Tesla Versus The Auto Franchising System, Part 5, Car Sellers’ Interests

Beyond consumers, other stakeholders in Tesla’s challenge to state franchise laws are the car sellers – car dealers, automakers, and Tesla. This is the first of a second set of articles in this series examining what various interests stand to gain or lose. See also the Introduction, Part One, Part Two, Part Three, and Part Four.

Classified as a “fallacy of ambiguity,” a “straw man” is like a dummy stuffed with hay – it is easy to knock over.

More specifically, a “straw man” fallacy is when someone misrepresents an opponent’s argument making it appear weak or flawed, then overcomes it with a seemingly reasonable argument, and this is what Tesla allegedly perpetrates against car dealers.

Presently Tesla has roused great sympathies for a number of reasons, but underlying its appeal is an often-repeated argument it even used in New Jersey court this week.

However, two attorneys and others familiar with franchise laws have said Tesla paints an inaccurate picture of pitfalls it would face if forced to rely on franchised dealers. Tesla, it’s said, fabricates worse-case assumptions and omits critical information to represent it’s doing what it has to in order to survive.

On the contrary, say those who’ve personally confronted Tesla with alternatives, Tesla could under franchise law stack the deck to leverage capital, enabling it to grow faster.

What is Tesla’s core argument? Tesla CEO Elon Musk repeated it in a March 14 blog post decrying alleged wrongdoings against it in New Jersey, and linked to an earlier post from October 2012.

“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,” said Musk. “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.”

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Musk has been forthcoming enough to admit he’s been told he’s making it harder on himself.

“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,” wrote Musk. “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?”

But this is as far as he goes in his October 2012 post, before weaving the narrative back to the “conflict of interest” argument and other alleged threats posed by franchise laws.

“Moreover, it is much harder to sell a new technology car from a new company when people are so used to the old,” wrote Musk Mar. 14. “Inevitably, they revert to selling what’s easy and it is game over for the new company.”

This does sound like a dire situation. And it could be “impossible” for franchised dealers to properly represent Tesla’s electric cars if this were actually the situation with which it was faced. But it isn’t.

A Road Not Taken?

According to those defending franchise laws, Tesla is not being asked to commit corporate suicide as it has said. Actually Tesla may have much more to gain than lose under the system, they contend, and therefore its core argument is a fallacious rebuttal and false plea to a demand never made.

Even in New Jersey, where Tesla has just filed an appeal against motor vehicle commission regulations, “it has options” to at least closely emulate its model of choice.

This would include no-haggle pricing, non-commissioned sales associates, and a Tesla-only store with zero competition from gas-powered cars, said New Jersey Coalition of Automotive Retailers President, James Appleton.

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And in Texas, which grosses $60 billion in annual sales, franchise laws would let Tesla match everything it wants, but instead it chooses to operate only two non-sales galleries rather than participate under franchise law.

This is the view of Texas Automobile President, Bill Wolters who personally proposed a solution to Musk.

Under Texas franchise law – where Musk very publicly fought and lost trying to change laws last year – Tesla could replicate its existing no-pressure sales retail store, and remote service center model down to a “T” for Texas.

The National Automobile Dealers Association says Wolters’ plan would work for most, if not all other states where Tesla now faces restrictions.

“If Tesla adopted the franchised dealer model throughout the country, their opportunity for sales success would be greatly enhanced,” wrote Wolters in a position paper repeating things he said to Musk, and last fall in Baltimore to Tesla’s Legislative Affairs Director, James Chen.

“Franchised dealers follow strict factory guidelines for dealership operations,” said Wolters.

In Tesla’s case, said Wolters, it could require:
1. A mall showroom
2. Non-commissioned technical advisors rather than salespeople
3. One price for the vehicle with no negotiation
4. Off-site service facilities that operate at next to zero profit

What’s The Catch?

“The only change would be to have an investor handpicked by Tesla who would have the opportunity to eventually own the outlet and who would be required to follow the Tesla sales agreement,” Wolters continued.

Bill Wolters.

Bill Wolters.

“By having an investor stand the cost of the retail outlet, Tesla could have many more stores in as many markets as they wanted to reach,” he wrote. “The sales and service opportunities for Americans would multiply along with the number of EVs on the road and as increased infrastructure for recharging those vehicles that would follow.”

In Baltimore, Wolters presented Chen with a list of elite dealers who’d said they would jump through hoops and hurdles if needed to develop a Tesla-only store where no other new or used gas-powered cars would need be on site to “undermine” the product.

According to Ted Stockton, an economist for the Fontana Group, and automotive consulting firm in Tucson, Arizona, it’s likely these investors could be asked to sign a contract that gives Tesla plenty of leverage and control.

Elon Musk.

