more revenue downstream once the 3 comes on line and volumes increase.
He also did a work-up of the costs associated with the dealer. He made a number of conservative assumptions (running with a staff of 10, where Tesla proposes to use 25, lower salary costs, etc). His 3 scenarios were Tesla increases Richmond sales in line with the percentage of the market they command in NoVA with no markup, adding a 1k markup and in the final scenario proposed double the sales with the highest markup. In none of these scenarios did a hypothetical dealership show a profit. He said that it was his expert opinion that no dealership could possibly show a profit.
He did a bit better under cross examination that O'Connell -- probably reflecting the fact that providing expert testimony is his job where O'Connell is mostly an exec. He refused to be baited and often declined to re-characterize statements, instead referring to his previous testimony on the record. The VADA tried to attack him for not developing Richmond specific numbers, but it wasn't terribly effective. The only spot where I think the attorney got the best of him was when he was talking about his numbers which were derived from state-wide averages. The attorney tried to get him to agree that salaries were higher in Tysons than they were in Richmond. He refused to agree with that idea. A better approach would have been to remind him that the numbers were based on state-wide averages and that Tysons is undoubtedly above and Roanoke is below, but Richmond is likely pretty close. In the end, I think the only spots he took damage were minor points like that which seem unlikely to affect the entire picture.
He had some Tesla-specific facts that he dropped and he called back to O'Connell's testimony a couple of times. The angle of attack against him was that he only looked at Year 1. They argued that it was a capital investment and that they were prepared to lose money for a few years to build a brand. There was back and forth about some dealers using salaried sales forces and flat rate pricing. I was hoping someone would point out that dealer's version of flat rate pricing is BS, not including dozens of add-on fees and always reflecting a sucker price that can be beat with negotiations. Nobody runs pricing like Tesla. He fought back on commission based sales, but didn't really challenge the flat rate stuff.
The attorney threw some more Google generated stuff at him, but nothing that stuck or seemed especially memorable to me as I type this.
Finally, Tesla called their economics expert. Her name was Fiona Scott Morton and she was a rock star witness. She's a PhD from MIT, was head economist in the DoJ anti-trust division and is a named professor of Economics at the Yale School of Management. She's written papers on the impact of the internet on car dealers and came across as someone in complete command of the topic. As an aside, the VADA attempted to object to her qualifications on a rambling basis that she needed to use facts from Virginia dealers and not auto dealers generally and cited a case that I'm 99% sure wasn't on point despite the fact that I haven't read it. Mr. Smith accepted her as an expert, as one would expect.
She laid out a higher level picture of what I think is an alternate theory. That Tesla's practice of vertical integration make sense as a business practice for an innovative and growing company, that the rise of technology allows them to more closely manage their customer interactions and that having a company operate in that way is very much in the public interest. She tied her work with the DoJ anti-trust division back into public interest analysis and was in my opinion persuasive and compelling. My sense was that the VADA guy was unable to dent her at all. She was the best of the three witnesses at taking his questions and lobbing them back at him. Obviously quick on her feet, she had a good feel for the big picture and nothing he said seemed to rattle her. There were a couple of funny moments where the crowd stepped in. The VADA atty tried to attack her Apple analogy by saying that Apple used to sell only through direct channels and is now willing to sell to Best Buy at a discount, proving that the direct channel is a failure. Techmaven interrupted with a brief rundown of the actual history of Apple's sales approaches and pointed out that they were failing with a traditional retail model before they switched to direct sales and have only relatively recently been allowing retail sales to creep back in. No one mentioned it, but O'Connell had already acknowledged that they might consider a dealer model in the distant future when they were much, much bigger. I also interrupted when the VADA guy was badgering her about the 10K, trying to use the frequently mangled argument that Tesla loses 4k per car to show that they might go under if they sold more. I pointed out that O'Connell had already testified that it was entirely due to R&D -- if they consolidated they would be profitable as is.
She also was the first one to address the seemingly obvious rebuttal to VADA's incessant complaints that they needed to see the financial results of the Tyco Road store. She said asking how much profit it made was nonsensical. It would be like asking an airline how much profit the check-in desk made. It is part of one cohesive enterprise. When they collect 100k for a car, they don't get any money in the store to pay for salaries -- it is just part of Tesla's overall revenue and the cost of the store is just like the cost of the superchargers or the assembly line or the internet bill. It only makes sense in terms of the profit of the enterprise. After spending a long time with both of the past two witnesses on this question, it was nice to see it answered the way I wanted it to be answered.
I've missed some things. There was some audience feedback about Fisker somewhere in there and the VADA guy tried to muddy the waters wherever he could.
As the day drew to a close, the VADA guy asked to be able to call one of his dealers to testify. She was personable and reasonable. She praised Tesla, said he loved their car and that they would love to be able to represent them. She was prepared to lose money in order to build the brand and has some experience with electric cars with her Nissan dealership. They made some hay of the fact that they too had invested in charging stations. I mean to point out that the gulf between the L2 chargers at most dealers and even the CHAdeMo ones is vast when compared to the Superchargers, but forgot to raise that point when I spoke. The Tesla guy would loved to have examined her about her willingness to lose money forever, but conveniently she didn't have time for it. The whole thing was a farce, because theoretically they were letting her talk before she caught her plane, but none of his other witnesses got to talk and she was promised to be available for the next hearing. Therefore, there was no reason not to leave her entire testimony until next time.
They finally opened the floor to public comment. Techmaven got up first and talked about the inescapable rise of the direct sales channel and his experiences with Tesla. I spoke last and tried to mostly praise the Tesla purchasing and service experience and distinguish it from the traditional dealership model. I also addressed the recall and contrasted it with a Lexus recall I just experienced. In hindsight, I wish I had treated it more as a prepared speech and taken more time. I really didn't know what to expect. The Tesla folks were generous in their praise of our brief remarks and I suppose no matter how disorderly the content, it makes an impact to be an unpaid customer instead of a hired gun. The lobbyist thinks there will be a fight in the legislature and threatened to hit me up when that happens and I agreed in principal. As I reflect on the way it all went down, I wish I had made notes on things that were said or implied in the hearing and tried to address them in a more orderly fashion. There were a number of minor things that were distorted or incorrect.
On the plus side, I am very confident in my read that Mr. Smith is very much pro-Tesla and that the initial ruling is likely to be favorable. There were many indications that this is so. So it is probably the case that the real battle will be afterwards.
When the hearing concluded there was a Keystone Kops attempt to find valid dates, with the DMV staff initially offering a Saturday. They eventually agreed on a second day of hearings for April 25 at 9am. My bet is that Tesla will ask for audience participation again. VADA intends to hire an expert and there are some discovery skirmishes going on. Apparently Tesla is providing some stuff subject to a protective order and refusing to provide other stuff. Mr. Smith was a bit hesitant to sign the protective order until both attorneys assured him that he was empowered to do so.
Anyone else who was there is more than welcome to correct anything I've got wrong or missed. I'm sure there are many of each category.
