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Thursday, May 23, 2013

Tesla's Distribution Challenge

...the issue isn't whether Tesla's distribution approach is legal, it's whether it's sensible...
Tesla is distributing its battery electric cars directly, rather than through franchised dealers. That's raised a hulabaloo from NADA and dealers about legality. Texas is one large market in which Tesla may be stymied for several years; its attempt to get legislation that would permit direct sales is dead this legislative season, and the next session isn't for two years, until 2015. Barring judicial support, that's a long wait in a large market. There may be room to do so, since the firm has no franchised dealers in any state, hence the idea that it is undermining dealers protected by franchise agreements has no merit. Be that as it may, taking the issue to the courts takes time, and Tesla would like to become a volume manufacturer sooner rather than much later. Time will tell, but time is not in their favor.
The real issue, however, isn't whether Tesla's distribution approach is legal, it's whether it's sensible. In his visit to Lexington to speak to my Economics 244 students, David Ruggles posited that it's ultimately unworkable. Let me make a few points in that direction; interested readers might find the Dicke chapter cited below of interest, and hopefully David will add his thoughts.
    1. For a firm seeking to expand, dealerships are the cheapest available source of finance. We can ignore the up-front fees to purchase franchise rights (at issue in the failed attempt of Mahindra & Mahindra – or maybe primarily the serial entrepreneur Malcolm Bricklin – to set up a dealerships to sell trucks imported from India). That's really small stuff, from the perspective of the financial needs of a car assembler. Much more important is that a dealership pays for new vehicle inventory, signage and replacement parts inventory and provides the necessary real estate. That is a crucial source of working capital for a manufacturer, because the factory is paid cash when a car rolls off the assembly line, whereas parts suppliers are paid a month or three (and workers a week or two) in arrears. Remember, too, that dealerships frequently hold two month's of inventory. Under its current structure Tesla will need to fund that directly.
    2. It may not be a big issue when they restrict themselves to a low volume of hand-assembled cars. It won't be trivial when they want to run a proper assembly operation.
    1. Moving to volume business will also require making provision for repairs. That may not be a big issue when its market is limited to a handful of states and is of high-end cars. They and their cars' owners can wait for a technician to be dispatched, or the car transported. That won't work if they want to move away from the supercar end of the market, because their vehicles will be means of transport, not playthings. Would-be purchasers won't want to wait a week or more to get a problem looked at. I think Tesla underestimates the challenge (cost!) of directly developing a dense network of repair facilities.
    2. In the old days, the local mechanic could do the actual work. But as Kevin Borg (a historian of the independent service station at James Madison University in Virginia) emphasizes in recent work, even the most skilled of independent service technicians lacks the training and equipment for working with the computers and high-voltage electrical systems of a vehicle such as a Tesla. To put it simply, they are fundamentally mechanics, experts in traditional mechanical systems, and a Tesla lacks much of the appurtances of an internal combustion engine powered vehicle.
    1. Historically the "factory" has been abyssmal at controlling inventory and even worse at handling tradeins. Think of Ford's disastrous attempt [1998-2001] under Jacques Nasser at Ford to buy up independent dealers and run their stores directly in several markets where state franchise law allowed direct sales (eg, Oklahoma City). Dicke's history of the early days of automotive distribution tells the same story. The bottom line is that the factory bleeds, and the longer it tries, the more money it loses.
    2. Now the rise of multistore dealership groups suggests that at least some people have figured out how to run stores under hired general managers rather than owner-operators. So maybe there is more know-how available. However, such dealership groups – the AutoNation and Penske's of the world – still account for but a small share of total US vehicle sales. I remain skeptical.
Ford in its early days had time to experiment; it wasn't until the early 1920s, after DuPont took over GM, that Ford faced a serious rival. They had time to recover from mis-steps. Tesla won't have that luxury.
...mike smitka...
Dicke, Thomas S. (1992). “From Agent to Dealer: The Ford Motor Company, 1903-1956.” In: Franchising in America: The Development of a Business method, 1840-1980. Chapel Hill: University of North Carolina Press, Chapter 2, pp. 48-84.

2 comments:

  1. For those who believe customers would flock to a no hassle buying experience we might hearken back to the Saturn Aura, a really good car that never sold well. It never sold more than 60K in a year, even though the car was good, the quality was high, and Saturn's consumer friendly selling process was in place.

    So where were all the consumers who said on surveys they prefer the No Hassle, One Price, approach? They must have down at the Toyota store getting abused, or perhaps at Honda? Camry, about 450K per year? Accord about 350K.

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  2. Posted on LinkedIn "Tesla vs Dealers"

    @David - When I opine about these matters I work hard to formulate an unbiased opinion and base most of my statements on historical context and my personal expertise. Until you have been in the fight it is difficult for many who seem to think operating a dealership is an easy business is foolhardy. It looks easy from an outside perspective, but much more challenging once in the arena... Factories did run stores and still do in limited bases when a good sales point closes and the manufacturer is in need of an operator (less now than in years past) and any factory person will tell you that they do not want any part of the retail business as most lose money during these transitions.

    You mentioned the failed Ford Retail Network and the GM plan to operate stores that failed and they had former dealers in most of these stores. The modeled failed because the surrounding dealerships ate their lunch, they outsold them and out serviced them because the factory tried a controlled model (one price, service reservations, controlled advertising, everything the customer said they wanted) in a competitive environment and in the end the customers went to the competing, neighboring same brand dealership... lesson learned...

    Which does raise to mind, two business models in which Elon Musk/Tesla could find there way into states and circumvent existing laws, much like the FRN plan, he would set up a separate Tesla Dealership Ownership Corporation and hire a dealer operator and give them a significant ownership percentage/stake into the business who would become the President/Operator. This allows for the creation of more capital through the future dealership to have a floor plan and additional working capital, which will serve him well when the marketplace for customers who want to purchase electric vehicles heats up - Secondly, much like the old manufacturer dealer development models, Elon Musk/Tesla could set up dealer development programs in which the Dealer Operator buys Tesla out eventually through profit and stock purchase under a controlled plan that would satisfy existing state franchise laws, in this case he would have better control of his sales process and develop dealerships in his vision and hire dealers who don't currently have competing brands or new dealers who want to enter the business. Most state franchise laws allow manufacturers to own a majority % of the stock of a dealership who appoint an independent dealer/operator, who will eventually own the dealership/corporation.

    By Kevin Kimbrough

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