Elon Musk Explains Tesla’s Approach to Selling Cars

 

Recently I wrote about how Tesla’s unconventional distribution model has broad implications for auto retailing and the current distribution system between auto manufacturer and dealer.   Elon Musk, Chairman of Tesla Motors, responded to concerns voiced by state dealer associations about Tesla’s direct-to-consumer approach for selling its vehicles.  I’ve posted it in its entirety below.  I think Mr. Musk’s most compelling argument is that Tesla’s activity falls outside of state franchise laws relating to factory ownership of dealerships because Tesla has not operated with independent dealerships to date.  I still think concerns remain regarding protecting consumers conducting automobile transactions, which I elaborated upon in my post linked above.  What are your thoughts?

 

October 22, 2012

By Elon Musk, Chairman, Product Architect & CEO

TAGS: CUSTOMERS / CORPORATE / STORES /
 25 comments

There are reasons why Tesla is pursuing a company owned store and service center model that we feel are really important. In many respects, it would be easier to pursue the traditional franchise dealership model, as we could save a lot of money on construction and gain widespread distribution overnight. Many smart people have argued over the years that we should do this, just like every other manufacturer in the United States, so why have I insisted that we take a unique path?

GASOLINE vs ELECTRIC

Existing franchise dealers have a fundamental conflict of interest between selling gasoline cars, which constitute the vast majority of their business, and selling the new technology of electric cars. It is impossible for them to explain the advantages of going electric without simultaneously undermining their traditional business. This would leave the electric car without a fair opportunity to make its case to an unfamiliar public.

Anyone who has experienced Model S understands that our car is quite different from other vehicles. It is designed with the aspiration of not simply being the best electric car, but being the best car of any kind. Despite being purely electric, it is faster 0-100 than BMW’s top of the range M5 (according to Automobile Magazine) and yet can drive incredibly long distances.

A journalist from The New York Times recently drove Model S all the way from Lake Tahoe to Los Angeles, a distance of 531 miles, using our new Supercharger system to recharge for free in less time than it took to eat lunch. In case your eye skipped over the “for free” part, I would like to emphasize that again – owning a Supercharger enabled Model S really does mean free long distance travel forever on our high speed charging network. Given the high cost of gasoline, this is something that only an electric car company can offer.

Model S also has the largest automotive touchscreen in the world and the ability to add new features and capabilities over the air, just like your computer or mobile phone. This is a car that will keep getting better the longer you own it, creating a difficult comparison for dealers that still have to sell large numbers of old technology gasoline cars.

REACHING PEOPLE BEFORE THEY MAKE A DECISION ON A NEW CAR

By the time most people decide to head to their local dealer, they have already pretty much decided what car they want to buy, which is usually the same make as their old car. At that point it is largely just a matter of negotiating with the dealer on price. Tesla, as a new carmaker, would therefore rarely have the opportunity to educate potential customers about Model S if we were positioned in typical auto dealer locations.

That is why we are deliberately positioning our store and gallery locations in high foot traffic, high visibility retail venues, like malls and shopping streets that people regularly visit in a relatively open-minded buying mood. This allows us to interact with potential customers and have them learn about our cars from Tesla Product Specialists before they have decided which new car to buy. The Product Specialists are also trained to answer questions about electric vehicles in general, not just ours. They are not on commission and they will never pressure you to buy a car. Their goal and the sole metric of their success is to have you enjoy the experience of visiting so much that you look forward to returning again.

As it is, our Product Specialists could not sell you a car today under any circumstances, as Model S is already sold out several months in advance and there is no inventory on site. All they can do is get you to consider placing a reservation. Our stores are designed to be informative and interactive in a delightful way and are simply unlike the traditional dealership with several hundred cars in inventory that a commissioned salesperson is tasked with selling. Our technology is different, our car is different, and, as a result, our stores are intentionally different.

FAIRNESS & FRANCHISING

The U.S. automotive industry has been selling cars the same way for over 100 years and there are many laws in place to govern exactly how that is to be accomplished. We do not seek to change those rules and we have taken great care not to act in a manner contrary to those rules.

Automotive franchise laws were put in place decades ago to prevent a manufacturer from unfairly opening stores in direct competition with an existing franchise dealer that had already invested time, money and effort to open and promote their business. That would, of course, be wrong, but Tesla does not have this issue. We have granted no franchises anywhere in the world that will be harmed by us opening stores.

Regrettably, two lawsuits have nonetheless been filed against Tesla that we believe are starkly contrary to the spirit and the letter of the law. This is supported by the nature of the plaintiffs, where one is a Fisker dealer and the other is an auto group that has repeatedly demanded that it be granted a Tesla franchise. They will have considerable difficulty explaining to the court why Tesla opening a store in Boston is somehow contrary to the best interests of fair commerce or the public.

It is further worth noting that these franchise laws do not even exist in the rest of the world, where almost three quarters of premium sedan sales take place.