Elon Musk.

“The contracts are extremely one-sided; they’re contracts of adhesion, and Tesla may have the juice right now to put out aggressive take-it-or-leave-it contracts,” said Stockton. “They probably do, and yes, I think Bill’s point is good.”

Wolters said this contract could stipulate franchised Tesla stores could not send prospects to any other competitive dealer owned by another or themselves.

Or they could be obligated to own only the Tesla store(s) and service centers, so electric technology would be exclusively represented by non-commissioned sales people.

What’s more, Wolters said, this could ultimately save Tesla millions on a growing network as Musk essentially conceded without explanation.

Each Tesla franchise would save Tesla Motors from having to pay rent, payroll, insurances, and utilities. It could stock as little or as much inventory as required, and be on the hook for local, state, and federal taxes, any future advertising if desired, and all other liabilities and expenses incurred by local retailers.

Nation-Wide Possibilities

Most if not all of the 32 or more states with some form of laws against factory ownership could instead welcome Tesla with open arms, said Wolters. His premise was further validated by James A. Moors, Senior Counsel and Director, Franchising and State Law, for the National Automobile Dealers Association.

“The basic point is that Tesla could write its own franchise agreement stipulating the way vehicles are marketed, serviced and sold. It could also hand pick the retailers or investors. I don’t think this is in dispute,” said Moors. ”I can’t tell you that there might not be a state law out there that might be applicable, but Tesla can clearly design a selling arrangement like the one Bill describes.”

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Bruce Gould, executive director of the Motor Vehicle Dealer Board in Virginia – where Tesla is now restricted with one gallery in Tyson’s Corner – said Wolters’ plan sounds feasible in that state.

As we reported in the last installment, Moors added his voice to those who cite Tesla saying the factory direct push is only temporary anyway.

“I believe Tesla spokespersons have been quoted as saying they might move to the franchise system when they reach a certain volume,” said Moors.

Truly Desperate Or Playing A Game?

Wolters contends by sharing the load Tesla could expand its number of dealers as it anticipates higher production volumes and Gen 3, but Tesla never mentions these possibilities, and routinely acts like it is backed into a corner by the powers that be.

“The evidence is clear: when has an American startup auto company ever succeeded by selling through auto dealers? The last successful American car company was Chrysler, which was founded almost a century ago, and even they went bankrupt a few years ago, along with General Motors,” wrote Musk, March 14. “Since the founding of Chrysler, there have been dozens of failures, Tucker and DeLorean being simply the most well-known. In recent years, electric car startups, such as Fisker, Coda, and many others, attempted to use auto dealers and all failed.”

NJ CAR President James Appleton observed Fisker and Coda, if not also other startups, failed for reasons beyond dealers relied upon.

“Saying Fisker and Coda failed because of franchised dealers is like saying, ‘Because people wore heavy coats, the temperature went down to 32 degrees,” Appleton said. “It confuses cause with effect.”

Appleton said Tesla could avoid pitfalls and is in a position to play within the system instead of fighting against it.

Tesla has published related objections:

“We strongly believe it is vital to introduce our own vehicles to the market because electric cars are still a relatively new technology,” said Tesla. “This model is not just a matter of selling more cars and providing optimum consumer choice for Americans, but it is also about educating consumers about the benefits of going electric, which is central to our mission to accelerate the shift to sustainable transportation, a new paradigm in automotive technology.”

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Mike Charapp, an attorney in Tyson’s Corner Virginia said Tesla’s “new technology” argument is “a red herring,” and salespeople will sell anything with wheels on it, if put in the right environment.

Wolters reiterated Tesla’s environment of choice could be done legally now, and instead of fighting battles all over the country, it would get the help of dealer associations that would be relieved to end the contention, and work to help Tesla succeed.

“Yeah, I mean he has no argument, that’s what I went to tell him, said Wolters. “I said ‘have it your way,’ eliminate the competition, just bring in an investor who has the opportunity for a 100-percent buyout in a period of time and they would have to comply with your sales agreement or you could terminate them just as any manufacturer can do today if the dealer does not comply.’

“We can overcome every one of his arguments. Our franchise law is extremely friendly to a company that wants to do exactly what he does. But he doesn’t care. He just wants it to be his way, whether it’s the better way or not.”

Consumers who’ve seen mixed success by Chevrolet dealers with a love-it-or-not-so-much attitude toward the Volt can readily grasp the “conflict of interest” and related objections Tesla makes.

Many customer accounts tell of disinterested or misinformed salespeople who may steer would-be Volt buyers to the Cruze or another car easier to sell. Nissan, which is having more success of late, also does not compensate its dealers extra to sell the Leaf.

Sometimes major brand dealers may have a designated plug-in car salesperson willing to talk about things like charging, and walk people through with more hand holding.

