Tesla has been grabbing headlines and stirring up debate with its insistence on a direct sales approach for its all-electric vehicles. In one of Chief Executive Elon Musk’s more recent blog postings on the subject, he brought up a number of reasons why the traditional franchised dealer approach did not make good business sense for vehicle manufacturers of electric vehicles (EVs). Not surprisingly, these arguments have proven as contentious with some camps, as many of Tesla’s other business strategies have.
Conflict of interest
To begin with, Musk claims that automotive dealers “have a fundamental conflict of interest between promoting gasoline cars, which constitute virtually all of their revenue, and electric cars, which constitute virtually none.” Not only that, but it is simply “harder to sell a new technology car from a new company when people are so used to the old. Inevitably, they revert to selling what’s easy and it is game over for the new company.” The new company in this case is Tesla or another EV start-up.
Anil Valsan, Global Lead Analyst at EY, sees EV retail “not as a conflict of interest as such but more as a challenge. Difficult because it takes a lot more investment in terms of time, coaching of the customer, convincing them, etc. The playing field can be levelled if the dealers are properly compensated and supported for selling EVs.”
Russell Hensley, Associate Partner in McKinsey’s Automotive Practice, believes EVs could prove useful in attracting new buyers to dealerships. He told Megatrends: “Certainly short term it [promoting EVs] could be advantageous for dealers as it would diversify the potential segments to which they would appeal. Customers for gasoline cars and EVs will, in the short to midterm, likely come from quite different customer segments.” He went on to add: “Net-net the selling price for EVs is greater than that of gasoline cars, so fewer would need to be sold for the same revenue.”
Bernard Lycke, CECRA’s Director General, told Megatrends that he “strongly disagrees” with Musk’s comments. CECRA represents the interests of automotive dealers and repairers in Europe. “Dealers are selling what is put on the market by the manufacturers. They receive (and have to pay) very extensive and expensive training which allows them to be able to sell (and to repair) the products that they are selling,” he explained. “Their remuneration is based on the margin system; therefore if the margins that Tesla would propose, would be in conformity with the normal uses, there should not be any problem to motivate dealers to sell Tesla products which are in addition attractive cars.”
General Motors has also expressed satisfaction with the current retail model used for its own electrified vehicles. “We sell EVs successfully through our existing retail network – Volts and Spark EVs through Chevrolet dealers and the new ELR through Cadillac dealers,” a spokesperson told Megatrends. ”Our dealers have made significant investments in their facilities and in training their personnel to provide white-glove treatment to EV customers.”
Karl Brauer, Senior Analyst for Kelley Blue Book, had this to say: “Traditional car dealers are driven by the same motivation that drives Elon Musk – profit. If dealers see far more demand for traditional cars priced between US$15,000 and US$35,000 than they see for pure electric cars priced between US$35,000 and US$110,000 it’s not Space X science to assume the US dealer body will build its business around traditional cars.”
Aftersales and service
Another key area of concern flagged by Musk involves aftersales and services. He notes that EVs inherently require less service than traditionally powered vehicles, meaning dealers stand to make less profit on that side of the business: “An even bigger conflict of interest with automotive dealers is that they make most of their profit from service, but electric cars require much less service than gasoline cars. There are no oil, spark plug or fuel filter changes, no tune-ups and no smog checks needed for an electric car.”
Musk goes on to indicate that profiting from the provision of service could be unethical, and that he has “made it a principle within Tesla that we should never attempt to make servicing a profit centre”. This is followed by a comment that “overcharging people for unneeded servicing (often not even fixing the original problem) is rampant within the industry.”
KBB’s Brauer told Megatrends “Service requirements are theoretically more expensive for traditional cars versus electric cars, but not enough to make up the difference in up-front purchase price. And in reality electric cars aren’t always as low maintenance as they claim to be. Many of them have been recalled or suffered unexpected failures. A sweeping statement about rampant, unnecessary service charges on traditional cars is as accurate as most sweeping statements.”