SERVICE COVERAGE

Finally, I’d like to address another issue that is very important to us as a company. We believe service is a top priority for every customer. At the beginning of 2012 we had 10 Stores, 1 Gallery and 9 Service Centers in the United States. At the end of this year, we plan to have 19 Stores, 3 Galleries and 26 Service Centers. In less than three months from now we will have more Tesla Service Centers in the United States than Stores and Galleries combined. We are opening service centers in numerous cities where we do not even have stores. This will ensure that all customers in these areas will have access to Tesla certified technicians, despite the fact that we do not have a store in the immediate area. By the end of this year, over 85% of all Model S reservation holders in North America will be within 50 miles of a Tesla Service Center. 92% will be within 100 miles. Service is a top priority at Tesla and always will be.

At Tesla, we will continue to focus on the future and the future of your children, grandchildren and their children. In order to accelerate the adoption of EVs, we must be able to create and execute a business model that allows us to advance the knowledge of EVs in a convenient, accessible, no pressure environment.

Elon

 

 

Via the Tesla Blog

Image Courtesy of Discover Magazine

How Apparent Authority Can Put Your Dealership In A Bind

Suppose a sales manager at your dealership, who is not an officer of your company, signs an agreement with a vendor to extract customer information from your database and mail offers to these consumers over a six-month period.  The sales manager quits around the time you receive the first bill from the vendor.  When you refuse to pay the vendor, he counters that your dealership entered into a binding agreement.  Does the vendor have an argument to hold your dealership to performance of the contract?

The answer is likely ‘yes’ because of the doctrine of apparent authority.  Apparent authority, typically arising from principal/agent and employer/employee relationships, binds the principal (or employer) to fulfill obligations entered into by the agent (or employee) with a third-party when the third-party reasonably believes the agent has the authority to act on behalf of the principal.  In this example, the vendor would likely argue that, as the manager of the sales department, the sales manager has the authority to enter into agreements relating to sales of vehicles, such as advertising.  Therefore, the vendor could sue the dealership for breach of contract if the dealership refuses to pay the vendor for services rendered.

There are several steps you can take to reduce the likelihood of unauthorized personnel entering into agreements that may obligate your dealership to performance.  A key step is making sure your employees clearly understand what they are and are not allowed to do.  Your employee handbook and other documents should express which staff has authority to act on behalf of the dealership in regards to contracts with vendors.  Your staff should acknowledge this authority, or lack thereof, in writing.  You should notify each of your dealership’s vendors in writing regarding who has authority to act on behalf of your business and instruct your staff to whom they should refer vendor inquiries.  If you own several dealerships, you should consider consolidating responsibilities for review and execution of contracts to a limited number of individuals instead of allowing each store to act independently.  Doing so has several benefits, including more oversight of vendor contracts, monitoring of pricing and terms for each dealership, and improved leverage when negotiating specific terms of each agreement.

Image Courtesy of Perfman HR Blog

Tesla’s Sales Processes May Lead To Shocking Results For Consumers

Automotive News recently published an article about Tesla and its nontraditional distribution model for its high-end electric cars.  Usually, automobile manufacturers establish relationships with independent businesses to sell vehicles in a particular market and do not sell vehicles directly to consumers.  There are a host of reasons why manufacturers would want to do this.  Dealerships are very capital-intensive.  They typically have large overhead costs because of the size requirements of a typical dealership (display areas, utilities, service areas, showrooms, offices, etc), high staffing costs because of the number of employees required to operate the dealership, and high inventory costs.  Automobile dealerships purchase their new vehicle inventory from their respective franchisor, and payments are due upon release of the vehicles from the factory.  So, by shifting these costs and risk to the independent dealership, the manufacturers can expand into new markets with little to no significant increases in cost.

Tesla has taken a different approach.  Instead of seeking out independent businesses to sell Tesla vehicles through a franchise arrangement, Tesla will sell vehicles directly to consumers.  Tesla selected several strategic locations that allow consumers to get information on the vehicles and experience them firsthand.  Some states do not allow manufacturers to own dealerships directly.  In these states Tesla seeks to operate a showroom to display the vehicles but claims it will not offer the vehicles for sale from these locations.  Many state dealer associations have challenged the legality of Tesla’s showrooms in their respective states.

Tesla’s distribution model presents a novel question of legality since most state franchise laws were written to address steps taken by manufacturers to sell vehicles outside of franchise agreements with independent businesses (a case study of Ford’s activities that gave rise to the modernization of many state franchise laws can be found here.)  Since Tesla does not have any franchise agreements with independent businesses, there are questions regarding if many state franchise laws apply to Tesla’s practices.

