Tesla: Armageddon for Traditional Auto Dealers?

Published: Apr 1, 2014

Michael Kappel / Foter / CC BY-NC

When Tesla Motors started promoting and selling their electric cars directly to consumers, the world of new car auto dealers was suddenly thrown off balance.

A heated debate followed about whether direct selling is legal, and, if allowed, wouldn’t turn auto dealers into a remnant from another era.

Tesla’s Direct Approach

Tesla is perceived to be a “giant business,” with a market capitalization of $30 billion. The company’s direct approach to chase customers without a middleman has been viewed as an aggressive tactic, and a threat to smaller businesses owned by independent auto dealers.

Reportedly, by the end of 2013, the company had sold more than 25,000 cars worldwide, with over 20,000 units sold just in the U.S. But that doesn’t seem so big when compared to the total 15.6 million cars sold there last year.

The base price for Model S starts at $58,570 and can go up to $106,570, depending on whether the vehicle is equipped with a 60-kWh or a 85-kWh battery pack and other special features.

To protect the auto dealer community, some states have already banned direct selling; others are attempting or considering passing such a ban. If we have to sum up the core of the debate: as one auto dealer in Ohio reportedly said, Tesla is “Armageddon” for traditional car dealers, while Tesla officials accuse dealers of being monopolists.

However, the states shift their position on the matter quite often. So here’s my word of advice: If you’ve been thinking of opening a new car dealership, ignore the ongoing hoopla altogether. Just go ahead and find out what it takes to get a license and an auto dealer bond in the state where you plan to do business.

The Tesla debate is continuing its ups and downs even today. Let’s take a look at what’s been going on lately.

gtasandman / Foter / CC BY-NC-ND

The Latest Developments

On March 11, the New Jersey Motor Vehicle Commission passed a rule that will end Tesla’s direct sales to consumers, staring April 1st. The measure put the state of New Jersey in the company of Arizona, Texas and Virginia, which also don’t allow new car sales outside of licensed auto dealerships.

Ohio has been on the verge of enacting such a ban for a while, and on March 26th, after months of exchanging harsh words, the Ohio Automobile Dealers Association finally decided to let Tesla Motors operate three stores in the state. Nevertheless, Ohio has no intention of turning direct sales into a common practice, because the bill specifies that no other automaker, aside from Tesla in those three locations, can operate manufacturer-owned stores.

Now that some time has passed, states that banned Tesla’s direct sales seem to be having second thoughts, according to a Forbes article from March 26, titled “Tesla Thaw? Suddenly States Are Moving On Laws Favoring the Company’s Stores.” It may turn out that states are more open to that kind of business than they initially suspected.

The Tesla vs Auto Dealers Debate: Main Points

The debate is quite polarized; both sides have solid arguments for and against direct selling, voicing them passionately through the media, lawmakers and lobbyists.

Here is how the two camps view the Tesla concept of directly selling new cars.

cdorobek / Foter / CC BY

#1. Supporters Think That:

  • Tesla’s manufacturer stores offer a free market model that challenges the traditional way of selling new cars through licensed dealership – an stale tradition that is more costly to the end-consumer.
  • Tesla renders the dealer-based system obsolescent, taking advantage as it does of web-based retail, which is becoming more popular among consumers, especially the Millennials.
  • It represents the future by offering fuel-free, no-carbon-emissions vehicles.
  • It encourages states to be open to innovation and, therefore, to further support environmentally friendly enterprises.

#2. Opponents Think That:

  • To lower carbon emissions significantly, manufacturers of electric cars have to be subsidized on a federal level, so they can produce and sell more than just expensive luxury cars, which only 1% of the population can afford.
  • Auto dealers traditionally stand for consumer protection. A dealership that has invested substantial capital in the local community is more committed to taking care of that area’s customers.
  • A franchised auto dealer does safety and warranty work. Therefore, it provides an extra level of accountability. It gives consumers the peace of mind they want, by assuring them they have a place to go when help is needed.
  • Pushing out dealers will not lower car prices, because the manufacturer’s retail network would require the same investment in physical assets, along with the same operating expenses.

No matter where you stand on the economic, environmental, and ideological questions of the debate, one thing’s for sure: auto dealerships are a cornerstone of local community that can’t simply be replaced.

Auto Dealers as Community Backbone

Since the annual sales bottomed in 2009, the auto industry is experiencing a new surge of sales and optimism. Light vehicle sales in the U.S. are expected to surpass 16 billion by the end of 2014 for the first time since 2007, which will directly help the further recovery of the U.S. economy.

dailyinvention / Foter / CC BY

These are some of the factors that make auto dealers a valuable economic pillar of the local community:

  • The recent rise of employment and the better economic climate have led to more confident customers who are ready to buy new cars, and this in turn has boosted auto sales. This, along with increased home values and residential housing construction, has spearheaded the recovery of U.S. economy in recent months to come full circle.
  • Auto financing possibilities remain positive, with easier access to credit and more leasing with auto debt credit levels. Lenders, dealers, consumers, and the economy will all benefit from those trends.
  • Auto dealers give back to the community by supporting various programs such as safe teen driving, or organizing events in local schools. Most of them strive to improve the lives of others by contributing to cancer foundations, children’s hospitals, and charities.

 

Conclusion

Despite all the commotion around direct sales, franchised auto dealerships will be around for years to come, because they’ve proven to be a reliable source of customer satisfaction. Tesla Motors will have to adjust to that reality and comply with state regulations that have set the auto industry’s rules decades ago.

The debate shouldn’t be a reason for you not to follow your dreams and open a new car dealership. Just make sure that you learn about all the steps to get licensed and bonded.

Finally, do you think that Tesla is a real threat to new vehicle auto dealers today? Share your thoughts in the comment section below!

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Victor Lance is the founder and president of Lance Surety Bond Associates, Inc. He began his career as an officer in the U.S. Marine Corps, serving two combat tours. As president of Lance Surety, he now focuses on educating and assisting small businesses throughout the country with various license and bond requirements. Victor graduated from Villanova University with a degree in Business Administration and holds a Masters in Business Administration (MBA) from the University of Michigan's Ross School of Business.