Tuesday, March 25, 2014
Elon Musk’s Battle to Sell Cars the Way Apple Sells iPads
IfApple built a car, its name would be Tesla. The irony of this is captured in the recent decision of the New Jersey Motor Vehicle Commission to ban direct sales of Tesla automobiles. If these politicians had passed a similar ban on the sale of iPads, iPhones and Macs, Apple would need to covert its twelve stores in the Garden State to “galleries” where consumers could view (but not play with) iPads and MacAirs and would be prohibited from discussing the price of the devices with Apple reps or place orders. The heated debate over the direct sale of Tesla automobiles, which is also being played out in Ohio, Maryland, Arizona, Texas and Virgina, is a battle between preserving the past and embracing the future.
Automobile dealers are terrified that Tesla’s company owned showrooms pose a threat to their livelihood. They are using automobile franchise laws (which vary by State) to claim that direct sales of automobiles by a manufacturer (whether the company was started in 1903 or, like Tesla, in 2003) are forbidden. Tesla, for its part, argues that state franchise laws were designed to protect dealers from predatory tactics by the manufacturers they already represent and for whom they have invested considerable sums in the construction and operation of showrooms and service facilities.
Automobile dealers are a threatened species. Fixed prices undermine their new vehicle profit margins and cars that require far less maintenance mean lower service revenues. It is understandable why the dealers are turning to politicians and the courts to save their skins. However they are fighting against the tidal wave of technology and that will be a losing battle.
When Mr. Daimler and Mr. Chrysler started their companies they took orders — just like Mr. Musk today — directly from consumers. It was the assembly line and mass production that triggered the need for dealerships all around the country. At the outset, dealers were a godsend for Ford, General Motors and other manufacturers because, in exchange for obtaining a franchise, they stumped up the capital required to build the gleaming edifices that, in the 1920s, housed showrooms and repair bays. But those were the days of telegrams, newspapers, radio, inner tubes, crank-handles and 100-mile services — not of tweets, price comparison websites, search-marketing, lithium-ion batteries, sat-nav and lifetime warranties
Tesla, like Apple, is selling its products in an unconventional manner — directly. Like Apple, which started building stores because it was getting sidelined by retailers selling WinTel machines, Tesla elected to sell directly to consumers for fear of being spurned by traditional auto retailers with their life-long affinity for gas powered vehicles that needed oil changes, smog checks and tune-ups. If dealers are alarmed at the sale of $100,000 electric vehicles, they will be having aneurysms when Tesla’s $35,000 model is unveiled.
You can bet your bottom dollar that Mrs. Barra at General Motors and Mr. Mulally at Ford would also love to sell new Cadillacs and Mustangs directly — and that’s what terrifies the dealers. Everyone knows that direct distribution (unless there is an oligopoly or monopoly) benefits both consumers and manufacturers because it eliminates superfluous dealers, ruinously expensive inventories, and provides — especially in the age of the Internet — better and clearer information for both parties. General Motors actually stole a march on Tesla and has been selling cars directly since 2000 — but in Brazil rather than in the U.S. In Brazil, consumers can order and configure a Chevrolet Celta at a fixed price every minute of the day over the Internet and dealers need only stock two vehicles — one for a showroom and one for a test drive.
Automobile dealers are trying to stave off the inevitable.
Newly imagined vehicles, like the Tesla, require far less from them than a Studebaker or Buick, and the Internet gives consumers and manufacturers a way to whisper in each other’s ear. As for the politicians, especially those in New Jersey, they may be able to block bridges, but someday they will discover they cannot block the future.
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