There are numerous arguments for and against the franchisor/franchisee arrangement and car sales.  I’m not going to address those arguments here.   Instead I will illustrate why this distribution method may be harmful to many parties.  Consider the following scenarios:

  • Suppose an offshore manufacturer sets up dealerships in malls and sells vehicles to consumers that end up having serious flaws.  Said offshore manufacturer then terminates its leases at its mall locations and ceases all operation in the United States.  The US holding company handling the offshore manufacturer’s presence in the US has no assets.  Consumers have nowhere to turn to seek relief for their damages.
  • Suppose Ford, taking a cue from Tesla’s success against state dealer associations, decides to create a brand called “Continental” that will be sold at high-end malls, storefronts in ritzy parts of town, etc.  Ford will continue to make Lincolns, but it is clear that Continental receives the lion share of Ford’s investment in non-Ford branded vehicles and Lincoln suffers accordingly.  A few years pass, and Continental never pans out for Ford as planned.  Ford decides to discontinue Continental  but keeps Lincoln because of state franchise laws make termination of a brand costly.  Consumers that purchased Continentals are now left with cars that have reduced value and may or may not receive after sales support (service and parts).    Depending on how Ford structured its subsidiary, consumers may have no redress against Ford for issues with Continental.  Ford-Lincoln dealers are harmed because the value of the Lincoln brand was greatly diminished by lack of investment (that was diverted to Continental). 

As the scenarios above illustrate, direct selling shifts a lot of risk to consumers.  Many states require manufacturers to compensate dealerships for the termination of brands, and make termination of dealerships very difficult.  These protections are very beneficial to consumers as well.  They ensure that smaller markets can be serviced by existing dealerships and they make manufacturers think twice about exiting a local, state or the national market.  In particular, the second scenario that hypothesizes a new luxury brand by Ford is the more likely of the two scenarios to happen should Tesla prevail against state dealer associations.  If manufacturers were free to develop brands for sale outside of their existing network, they would effectively obliterate state franchise laws that protect both dealerships and consumers.  Manufacturers could create and kill brands with ease, leaving customers with assets with little value and little recourse.

While it may not be such a big deal for seasonal retailers like Halloween and Christmas stores to come and go from a community, many state and local governments don’t want the same for businesses selling vehicles.  Auto retailing is highly regulated by federal, state and local governments.  Vehicle sales entail title and licensing requirements, and dealerships have to comply with a host of other regulatory requirements.  The majority of these regulations serve to protect consumers, which complement the protection afforded by state franchise laws mentioned above.

Dealerships and manufacturers alike seek to make purchasing a car as easy as possible.  Nevertheless, buying a car is an infinitely more complex transaction than purchasing an iPhone, PS3, or sweater.  There is no question we can do better to make the sales process more consumer friendly.  What we shouldn’t do is make the transaction more risky for the consumer.

Source:  Automotive News (linked to in this post).

Image Courtesy of Gawker

FTC Revises Green Guides: What Dealers Should Know

Earlier this month the Federal Trade Commission amended its “Green Guides,” which address claims made by marketers of products’ environmental attributes. Since dealerships fall within the types of businesses regulated by the FTC, it is important that you are aware of the Green Guides and take them into consideration when creating and placing your advertisements. The Green Guides are not new laws or rules created by the FTC. Rather, the Green Guides outline what kinds of additional trade practices the FTC considers deceptive and/or unfair under Section 5 of the FTC Act.

Advertisements that fall within the Green Guides include claims made about products’ environmental attributes or claims made regarding your dealership’s sustainable business practices or certifications such as “LEED” (or Leadership in Engineering and Environmental Design). Sustainable business practices include recycling initiatives, reductions in water and energy consumption, and utilizing renewable energy like solar and wind. Generally, the FTC considers broad, unqualified general environmental claims like “green” or “eco friendly” unfair and deceptive trade practices. To avoid claims that an advertisement is unfair or deceptive, advertisements claiming a vehicle is “eco friendly,” for example, will need further disclosure of specific environmental benefits that are clear, prominent and specific. Statements made regarding your dealership’s sustainability practices or certifications also trigger compliance with the Green Guides. If your dealership has received certifications or “seals of approval” for sustainable practices or for the property, and you chose to advertise such certifications or seals of approval, the FTC may consider such advertisements endorsements, thus requiring additional disclosure. Dealerships will need to disclose any material relationship between the business and the organizations granting the certifications or seals, and disclose the basis for the certifications.

 The FTC has demonstrated it is willing to actively pursue claims under Section 5 of the FTC Act against businesses that engage in unfair and deceptive trade practices even when consumers do not initiate complaints against the businesses. The FTC’s recent enforcement action against dealerships advertising negative equity claims is one example of this trend. You should consult the Green Guides to see whether the FTC may consider your current advertisements unfair or deceptive.  

I used to get a ton of traffic off of my dealership’s Google Places listing. Have you optimized your Google + Local listing?

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Google+ Local Replaces Google Places

If Google Places has been a method of driving online customers to your brick-and-mortar business, big changes are on the way. Google is importing Google Places into Google+ Local, and this means big changes for businesses and consumers who use the internet to find local establishments. This post is all about Google+ Local Optimization.

What’s in it for My Business?

Google’s algorithms consider many factors when ranking sites. The more web presence and reviews your company has, the better it will fare. When consumers look for a business in their local area, Google is happy to provide the information. When it can provide a great deal of usable information to the customer, Google is even happier. Google+ Local works on Smartphones as well – enhancing the user experience when they are on the road and looking for your business.

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