TESLA’S ‘NO DEALERS’ MODEL IS A SIGNIFICANT THREAT

The news that Tesla Motors is suing the state of Michigan for the right to bypass Dealers and sell its cars direct to the public is a timely reminder that nothing stands still in this world and those who do invariably go backwards.

This is a major theme for us and will grow in importance over the next few years. The nature of retailing is –changing – forced not by technology alone – but by technology allied with more modern business models.

In 1919 General Motors partnered with the DuPont family to create GMAC. This new business model allowed the average family to own a car – the famous ‘dollar down and a dollar a week’ program. In 1918 one in 13 American families owned a car; 11 years later 80 per cent of American families owned one.

Ubiquitous finance combined with the then new ICE technology to put America on wheels in just over 10 years.

The lesson here is that business model innovation is more important than technology innovation. But when the two combine – then watch out!

In taking on traditional manufacturers and the old way of doing things in the home state of  General Motors and Ford, the Tesla ‘no dealers’ model is likely to be as significant as the creation of GMAC was in its day. It is the harbinger of ‘cars as a service’, variations of which concept are flourishing all over the world.

You can argue that this is not exactly good news for our members. On the other hand the successful OEMs are not going to lie down and let Tesla walk all over them. We’ve already seen some responses and we’ll see more.

The challenge for traditional Dealers is to try to understand the inflection points and the timing – almost impossible to get right admittedly – but you have to make plans.

The only way a franchised Dealer can penetrate the future fog is in partnership with the OEMs. I personally don’t think the OEMs are doing anything like enough to plan for the speed at which new business models will arrive. And if they are doing anything, it is usually the network that comes last in their thinking.

I touched on the enormous risk of Dealers owning ‘stranded assets’ in my address to the Industry Relations Lunch at the recent AADA National Dealer Convention. I don’t know, however, if anyone was listening!

The Tesla suit: what’s going on, what it means

Tesla wants to sell its electric cars directly to customers and has filed its first federal lawsuit in a bid to force the state of Michigan to overturn its ban on direct sales by auto manufacturers.
Michigan passed an amendment in 2014 in its law regulating motor vehicle manufacturers, distributors, wholesalers and Dealers. In its federal suit, Tesla is arguing that the bill was effectively an ‘anti-Tesla’ amendment, designed to favour the state’s automakers and franchise Dealers. It says the law violates the US constitution by illegally restricting the free flow of commerce. According to Tesla, the state of Michigan has denied it a vehicle Dealer licence and has failed to rule on its application to register a vehicle repair facility, a year after the initial submission.

The ‘federal’ part of the lawsuit is important. Previously, Tesla has challenged laws restricting its sales model on a state-by-state basis. But a federal court ruling against the ban would have national – and possibly international – ramifications.

Tesla is aiming to release, late in 2017, its Model 3 – a more affordable electric sedan than its flagship luxury vehicles.

Michigan is, along with Texas, Connecticut and Utah, one of just four US states in which Tesla has been unable to acquire a license to sell directly to consumers. It currently operates stores in 23 US states and the District of Columbia, as well as in 20 other countries, including Australia.

The Michigan Attorney General’s department is currently reviewing the suit, as is NADA.

And then there’s Virginia

As it does in 22 other US states, Tesla is licensed to sell its cars in Virginia. It already operates a retail showroom in Tysons Corner, Northern Virginia, and has sought permission to open a second in a shopping mall in Short Pump, in suburban Richmond.

Department of Motor Vehicles commissioner, Richard Holcomb, was due to rule on the matter by mid-December. In 2013 he ruled against the Tysons Corner application but Tesla sued and won the right to open the store. This case could end up in court as well.

As in most US states, it is mainly illegal for car manufacturers to sell direct to the public; however there are some exceptions which, Tesla says, apply to it due to its vehicles being unsuited to conventional dealership models. Its more complicated vehicles take longer to sell, have a set price that excludes room for dealer margins and have few moving parts that require servicing.
Virginian law allows manufacturers to sell directly to customers if no Dealers are available in an area. When Tesla applied for the Tysons Corner showroom, no Dealer expressed interest. With the Short Pump application, 11 Dealers expressed interest.

The Virginia Automobile Dealers Association (VADA) is fighting Tesla’s application. Its president, Don Hall, told Virginian dealers via video message that the Tesla model could be disastrous for traditional dealerships, calling for them to band together to protect their common interests, as well as those of consumers.

VADA has been a major donor to Virginian politicians ($US4 million over the past decade) but, balancing that, Governor, Terry McAuliffe, is a supporter of green technology, having previously headed GreenTech Automotive, an electric car company.

Tesla is allowed to open a ‘gallery’ in Short Pump, where the public can learn about the vehicles but cannot test-drive them, and staff are barred from discussing sales.

Consumer protection

VADA’s director of legislative and legal affairs, Anne Gambardella, argued the law prohibiting direct sales protected consumers as well as franchisees.

“There are consumer reasons you don’t want the distribution chain controlled from top to bottom,” she told the Washington Post. “You can go to any number of Honda Dealers, competing on price and service.”

That would not be the case “if Honda controlled it all”.

Tesla has been showing politicians through its Tysons Corner store, attempting to convince them that electric cars are so different from conventional petrol cars that they deserve separate legislative consideration (i.e. the right to sell direct to the public).

By the time you read this, there might be a decision on Tesla’s Short Pump application. But it will be far from the end of the story.

 

David Blackhall
AADA CEO

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