Motoramic

How Tesla plans to short circuit new-car dealers

Justin Hyde
Motoramic

If you want to buy a new car or truck in the United States, you have the choice of going to a dealership in person or not buying at all. For the first time, one automaker — electric vehicle maker Tesla — will attempt to short-circuit dealers by selling its cars directly to consumers over the Internet. It's controversial, risky and already under fire from traditional dealers, but Tesla's model could spark bigger changes.

The store above in Denver is one of 14 Tesla has opened in the United States and 25 worldwide, with another eight to 10 set to open in North America before the end of the year. While the company has focused on meeting production targets of its electric Model S sedan, it's also been adding stores like these — owned by the factory, usually located in malls or central shopping districts closer to Urban Outfitters than other car dealerships.

It's a key part of Tesla's overall business: Instead of building cars and selling them to dealers who hawk them to shoppers, Tesla wants to build only cars customers order — eliminating part of the auto industry's massive overhead costs in inventory. By selling its cars directly, Tesla's executives believe they can make their customers happy, and eventually sell more cars for less money.

"Our way of thinking about the whole ownership experience is fundamentally different than the way other car companies think about it," said George Blankenship, Tesla's vice president for sales. "The best way to do this is to control the process throughout."

There's a reason America's 17,500 dealer franchises have an impenetrable hold on where you buy a new vehicle. Over seven decades, new-car dealers have built a protective web of state and federal laws that give them a legal shield against automakers and their own competitive urges unique in American business.

Starting in the late 1930s, auto dealers successfully lobbied state capitols to even the field with manufacturers, who were prone to canceling franchises without warning, making it costly for an automaker to pare back franchises once granted. In modern times, those rules are what prevent automakers from going the route of Apple or Amazon; it's illegal in several states to sell new vehicles over the Internet or for an automaker to own a dealership.

Dealers have also faced criticism from consumer advocates, who claim they've used their lobbying power to avoid tougher consumer protection laws. More customers file complaints about automotive problems with consumer protection agencies than any other business, according to the Consumer Federation of America. While new-car dealers do face far tougher standards from manufacturers than used-car lots or the guy selling cars on Craigslist, buying a new car can often be a painful process even when no rules are broken.

Scott Adams, creator of the "Dilbert" cartoon, wrote last week about buying a new car and how the steps familiar to many buyers — from drawn-out negotiations to the pitch for undercoating to paperwork "mistakes" always in the dealer's favor — left him sour. "The reality is that we are amateurs and we were dealing with professionals," Adams wrote. "The rational part of me knows that somewhere there are customers getting better prices on this same vehicle, which causes me to hate both the car and the dealership."

Tesla has maneuvered around these laws in several ways. As a start-up, Tesla has no base of dealers who might object to direct sales. It's sold fewer than 3,000 cars to date, and hasn't proven it can build cars at high volumes. It's no accident that Tesla's sales chief spent years building Apple stores; most Tesla stores look like an Apple shop, with glass doors, dramatic yet simple signage and a location in a high-traffic place. But unlike Apple, no one there can actually sell the company's main product.

Shoppers who walk into a Tesla store to buy a car are escorted to the company's website to fill out forms, a task Blankenship estimates a prepared buyer can accomplish in half an hour. Once the factory builds their car, Tesla will deliver the car to their home, or they can pick it up at the factory in Fremont, Calif. By communicating with the factory, the transaction legally takes place in California — letting Tesla avoid the purview of other state's restrictions.

"People don't necessarily enjoy that whole transaction"

Doing business differently comes with some serious hurdles. Tesla has made arrangements with an outside company to sell the used cars its owners trade in; how and whether there's haggling involved isn't clear. Tesla is adding service centers, which many states require for vehicles to be sold there. A few state agencies have already given Tesla's approach the stink eye, and dealers in Massachusetts objected to a Tesla store in a mall over zoning and regulations, saying car dealers weren't allowed the same leeway.

And Tesla's model disregards the biggest thing dealers have to offer; people whose livelihoods depends on selling cars. Those 17,500 dealers will sell nearly 15 million cars and trucks in the United States this year, and sales are expected to keep rising even though there are fewer dealers than at any point since 1947, when the National Automobile Dealers Association started keeping count.

Blankenship says Tesla complies with all state regulations, and that he's not aware of any law that will keep the company from selling in all 50 states — which it may need to meet its ambitious targets of 35,000 vehicles a year by 2014. He also contends the Tesla low-pressure approach will pay handsomely in the future, saying 1.3 million people had visited Tesla's 10 stores through May.

"People don't necessarily enjoy that whole transaction," Blankenship says. "If we can be in front of people on a day-to-day basis when they're not thinking about buying a car…after a while, they'll drop back in again, in an environment where there's no pressure.

"It's a different mindset than if you're under the gun to buy a car today, and they're (the dealer is) under the gun to sell you a car today."

The National Automobile Dealers Association has kept an eye on Tesla's strategy, saying in a statement that "auto manufacturers have tried owning and operating their own retail stores and have failed. The business model that works best is having the auto manufacturers focus on building quality products and the dealers focused on selling and serving the vehicles."

Tesla's model also raises several questions for Leonard Bellavia, an attorney who specializes in auto dealer laws and says Tesla is playing on the edge. He says in several states, the definition of "selling" a new vehicle isn't just handing over the keys, but anything from test drives to talking up options.

"In the states where they cannot retail, they have to be careful they're just showcasing the vehicles and not selling," Bellavia said.

Bellavia also contends dealer laws were enacted to protect consumers more than dealers -- making sure there was some way for a car owner to have a warranty honored and regular service performed. If a future Tesla buyer has a problem with the car and wants to sue, they would have to file where the transaction took place -- namely, California.

"They're a niche player," says Bellavia. "If they were a mainstream manufacturer designed to compete with Ford, Chrysler or Toyota -- they would be the object of a lot of objection by the dealers." If Tesla can succeed on the scale imagined by chairman Elon Musk, those dealers will be getting the paperwork ready soon.

Photos: PaulswansenMark Nye via Flickr

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