Tesla & Car Dealers - Should Car Dealerships Be Eliminated?

[hybridbear]

Hybridcars.com is publishing a fascinating series about the Tesla vs car dealerships battle.

 

Introduction

 

Part 1

 

Part 2

 

Part 3

 

They haven't said how many parts there will be in the series, but they have indicated that there is more to come.

 

The first 3 parts have been very interesting and they have done a pretty good job of remaining objective in their reporting.

 

As remaining parts are published I'll continue to post the links here. I highly recommend reading the articles.

[hybridbear]

Here are my thoughts on this:

 

I don't trust Tesla. There are advantages to selling directly for them as a manufacturer, as pointed out in the series, in the form of increased profits. Tesla hides that fact and claims to be doing this for the benefit of consumers. But, that is a disadvantage to consumers. I would only support Tesla's store business model if there was still the bargain hunting aspect of the purchase that's available with current car dealers.

 

I agree with Tesla about the conflict of interest with dealerships and selling electric vehicles. As the auto dealers themselves point out, their profit margins are razor thin on new car sales. They make their money on used cars and service. Since electric cars don't really need service, there is a clear reason for conventional dealerships to try to avoid selling electric cars. However, this conflict of interest doesn't mean that you should do away with all car dealers though. You could just incentivize them to sell electric cars.

 

Say, for example, that dealer holdback on a gas Fusion is $500. If the FFH had a dealer holdback of $750 and the FFE a holdback of $1000, we can be sure that there would be a lot more FFHs & FFEs being sold. If the Focus Electric had a dealer holdback of $1500 we can be sure that there would be a lot more Focus Electrics being sold and less gas Focus models being sold. That is how you get around the conflict of interest for conventional automakers like Ford or Nissan. By offering a higher holdback on the models that dealers might not otherwise want to sell, you can encourage them to make the transition.

 

Why would any OEM do that? If they realize that alt-fuel vehicles are the future, then they're going to want to start preparing now. And preparing their dealerships now will make it easier for them to sell in the future, without as many headaches. By increasing the dealer holdback they would also be able to drive down their costs to make more profit on the alt-fuel vehicles through economies of scale. At first their gross margin per vehicle might fall, but as they increase production volume, their costs will fall thus making up for the increased dealer holdback.

 

For example, with the price cuts that Ford has had to offer on the Fusion Energi, they are likely losing money on each Energi that is sold. But if they were to be selling 3000-4000 Fusion Energis each month, instead of 3000-4000 in a year, they could likely turn a profit on each car.

 

The other debate is about whether dealerships are really consumer advocates. One point is that for warranty work they are, because the OEM sees warranty work as an expense to be avoided, and the dealership sees it as revenue to be earned. However, since warranty work is paid at a much lower rate than what the dealer can charge someone off the street outside of the warranty period, they are not always very willing to help out consumers with issues that are under warranty. So dealerships are provided with both an incentive and a disincentive for warranty work, especially if non-warranty repairs are abundant and keeping them busy and making money at a higher rate.

 

If Ford were to run its own repair centers to which you would bring your car for warranty repair, the objective at these locations might be to deny every claim possible to minimize the cost since any warranty repair would be seen as an expense. That would not be better for consumers. But at the same time, it could also provide a better network for discovering common issues and getting them fixed more quickly.

 

So, ultimately, I'm on both sides of this issue. I can see the Tesla argument about dealerships not being incentivized to sell electric cars, but that only happens when the dealer is selling Focus Electrics & gas Focus models, or Nissan Leafs & Nissan Sentras. That would not be a concern if you had a dedicated Tesla dealer who was selling only Teslas. Perhaps, the exemption for OEM direct sales should not be for an OEM making only alt-fuel vehicles, but should be for OEMs who make both alt-fuel and regular cars to allow them to sell their alt-fuel vehicles directly to consumers and to still sell their regular cars through dealers. That way a Ford or a Nissan could promote their alt-fuel vehicles and educate consumers by selling them directly. They could also eliminate the conflict of interest of a dealer not wanting to sell electric cars that don't need much maintenance.

 

I like what Tesla is doing as far as service, but don't know that anyone else would invest that much money into servicing cars.

[Ted Swing]

I read a lot about this when it got in the news a few weeks ago. To me, the best argument I came across is this one from Dan Crane:

 

http://truthonthemarket.com/2013/06/24/tesla-and-the-auto-dealers-lobby/

 

Worth the read if you have time.

 

My main feeling is that the laws requiring dealerships should be repealed. The dealers may or may not be the best ones to distribute cars. Either way, they should have to justify their position as middlemen in the free market based on how well they serve customers and manufacturers and how much cost they add, rather than legally forcing everyone to go through them.

 

Right now, dealers are one of the least trusted groups in society (only 9% of of Americans consider dealers "high" or "very high" in honesty or ethics: http://www.gallup.com/poll/166298/honesty-ethics-rating-clergy-slides-new-low.aspx). I think if the laws were repealed, we would see dealers either significantly improve the car buying experience or get replaced by manufacturer owned dealerships. It's not in Ford's interest for their customers to love the cars but hate the buying process.

