Thoughts on why Tesla can't (and won't) sell through franchise dealerships

[yesla]

I mean at what point would Tesla have to become a transportation company to manage millions of deliveries to customers doors? Do they really want to do that?

What about service? If they ramp out sales centers that scale with deliveries, the cost would severely impact resources in r&d/production.

Their goal is to accelerate the adoption of EV. If all auto manufacturers make only EV starting today, Tesla's mission is complete.

 

[PokerBroker]

The single greatest value a dealer provides to the manufacturer is the ability to get finished goods off the manufacturers books. GM, Ford, and Chrysler would have gone bankrupt a dozen times over if their books had to account for every car on every lot around the world.

It will be very, very difficult for Tesla to maintain a "build-to-order" strategy if they want to sell 500,000 Model III's. They will have to build inventory on lots across the country and it will likely be advantageous for Tesla to go to the dealer model so they can get that inventory off their books.

 

[Robert.Boston]

The single greatest value a dealer provides to the manufacturer is the ability to get finished goods off the manufacturers books. GM, Ford, and Chrysler would have gone bankrupt a dozen times over if their books had to account for every car on every lot around the world.

It will be very, very difficult for Tesla to maintain a "build-to-order" strategy if they want to sell 500,000 Model III's. They will have to build inventory on lots across the country and it will likely be advantageous for Tesla to go to the dealer model so they can get that inventory off their books.

I think your argument is flawed for two reasons:

1. Centralized inventory allows smaller inventories. If Tesla holds all inventory, it can do so in regional centers, dispatching cars for two-day delivery. By contrast, dealers collectively have to hold much higher inventories to achieve similar product availability.
2. Tesla's cost of capital is lower than dealers'. Dealerships are heavily equity-based, topped up by lines of credit from local banks. Tesla is more levered and can issue corporate bonds at a far lower borrowing rate than a dealership can get at the bank. Bottom line: Tesla's WACC is perhaps half that of a dealer's.

Together, these factors make it compelling for Tesla to manage inventory.

Remember: adding dealerships doesn't eliminate any of the complexity in the value-chain (starting from raw materials through customer service); dealerships merely change who is responsible for managing certain steps. Tesla has already replicated the really hard bit in this value-chain, namely developing the manufacturing chops to build a reliable car. Replicating dealers' ability to interact with customers is far simpler.

 

[dsm363]

Hate to break it to u guys but EM already said he would be looking into some sort of franchise model for model 3.

It seems you guys have your mind stuck on what a dealer is just as much as the dealers are stuck in their ways.

There could be an alternative way...

Well they have to give that possibility lip service as they fight the dealerships state to state to make them seem reasonable to the legislators. I hope they are able to avoid using them though. It wouldn't be impossible.

 

[TexasEV]

Selling through franchised dealers would ruin one of the things I like most about Tesla.

 

[eloder]

I don't see how franchised dealerships can refuse to sell a product.

Trust me, it happens.

My own adventures of trying to order an electric smart car with a non-refundable deposit were enough to make me never want to do it again. This is coming from the only dealer in a 100 mile radius who can sell me an electric smart car, meaning I essentially was dealing with a monopoly.

 

[Jaff]

Can you please cite the source for this remark?

All I remember is that Elon said (to the effect) that he wouldn't rule out using a dealership style model in the future...to me, I cannot draw the same conclusion as you have...

Hate to break it to u guys but EM already said he would be looking into some sort of franchise model for model 3.

It seems you guys have your mind stuck on what a dealer is just as much as the dealers are stuck in their ways.

There could be an alternative way...

 

[eloder]

I mean at what point would Tesla have to become a transportation company to manage millions of deliveries to customers doors? Do they really want to do that?

What about service? If they ramp out sales centers that scale with deliveries, the cost would severely impact resources in r&d/production.

Their goal is to accelerate the adoption of EV. If all auto manufacturers make only EV starting today, Tesla's mission is complete.

Perhaps I don't see how this is a problem?

Honestly, it seems like it would be even more of an issue to go from their beginnings to today, than it will be to go from today to 500k+ cars a year in 2020.

They can continue to make sure that services like delivery to a doorstep are cost-effective through charging customers for those costs. A Model III customer, for example, might be a lot more prone to buying a car off of a Tesla storefront or to accept delivery there rather than paying a higher price for delivery.

Not to mention the fact that $750+ delivery charges are commonplace and standard practice in dealers today, despite the fact that dealers keep the cars in stock and on the lot. Paying a few hundred more for delivery to home is not going to throw many customers off.

 

[Robert.Boston]

Tesla stopped making home deliveries over a year ago, at least for those who live near-ish a Service Center; most deliveries are made at a Service Center, which involves no greater logistics than delivering vehicles to a franchise dealership. So once again, a dealership adds no value.

I do agree that Model 3 sales in the U.S. will be better if there is some inventory. It doesn't need to be held locally, though; car dealers always take overnight to prep a car for delivery. Tesla can do well enough holding inventory vehicles in a regional warehouse with 2nd day delivery.

 

[yesla]

Can you please cite the source for this remark?

All I remember is that Elon said (to the effect) that he wouldn't rule out using a dealership style model in the future...to me, I cannot draw the same conclusion as you have...

Yes... I too recall a remark... In a video, I'll be back with link if I come across it again. But it only seems reasonable to partner up in order to scale the distribution channel to match production eventually. They needed Panasonic for production...

