Tesla vs. The Auto Franchising System – Part 1, Consumer Interests

Part one in a series. See also the Introduction.

What do consumers potentially stand to gain or lose by Tesla Motors’ insistence on its factory direct sales and service model?

The answer depends on a complex set of state-by-state variables yet in play, and while this is a question about the future which no one really knows, some have been quite willing to say what it will or can be.

For now Tesla’s fewer than 30,000 Model S sales to date make it a niche player compared to millions of cars annually sold, but it aspires to grow toward mass market status in the next few years.

Observers in favor of Tesla are ready to wave it past existing state franchise and licensing laws in the name of a more enlightened way.

Others ask why Tesla should get special breaks when it already has received so many, and they talk of unintended consequences for the economy, consumers, and other issues that aren’t commonly reported with much coherence or cogency.

One thing Tesla supporters have expressed is distaste for the present car buying process. Backlash against car dealers has become ugly over “middlemen” trying to protect their turf, but from a 30,000-foot view, one might wonder if this is really a case of a system bigger than any one stakeholder.

As it is, deliberately worded verbiage has frothed up a longstanding distrust for what more likely is a love-hate relationship between consumers and the present car buying paradigm comprised of automakers selling through licensed franchise dealers.

Emotions ranging to moral indignation have run hot against car dealer associations and legislators who back them when they seem to trample on democratic ideals, free market tenets, and individual freedoms.

And without a doubt, it is a regulated market. Tesla as the self-appointed “disruptor” has challenged the status quo where opposed.

Thus far, Tesla has succeeded in planting full-fledged factory direct retail stores – not only its limited-scope “galleries” – in a growing number of states, so it’s not like other states holding onto restrictive rules speak from a place of unanimity either.

While Tesla’s stock price has seen a 10-year-old company that’s only produced two car models inflated to half the market capitalization of General Motors, and its name seems to be everywhere, the Tesla Question is more than only about Tesla.

Some of the spin has spun beyond reality too, say observers, but for the moment, imagine this really is all about the company headquartered in Palo Alto, Calif.

The following is based on 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.

Intangible Consumer Benefits

To some following the rise of Tesla and its magnificent Model S electric sedan launched summer of 2012, the start-up is as much an activist’s cause as it is a company.

Led by the charismatic billionaire “genius” Elon Musk, Tesla aims to impact transportation so profoundly that it will provoke automakers to follow where they may have been too timid to tread.

At least that’s some of the hope including Tesla’s promise of cleaner air, and its affront to the nebulously lumped together traditional petroleum-powered paradigm.

Tesla_fans

A waft of conspiracy theory is in the air for the underdog hero struggling against the entrenched powers that be.

If John Lennon were still alive, perhaps he would be singing, “All we are saying is, is give Tesla a chance!”

And wouldn’t it be nice, say supporters, to have a chance to at last say “we don’t need you” to OPEC, and oil companies? Instead we could accelerate the future with U.S. manufactured electric cars powered by domestically produced energy.

Waiting for the government to achieve “energy independence” has otherwise become a point of parody. Comedian Jon Stewart has richly rubbed the nose of the last eight presidents into their own unfulfilled big talk. Tesla in contrast is seen as a gleam of home-grown entrepreneurial hope and maybe our best current chance to push a paradigm shift.

Meanwhile, if auto dealers presented as attacking Tesla were to lose out in some way, there would be no love lost by some Tesla supporters. Dealers are widely castigated as purely self-serving interests trying to protect their grip on the market.

In short, this is nearly being viewed as a battle of good versus evil.

Tesla is a techno-cool company where Silicon Valley luminaries and various like-minded supporters around the world hope to show Detroit and Europe their way is better, and do what others say cannot be done.

Being a part of it all can be exciting, like rooting for a super talented underdog team pitted against a not-well-liked incumbent whose had enough wins for one lifetime.

It’s been said these high-stakes and emotional circumstances are also a recipe for intellectual filters and selective contemplation of the big picture – i.e., bias.

Not that everyone has drunk Tesla-flavored kool-aid, but many on all sides of the issues observed the phenomenon of skewing the story into a drama over moral ideals, even “us versus them,” a concept widely propagated, even from the top.

“We certainly have a lot of battles in a lot of places,” said Musk last year to Automotive News. “So far we’ve been successful in those fights. It’s because right is on our side.”

Tangible Consumer Benefits

Underlying the movement-that-is-Tesla are products; cars to be exact, and maybe trucks later too.

Ironically, the peoples’ choice candidate is a corporation with multinational aspirations, wants profits as fat as Porsche gets, and it now sells a car that costs two-to four times the $31,000 national average new car price.