[Waldo]

 

I don't trust Tesla. There are advantages to selling directly for them as a manufacturer, as pointed out in the series, in the form of increased profits. Tesla hides that fact and claims to be doing this for the benefit of consumers. But, that is a disadvantage to consumers. I would only support Tesla's store business model if there was still the bargain hunting aspect of the purchase that's available with current car dealers.

 

 

I don't understand this point. The sale price of a car is the sale price of the car. The cost of manufacturing and distributing the car is fixed. The difference between the two is the profit. Whether some of that goes to Tesla and some to a dealer or all goes to Tesla, the consumer is going to end up paying the same price in the end. If by eliminating the "middle-man" Tesla can reduce the distribution costs and maintain the same selling price, then they make more profit, but the customer still pays the same amount. The selling price of any car isn't governed by how much profit the OEM wants to make, it's governed by what the customer will pay.

 

In fact the typical design process works backwards from what most people assume. OEMs start with the selling price, then subtract out the profit they expect, and then they design the car so that it can be built with what's left.

[hybridbear]

 

I don't understand this point. The sale price of a car is the sale price of the car. The cost of manufacturing and distributing the car is fixed. The difference between the two is the profit. Whether some of that goes to Tesla and some to a dealer or all goes to Tesla, the consumer is going to end up paying the same price in the end. If by eliminating the "middle-man" Tesla can reduce the distribution costs and maintain the same selling price, then they make more profit, but the customer still pays the same amount. The selling price of any car isn't governed by how much profit the OEM wants to make, it's governed by what the customer will pay.

 

In fact the typical design process works backwards from what most people assume. OEMs start with the selling price, then subtract out the profit they expect, and then they design the car so that it can be built with what's left.

Not necessarily. Right now there is a haggling process when you go to the dealer to buy a car. Tesla's model is a fixed price model like the Apple Store. You walk in and pay the high sticker price, no negotiating. With car dealerships you rarely pay sticker price for a new car.

[Ted Swing]

I think the sticker price is deliberately inflated above what they expect to receive, though. They know what they really expect to make and are willing to accept and the sticker price is just a bargaining tactic to get there. In both cases, cars and Apple products, it's really the customer's willingness to forgo the purchase (and potentially go to another brand) that limits the price. In fact, a lot of people have more choices for brands than they do dealers, since many areas only have one dealer for a given manufacturer.

 

Most likely if there was no haggling, everyone would pay something close to the current average price (rather than the current sticker price). That would actually mean paying less than they do now for a lot of people, and based on surveys most people would gladly accept such a change. I admit that if you're good at haggling, you would probably have to pay a little bit more than you do now.

 

Even then, I doubt even good hagglers enjoy the upselling, all the stuff about "going to talk to his manager", the hidden, tacked on charges, and pushing the dealer's overpriced extended warranty. Dealers can do all of that stuff because the law limits their competition to other places that use the same business model they do. If they had to worry about direct manufacturer sales or other models like sales over the Internet, I think they'd have to stop doing those things and car buying would suddenly become a much more pleasant experience.

[Waldo]

Not necessarily. Right now there is a haggling process when you go to the dealer to buy a car. Tesla's model is a fixed price model like the Apple Store. You walk in and pay the high sticker price, no negotiating. With car dealerships you rarely pay sticker price for a new car.

 

Think of it another way. All car dealers use a fixed price system (invoice price). Anything you pay above that is just pure profit to them. In other words, do you think the haggling system subtracts profit or adds it?? I would suggest it just redistributes so that some customers pay more and some less, but the net profit to the dealer/OEM would be the same as if they all used the Tesla model.

Edited April 2, 2014 by Waldo

[hybridbear]

 

Think of it another way. All car dealers use a fixed price system (invoice price). Anything you pay above that is just pure profit to them. In other words, do you think the haggling system subtracts profit or adds it?? I would suggest it just redistributes so that some customers pay more and some less, but the net profit to the dealer/OEM would be the same as if they all used the Tesla model.

But the OEMs set MSRP. Tesla sells all their cars for MSRP. MSRP is higher than invoice price and higher than what almost all consumers pay now. If all manufacturers went to selling directly at a fixed price like Tesla, they might not decide to charge invoice price across the board to everyone, but might instead want something higher like Tesla does.

 

That's my concern with eliminating dealers, you actually eliminate the competition of being able to pit multiple independent businesses each other to win your cash if the OEMs are selling directly. Then you'd just be able to pit Ford against Toyota, for example, but if you had decided that you wanted a Ford, you'd be stuck paying whatever Ford charges with no negotiation room.

Edited April 2, 2014 by hybridbear

[hybridbear]

Part 4

 

This part calls out how Tesla cherry-picks facts and isn't always honest in what they say. I said earlier, "I don't trust Tesla", and this is why.