Of course. This is still in the realm of possibility until an eligible partner surfaces for further speculation.

TM is restricted to owning just a handful of stores in some, if not all of the states. And/Or is restricted by the number of cars that can be sold per store? (Globe and mail 2014 imagine a without dealerships)

Whatever the case, this is not a sustainable situation for a major player going forward. And I actually do not see what is so bad about dealers. If only they were not unionized or taking advantage of antiquated laws for greed.

Anyway, I've seen some reports on the crazy repair bills on fender benders. I'd like to see that come way down...

TMs patents are open.... How about team up with colleges to train the next batch of mechanics on how to use said patents? There's some practical training...

The auto repair and insurance industry is as toxic and corrupt as the filth coming out of ICEs exhaust. I'm not sure TM can tackle all the issues in the industry on their own. Too many peoples livelihoods depend on keeping the status quo.

Laying down a partnership of some kind for a dealership model is the first step in addressing the post sale service sector of car ownership.

Yet, I don't believe half the stuff I think up so.... Let's see

 

[yesla]

Tesla stopped making home deliveries over a year ago, at least for those who live near-ish a Service Center; most deliveries are made at a Service Center, which involves no greater logistics than delivering vehicles to a franchise dealership. So once again, a dealership adds no value.

I do agree that Model 3 sales in the U.S. will be better if there is some inventory. It doesn't need to be held locally, though; car dealers always take overnight to prep a car for delivery. Tesla can do well enough holding inventory vehicles in a regional warehouse with 2nd day delivery.

I did not know deliveries were not door to door anymore. Thanks for letting me know.

 

[ItsNotAboutTheMoney]

Yes... I too recall a remark... In a video, I'll be back with link if I come across it again. But it only seems reasonable to partner up in order to scale the distribution channel to match production eventually. They needed Panasonic for production...

Of course. This is still in the realm of possibility until an eligible partner surfaces for further speculation.

TM is restricted to owning just a handful of stores in some, if not all of the states. And/Or is restricted by the number of cars that can be sold per store? (Globe and mail 2014 imagine a without dealerships)

Whatever the case, this is not a sustainable situation for a major player going forward. And I actually do not see what is so bad about dealers. If only they were not unionized or taking advantage of antiquated laws for greed.

Anyway, I've seen some reports on the crazy repair bills on fender benders. I'd like to see that come way down...

TMs patents are open.... How about team up with colleges to train the next batch of mechanics on how to use said patents? There's some practical training...

The auto repair and insurance industry is as toxic and corrupt as the filth coming out of ICEs exhaust. I'm not sure TM can tackle all the issues in the industry on their own. Too many peoples livelihoods depend on keeping the status quo.

Laying down a partnership of some kind for a dealership model is the first step in addressing the post sale service sector of car ownership.

Yet, I don't believe half the stuff I think up so.... Let's see

In Germany they've already partnered with Uber to arrange for test drives.
-I think Tesla can partner with rental companies if it needs to expand availability for test drives. Rental companies are everywhere. Just need to agree a deal and offer vouchers.
- If it is successful with Model 3, buddy test drives will increase availability as well.
- If you assume 500,000 sales per year, then if 200 stores, that would be 2,500 sales per store per year. If 250 business days per year, that's only 10 test drives per store per day. Given that they are unrestricted in CA as well, I think Tesla will not have any problems hitting capacity with current limitations, and given that capacity would be more sales per month than the Prius family, I think that it would then set Tesla up nicely to free up markets for later Gen 3 and Gen 4 exoansion.

As I've noted before, franchising itself is not a truly terrible thing, the problem is that the law makes it a terrible thing for car companies, because companies can't control the franchise sufficiently well. It's particularly bad for Tesla because the use of service as the key orofit center runs counter to what Tesla is trying to achieve, which is to aim for minimizing service. As Elon has mentioned, thetweeted, the aim is a "Formula 1" approach, trying to turn around cars fast, and as he's said in the past, they really want extremely high reliability. It's all about minimizjng costs, to maximize sales of Tesla BEVs.

 

[bhzmark]

I think your argument is flawed for two reasons:

1. Centralized inventory allows smaller inventories. If Tesla holds all inventory, it can do so in regional centers, dispatching cars for two-day delivery. By contrast, dealers collectively have to hold much higher inventories to achieve similar product availability.
2. Tesla's cost of capital is lower than dealers'. Dealerships are heavily equity-based, topped up by lines of credit from local banks. Tesla is more levered and can issue corporate bonds at a far lower borrowing rate than a dealership can get at the bank. Bottom line: Tesla's WACC is perhaps half that of a dealer's.

Together, these factors make it compelling for Tesla to manage inventory.

Remember: adding dealerships doesn't eliminate any of the complexity in the value-chain (starting from raw materials through customer service); dealerships merely change who is responsible for managing certain steps. Tesla has already replicated the really hard bit in this value-chain, namely developing the manufacturing chops to build a reliable car. Replicating dealers' ability to interact with customers is far simpler.

+1 Dealers simply add a level of local greed to maximize profit for the dealer at the expense of the customer and the mfr.

I understand that most car dealers don't make money on car sales, but rather on car service and rustproofing and finance scam kickbacks.

Once Tesla masters the body/window/roof/trim alignment issues, a Tesla service center shouldn't have much to do except rotate tires. It's not that dealers want to sell Tesla cars -- it's that they don't want electric cars (without oil changes) to exist. In the same way the buggy and saddle makers didn't want cars to exist.