Certainly Tesla would be handicapped under such conditions, but those are not the conditions it would need to work under, not even in New Jersey, said Appleton.

New Jersey Is Iffy

Presently, New Jersey has provision to suspend rules against factory direct ownership for two years if a minority investor is brought in with intent to ultimately take over.

The state did throw a wrench into Tesla’s ideal by mandating a minimum of 1,000 square feet with adjoined service but Appleton said they are talking compromise these days.

Model_S_showroom

“NJ CAR is committed to working with members of the legislature who are seriously exploring options that would allow a startup electric carmaker, like Tesla, a reasonable period of time to ramp up operations before they conform their operations to the franchise business model,” said Appleton.

Questions remain in New Jersey because the idea of a mall store may still be a problem at this point, but when told of Wolters’ plan, he said a number of ways to work around existing rules could be found.

‘Free’ and Low-Cost Service?

Tesla’s business model also includes unusual qualifiers regarding service, and this is another “conflict of interest,” according to Musk.

“An even bigger conflict of interest with auto dealers is that they make most of their profit from service, but electric cars require much less service than gasoline cars,” said Musk. “Going a step further, I have made it a principle within Tesla that we should never attempt to make servicing a profit center. It does not seem right to me that companies try to make a profit off customers when their product breaks.“

Electric cars may need less service in theory, but the Model S is highly engineered and a standard automobile aside from the powertrain. Further, no one has seen a high-mileage 8-year-old Model S, or the condition of its battery pack and other standard automotive components.

And according to Stockton, Tesla’s no profit service model is what economists would term a bundling of products and services.

genericservice_large_40_0

That is, Tesla’s optional service plan is an insurance policy over and above the warranty. In either case, the price of the car has enough profit built in to cover the service.

Stockton said this indicates Tesla believes its customers want peace of mind in knowing all will be taken care of, even if Tesla does aim to charge as little as possible, if at all.

But these conditions are also no problem, said Wolters.

“Under Texas law they can have off site service in any configuration or no service facility at all with fly in technicians,” said Wolters and pricing could be according to Tesla’s contract, “Whatever suits their business strategy or model. As long as they have an investor.”

Tesla has also avoided being a full service dealer and the sticky proposition of taking in, fixing up, and re-selling trade-ins. If that’s the way Tesla wants it, Wolters said this objection could be dealt with too.

“Tesla’s sales agreement [with its franchisee/dealer] could also require that trade-ins be wholesaled or sent to another location for retail,” Wolters said, “So they wouldn’t compete with the sale of a new Tesla.”

So What Is This Really About?

Tesla says it’s about survival, but car dealers, who make their living sizing people up, and others close to the issues, are not buying it.

Wolters observed TSLA stock has bloated Tesla’s market capitalization to half of General Motors and Tesla has not needed to advertise by keeping controversy in the news about a “technology” many do not grasp.

He said the public is lapping it up like a kitten drinking warm milk – or in cases, like a mob ready for blood against already perceived foes.

In a long November 2012 feature in Esquire titled “Triumph of his will,” writer Tom Junod outlines Elon Musk’s career with the lead-out sentence: “For his entire life, Elon Musk has bent people to his insatiable will.”

Is there method to Tesla’s purported madness? Tesla in other ways is actually costing itself money, but Wolters also thinks Musk wants full control, and does not want to share profits, an assessment several others have made as well.

Stockton added Tesla is now enjoying a seller’s market with a waiting list of grateful early adopters and no meaningful competition.

It’s like having the first HD flat screen TV a few years ahead of everyone else, and Tesla is positioned to scoop profits in an economic theater writ large of its own masterful creation.

When Musk was pursuing a legislative change in Texas, Wolters said he flew to Tesla’s Palo Alto offices and sought to plea with Musk.

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What else could be behind Musk’s stance?

“It is total ego. When I sat across the table from him, it was just, it was just awful because I went with my hat in my hand,” said Wolters with a tone of dismay and amazement. “I offered him our support. I said you know, you are like Thomas Edison, I mean it’s amazing what you have done here; this is such a unique enterprise that you have created and it’s great for America, it’s great for the industry.’ He just glared at me.”

To this, we interjected, “He didn’t believe you. He thought you were just flattering him.”

“Well, I wasn’t I truly admire what he has done, but we will never give in to something that is bad for the industry and is bad for our state,” Wolters said. “And all across America if he adopted the franchise dealer system he would have a much greater opportunity for growth and success.”

We will have more on what the car sellers stand to gain or lose in our next installment.

This article is based on info and interviews provided by Tesla proponents and opponents and also those with no direct stake. Tesla did not reply to repeated requests for an interview or commentary.