[GrySql]

Part 4

 

This part calls out how Tesla cherry-picks facts and isn't always honest in what they say. I said earlier, "I don't trust Tesla", and this is why.

Let's face it, the Tesla car has no real practical application to mass consumer transportation, it's a nice looking, fast, electric niche vehicle sold to wealthy consumers.

In other words its a business created to play on 'green' concerns for the enviroment and make the most money for it's shareholders and owner.

Sure, it is using new and clever technology that may have some use later in the hybrid/electric car market.

How they sell their cars makes the most profit for them and they rigidly control marketing as mentioned by HB above.

The other car manufacturers are set up quite differently in sales, distribution and service and they follow the USA free enterprise model of 'let's make a deal', that is why they are called Dealerships.

 

If you recall GM created the Saturn to sell at the showroom sticker price, a daring sales technique and they sold a bunch of vehicles. After the bailout they were deemed non-profitable and the company was terminated.

Ford is declaring large profits and employing a lot of people, like Ashley and Kim on our Forum.

I don't think car maketing in the usual way needs interference.

If you don't want to buy at any car makers Dealership use a broker like Costco or Autoland, it's painless.

[Ted Swing]

The articles strike me as anti-Tesla, because they gives a lot more time to the dealer's point of view and don't challenge a lot of specious arguments made by the dealers. Tesla is in this for profit and dramatizes their points, but I can't disagree with their central point that it's unfair to require them by law to sell through dealers. I don't think we need to try to get rid of dealerships, but none of the arguments made by the dealers justify a position as legally mandated middlemen.

[djminfll]

To me, the hardest part about deciding to buy a new car is never knowing if I am getting a decent deal on the car, or if I should have tried haggling a little more. I never bought a Saturn, mostly because they always struck me as sub-par vehicles, but I always liked the "no-haggle" price policy they had. Everyone who purchased a particular Saturn model with specific options paid the same for their cars; nobody had to worry that they could have haggled more and shaved off a few more dollars. We don't have to do this with almost any other merchandise that we buy, so how do car dealers get away with it?

[hybridbear]

The articles strike me as anti-Tesla, because they gives a lot more time to the dealer's point of view and don't challenge a lot of specious arguments made by the dealers. Tesla is in this for profit and dramatizes their points, but I can't disagree with their central point that it's unfair to require them by law to sell through dealers. I don't think we need to try to get rid of dealerships, but none of the arguments made by the dealers justify a position as legally mandated middlemen.

Part of that is because Tesla has refused to respond.

 

Let's face it, the Tesla car has no real practical application to mass consumer transportation, it's a nice looking, fast, electric niche vehicle sold to wealthy consumers.

If they succeed in building a car that is $35k before the tax credit and can go 200+ miles on a charge then their car will appeal to the mass market.

[Waldo]

Let's face it, the Tesla car has no real practical application to mass consumer transportation, it's a nice looking, fast, electric niche vehicle sold to wealthy consumers.

 

 

But that's part of the problem, Tesla's business model is faced with a fundamental challenge, they will always have a higher cost of production than their competitors due to the battery cost. Everything else in their business model must thus be about reducing the total costs of the supply chain to try and offset that. So I don't see eliminating dealerships as a "profit grab" by Tesla, it's merely an opportunity for them to lower the costs in their supply chain to try to offset their competitive disadvantage.

[djminfll]

But that's part of the problem, Tesla's business model is faced with a fundamental challenge, they will always have a higher cost of production than their competitors due to the battery cost. Everything else in their business model must thus be about reducing the total costs of the supply chain to try and offset that. So I don't see eliminating dealerships as a "profit grab" by Tesla, it's merely an opportunity for them to lower the costs in their supply chain to try to offset their competitive disadvantage.

I just heard the other day that Tesla is building a new factory in the USA which will be building batteries on a large scale. It is rumored to produce more batteries than all other battery manufacturers combined. That should help reduce the cost for them. Tesla is predicting a mid-priced sedan with a 200+ mile range that will sell for $30-35K by 2017.

[hybridbear]

Part 5

[acdii]

I think part of what is misleading is MSRP. Window stickers are pretty much the same across the board for all car manufacturers, I believe there is a law stating so. In any case, all car companies, excluding Tesla have a set price on a car, what the dealer pays for it. It is well known to be far below MSRP. If a dealer can sell a car at MSRP, Dealer makes a good profit, but the car manufacturer makes the set amount that the dealer pays.

 

Now on the Tesla side, what we dont know is, what is the true cost of the car? I think that is what the true question is. Everyone pays MSRP for a Tesla, but that is a set price, by the manufacturer, so if there were dealers selling Tesla, they would pay that set price, and there would be a much higher MSRP printed on the sticker, the dealer suggested price. Since there are no dealers, everyone pays Invoice for one.

 

Even Saturn stickers had MSRP, yet everyone paid the same price.

[hybridbear]

Part 6