Cutting Out the Dealer: The Evolving Impact of Tesla

Evolving Impact of Tesla

Tesla, Elon Musk’s electric car company, has not only brought innovation to the resource used to power the automobile but also to the industry itself. It is no secret that Tesla’s direct-to-consumer selling model is as intriguing as it is disruptive. Instead of stocking local dealerships with Tesla models, the goal has been to create Tesla-owned showrooms where the company’s product specialists provide information and guidance to the customer. When describing the approach, Ganesh Srivats, Tesla’s vice president of North American sales, expressed that the company could not rely on dealerships to convey the mission to customers, and needed to conduct business in the way they saw fit while creating an exceptional customer experience.  

Cutting out the dealer

While some have expressed curiosity and even delight at this new process, many are cautious about cutting out what some consider the backbone of the automotive industry since the 1950s: car dealerships. Texas, West Virginia, Utah, Arizona and Connecticut have all banned Tesla’s stores in their states. All of these locations have dealership protection laws that are meant to keep dealerships from facing unfair regulations and competition from the manufacturers. However, Tesla feels it has the mandate to steer away from dealerships. According to Tesla CEO, Elon Musk, the new technology of Tesla’s electric car needs an explanation by a specially trained employee that works at a Tesla showroom. There is also a worry on the side of Tesla that independent dealers will not be incentivized to sell electric vehicles since they have lower maintenance costs than traditional vehicles. These issues intensify the tug-of-war between Tesla and the independent dealer. As a result of this battle, state courts and legislatures have continued to join the fray.

Michigan’s “Anti-Tesla” Amendment

In 2014, Michigan Governor Rick Snyder signed an “anti-Tesla” amendment that was written to protect the automakers and dealers from the “intrusion” of Tesla in the state. Tesla sued in response, but as of December 2016, the dealer was still banned from setting up showrooms in the state. The company got around this by setting up a gallery in Somerset that directed customers to Ohio to purchase the vehicle. Tesla’s new roll out of their affordable mass-market Model 3 has caused the company to push harder to get Tesla showrooms in as many states as possible, but laws like the one in Michigan have made this feat a difficult one.

The National Automobile Dealer Association Response

In an October 2016 WardsAuto article, Colorado dealer and former National Automobile Dealer Association Chairman, Jeff Carlson voiced his opposition to Tesla’s model, and also expressed his opinion on the future of Tesla’s direct-to-consumer model. Carlson remarked that the franchise model would remain intact due to the cost it would take a manufacturer like Tesla to maintain showrooms, train staff, and track inventory; processes that dealers have had to be experts in for decades. Today, the organization continues to lobby in Washington against legislation that would create a more favorable environment for Tesla’s sell model.

Leading the Pack

As for now in the electric vehicle industry, Tesla still leads the pack. Last year, the company sold 50,000 cars, a third of all plug-in electric and plug-in hybrids in the U.S. As of April 2016, the company had sold a total of 107,000 vehicles, and had 325,000 reservations for the new Model 3, which will hit showrooms in late 2017. While the company’s performance is still a drop in the bucket compared to the 17 million vehicles sold in 2016, Tesla’s impact on the market is not going unnoticed, especially by other manufacturers. On July 5th, Volvo Cars announced that all vehicles produced after 2019 would have electric motors in addition to internal combustion engines. This action marks a significant move by a major manufacturer to challenge Tesla’s fully electric fleet directly.  If Tesla’s success continues to grow, other large automobile manufacturers may follow suit.

A Changing Landscape

The car buying landscape has changed drastically in the last decade. A survey in 2015 by Accenture revealed that 75% of respondents would rather conduct the car buying process online. Tesla is aiming to remove a crucial step from the traditional car transaction these respondents experience by bypassing the dealer. While many states are embracing this change from the status quo, some are standing firm against it and instituting their dealership protection laws. Future cases like the one in Michigan and increasing interest of competitors will indicate the staying power of Tesla’s direct-to-consumer method.