For those who cannot now afford the $72,000-$133,000 federal subsidy eligible Model S, but otherwise love the idea of ushering in an electric-powered world, they are waiting as patiently as they can. Tesla is working on planting its “Gigaplant” so it can begin selling close to a half million cars per year within the decade, and first up is to be the $35,000 Gen 3 sedan aimed at a BMW 3-Series demographic.

In one sense, it could be seen as a strange twist on the Robin Hood story. Traditionally Robin Hood robbed from the rich and gave to the poor. In Tesla’s case, it is led by a rich man, caters to the well-to-do, and the lower income folk hope to get their portion in due time. Perhaps the populist hero mantle still fits because Tesla in other ways remains a small player against an even bigger and deeper pocketed perceived foe.

Breaking into the market was always expected to have high costs, so concentrating first on the luxury performance segment was seen as the easiest way to begin.

In any event, Tesla has given supporters – and TSLA investors and speculators – a glimpse of a future that looks much better than the present. To them, it must therefore be permitted to succeed and bear fruit on a host of implicit and explicit promises.

Opposing Viewpoints

Talking points and allegations fomenting this revolution rumbling in the background have come from all over, including Tesla itself. It is backed also by the Consumer Federation of America (CFA), among others, against an old nemesis: the car dealer lobby as it’s generally called.

“If the people of Texas knew how bad this was, they would be up in arms, because they are getting ripped off by the auto dealers as a result (not saying they are all bad – there are a few good ones, but many are extremely heinous),” wrote Elon Musk last year in an internal e-mail when trying to get Texas laws changed. “For everyone in Texas that ever got screwed by an auto dealer, this is your opportunity for payback.”

Wanting correction for perceived inequities also is the CFA which counts Consumers Union, which publishes Consumer Reports, as one of its members. That advocacy group was soundly “crushed” last time it sought factory direct sales 12 years ago, said Jack Gillis, director of public affairs and author of The Car Book.

Model_S_gray_driveway

“This is a market crying out for disruption for so many reasons. If Tesla is allowed to sell directly to consumers and they fail…so be it,” said Gillis. “But for dealers to fight tooth and nail in state legislatures to keep them from doing so is not only uncompetitive, but un-American!”

“The current buying process is severely broken,” he said. “Not only is it broken in terms of its implementation, but I haven’t even mentioned the racial discrimination that happens in dealer financing, the selling of overpriced products and features that are valueless (rust proofing, extended warranties, fabric sealant, etc.), the shenanigans that go on in the dealer’s financing office, and any number of dealer practices that cause auto dealers lead the list of complained about companies at the BBB, state attorney general’s offices, and county offices of consumer affairs.”

Gillis sent along a position paper based on studies done in the 1980s and with data from the 1990s, and two press releases linked here and here, dated 2001 and 2002. The 14-year-old-plus market analysis said car shoppers could save $1,500 per transaction by unleashing the power of the Internet and essentially deregulating car dealers. Gillis guessed more could now be saved, but said CFA has no more recent studies supporting its passionate position.

In disagreement with the CFA is Michael Charapp, a partner at Charapp & Weiss, LLP, a firm representing car dealers and car dealer trade associations..

“To Mr. Gillis’ reliance on an archaic study of what dealers cost customers that was incorrect when published, the conclusion is nonsense,” he said. “That study on which Mr. Gillis and all the other anti-dealer advocates have parroted for years was fatally flawed. If you disregard the facts that local representation for showing cars, stocking inventory, allowing test drives, arranging financing,, handling trades, providing get ready for the vehicle delivery, handling warranty repairs, and all the rest of the things a dealer does, the costs could go down. But you cannot. Those functions of a local dealer are a necessity for the market. Without those things the car market will not work.”

And Bill Wolters, president of the Texas Auto Dealer Association had more to say.

“Jack Gillis and the CFA have been a voice in the wilderness on automotive issues for years. They have never sold a car, never had their own money at risk, never had a franchise jerked out from under them and never worked as hard or had their family’s reputation on the line every day that they go to work,” said Wolters. “Jack Gillis is like the guy who never played a down of football but who is happy to tell the coach how to run his team.”

Gillis and Wolters both testified before authorities in 2002 on issues affecting car dealers and consumers, and said Gillis, “We were completely crushed by powerful state dealership lobbies when we tried to open the market in the states.”

So indeed, this is not just about Tesla.

“Dealers have used franchise laws, which were initially intended to protect them from manufacturer abuse, to prevent competitive channels of distribution,” said Gillis. “Tesla is the first significant challenge that they have had to these now outdated and very market restrictive laws. While Tesla has the wherewithal to challenge dealerships, from a consumer perspective this is not about Tesla, but about insuring that auto buyers have the same alternative buying sources as do purchasers of virtually every other consumer product on the market.”

To make points that stick, advocates may simplify issues. In reality, a vast array of major and minor issues besides are also floating out there. More of these, and how they might affect consumers will be continued in the next installment.