CECRA’s Lycke concedes that “EVs generate less aftersales, but less does not say ‘none’ and this argument is valid for all EVs and not only for Tesla. And we see that EVs from other brands are sold by dealers.”
Hensley noted: “Some of the systems on EVs will likely require less service, e.g., electric motor. Given the different economics in terms of total cost of ownership, a different value proposition will need to be conveyed by the dealer.”
EY’s Valsan believes dealers should look at other areas to compensate: “If they lose out on service they can offer other services to compensate, such as diagnostics, charging equipment, etc.”
Another key area under dispute involves recalls. Tesla’s Musk, who squabbled with the National Highway Traffic Safety Administration (NHTSA) last year over the use of the word ‘recall’, prefers to fix faults wherever possible via over-the-air updates. “All Tesla Model S vehicles are capable of over-the-air (OTA) updates to upgrade the software, just like your phone or computer, so no visit to the service centre is required for that either,” Musk notes.
Whether this is called a ‘remedy’, as Musk prefers, or a ‘recall’, NHTSA’s term of choice, the time will eventually come when a fault arises. National Automobile Dealers Association (NADA) Chairman Forrest McConnell recently highlighted the importance of dealers when it comes to recalls. “When something goes wrong on the assembly line, vehicle manufacturers turn to their franchised auto dealers and the dealerships’ service departments to make things right – all at no cost to the customer. The franchise system is a network that consists of more than 17,700 new-car dealerships across the country which support their customers beyond the point of sale.”
He goes on to note that effectiveness in handling vehicle recalls was “one of the important reasons why state policymakers adopt the franchised dealer system for the distribution, sale and service of new motor vehicles.” The wide distribution and service channels of franchised dealers can respond to recalls faster and more efficiently than a single manufacturer or factory store, Forrest believes. “The franchised dealer network will always be a model that benefits both our customers and manufacturers alike. And it’s a network that is irreplaceable.”
Breaking the rules
Overall, dealers may need to adapt. McKinsey’s Senior Partner Hans-Werner Kaas observed: “Dealers cannot oppose fundamental forces of market trends long term, and dealers will need to find a business model which works including economics if the product mix shifts more to EVs.”
EY’s Valsan believes that changes are needed in today’s retail model to adjust for the special requirements that EVs pose: “The current sales model itself doesn’t necessarily work. It requires a lot more hand-holding with the customer, less of a sales pitch and a lot more support. From a sales model perspective, that will need to evolve.”
However that model evolves, Tesla wants permission to do its own thing. It most recently attracted the support of top executives at the Federal Trade Commission. In a blog posting, three FTC executives backed Tesla’s retail strategy on the grounds that consumers are shopping in new ways today and that varied approaches aid competition.
Some OEMs, GM included, say they support market competition in general but want to ensure that the regulations are applied equally to all industry players. A spokesman for GM told Megatrends: “General Motors believes that competition is healthy and welcomes all competitors, including Tesla. However, we feel that all vehicle manufacturer should be required to play by the same rules in the marketplace.”
While Tesla’s dealer battle is centred on the US, few other OEMs have chosen the direct sales approach in Europe. “In Europe, the distribution of cars is still made via the networks of the dealers. There are of course also manufacturer-owned dealerships but they are still an exception (approximately 3% of all outlets) rather than the norm. In general, existing manufacturer-owned dealerships in Europe often serve as a solution for high-cost metropolitan areas and/or as marketing and retail laboratories,” observed Lycke.
The situation varies between European countries, with domestic OEMs in France and Germany traditionally investing more heavily in directly-owned dealerships. As a result the share of manufacturer-owned dealerships there is relatively high – 18% in France and 14.5 % in Germany. However, in Italy and the UK the share of manufacturer-owned dealerships is much lower at about 7%.
“As for the general trends, I can only say that, at present, there is little evidence to suggest manufacturers are moving extensively into wholly-owned networks,” Lycke concluded.