Tesla is a new car company that currently makes only electric cars. That in itself is revolutionary, but the company is looking at completely remaking the entire car selling and buying model, and that is ruffling some feathers setting up a Tesla versus dealerships battle royale.
New Jersey Bans Tesla Direct Sales
The latest news comes thanks to New Jersey’s decision to ban Tesla‘s standard business practice of selling cars directly to customers rather than going through the more traditional car dealer model. As it turns out, selling cars via car dealerships, the way the major automakers do, isn’t so much a strategic business choice made by car manufacturers, but a requirement of state law in many places. Tesla’s business model, however, doesn’t include car dealers, and it is starting to bump into the common scenario of entrenched businesses fighting to prevent newcomers from changing the way of doing things.
If you are wondering why a Republican Governor like Chris Christie is suddenly in FAVOR of government regulation after spending an entire career supposedly against it, you have to look no further than the campaign contributions regularly doled out by the dealership associations. State politicians are so eager to protect their local dealership cash cows that when General Motors was in danger of failing all together, and operating under a special federal government backed bankruptcy protection, states fought to keep even the most unprofitable of dealerships from closing. It’s no wonder, now that Tesla looks like it’s here to stay as more than just a novelty car dealer, that politicians are moving quickly to protect dealers.
Not Just New Jersey
New Jersey is not the only state, or the first state, to prohibit, or severely limit Tesla’s direct sale to customers strategy. So far, Arizona, Maryland, and Virginia have all banned or limited these kinds of sales. In Texas, Tesla has “galleries” that do not allow test drives or discuss pricing because the sales model is illegal there too. In Colorado, the lobbyists got to work faster. Since March 2010, state lawmakers have allowed Tesla to have just one store in the entire state. The dealer lobby in New York and Ohio are pushing for the same thing.
It’s curious how both liberals and conservatives in state government can get behind the dealer associations since there are no competing lobbyists or campaign contributions to be had. Who favors government regulation again? Which one opposes? Or, does the highest bidder win?
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Car Dealers Service
One of the arguments for the dealership model is that it is a “consumer-protection” issue. After all, if Tesla goes out of business, for example, where would its customers get it’s cars serviced?
This may be one of the dumbest arguments ever made. For starters, if Tesla went out of business, its dealerships would be right behind it. Dozens of car makers went out of business over the last three decades, and not one of them still has dealerships operating. Second, this statement ignores the thousands of independent mechanics and auto repair businesses that exist around the country.
According to some news reports, it is the over-priced service element that the dealers are most anxious to defend. When dealers provide warranty service, they get paid by the automobile manufacturer. When the provide non-warranty service, they get paid by the customer, both are very profitable. This isn’t the first time dealers have tried to protect their repair and service business. It wasn’t long ago court action and threatened legislation were required to force manufacturers and dealers to allow independent mechanics access to cars’ computer codes.
Buy Direct Benefits
I’ve often wondered why manufacturers didn’t offer a buy direction option. It turns out there are a few reasons for this. First, dealers don’t like the idea of funding all the infrastructure for people to come take a test drive, and then have that some customer go home to buy direct and cut the dealer out of the commission.
Second, dealerships have to be stocked with cars. Those cars have to be pre-made by the manufacturer. Allowing customers to customize and make their own cars, like Tesla does makes those cars sitting on the lot even harder to sell. Who wants to buy a car with pre-selected colors and options when you can create exactly the car you want.
Finally, car buying is very much an impulse buy business. That is, if you don’t walk off that car lot with a new car that day, chances are you won’t end up buying after all. Many car buyers end up with remorse after buying, but cars are one of the few goods you cannot really return once you’ve purchased them. That’s a reason car dealerships are such high-pressure environments. They know that if you go away to think about it, you might decide you don’t need a new car, and then no sale. If you’ve ever seen your how a new car loan affects your budget, you know why sales need to be struck while you still have stars in your eyes.
Tesla avoids all of these issues with its direct sale model. In all fairness, this model works exactly because Tesla is so new and has comparatively few sales. In order to sell hundreds of thousands of cars, like the big boys, Tesla might also need test drives and high-pressure sales. On the other hand, Tesla is smaller, so it doesn’t need to sell anywhere near as many cars to be profitable.
Car Dealerships Suck
People hate car dealerships, and Tesla knows this.
What does every car dealer commercial in America say?
We aren’t like those OTHER dealerships.
When your own industry markets itself by saying that you are one of the only good ones, it is no wonder that no one is rushing to the defense of car dealers.
But, as long as those lobbyists keep doing their job, states will keep trying to put up roadblocks for anyone that wants to cut in on the profits car dealers make.