When the rubber hits the road, what is the problem dealers have with Tesla’s direct sales? Publicly they claim Tesla’s direct to consumer model won’t provide the dealer support we Americans have come to expect. Looking at the competitive landscape, I don’t see it that way. Compared to other brands selling limited volumes, “dealering up” isn’t Tesla’s problem. That is, assuming regulators let them.
Tesla CEO Elon Musk’s has a proclivity to invest in infrastructure and there is no reason the OEM can’t roll out full service dealers as they grow volume and geography. Access to capital has not been a problem, to date. It will be a new hit on profits that investors need to look into, but it’s a viable alternative. In the end, this argument goes back to Ford’s experiment with “direct-dealing” in the 1990’s. U.S. dealers don’t want Tesla to crack the door open for the likes of GM, Ford, FiatChrysler or the Asian volume makes.
Tesla currently has around 50 retail locations and service centers nationwide. Take a look at the comparison to a few other automakers. To be fair, many of the Tesla showrooms are merely storefronts in malls or on luxury strips. However, their hard service stores are where the sales are. They don’t have a lot tied up in prospective service.
To match the likes of Audi, Lexus or Infiniti, each who sell in the neighborhood of 150 thousand a year, Tesla would need to open 150 additional full service dealers. Based on traditional costs, that would be an investment of roughly $700 million to $1 billion. That’s a lot, and I think underestimated by many company watchers — add this to the questions on forward-looking R&D. But given Elon Musk’s track record, not insurmountable.
Does a customer really car who invests to build the service center? Arguably he current model of OEM-dealer relationship hasn’t built the most efficient or trust-inspiring sales method. High end dealer have a bigger reputational risk in providing poor service or shifting blame to OEMs, and not surprisingly they are the most trusted in customer service surveys. So far Tesla has not met competition head on. The first real competition is hitting the market with the BMW i3. I think Tesla may underestimate how much it may take to run a competitive dealer network to BMW, but they can.
Bottom line: Last month, I wrote tongue-in-cheek that Tesla religion”ists” should offer up capital for a stand-alone, zero-profit distribution company to help out the company, More seriously, it’s important to understand that deep down, dealers realize that Tesla selling direct is not the demon, The sin would be cracking the door open for one of the volume makes. Some smaller dealer groups see this as an existential battle and I don’t see it being settled nationwide shortly. Meanwhile I am confident that Tesla has a plan B and will have a more fleshed out sales and service network, either direct or a close third-party.
In the end, the real question on Tesla is sustained demand for Model S in the short-term. It’s been pretty flat in the US, and erratic in Europe. As we wait for Q2 real production on Model X, Asian interest needs to translate into hard volume orders in in Q2 2014. Production at 7,500 per quarter, fulfills the order book in 3-6 months, and de-bottlenecked production to 10,000 per quarter would leave them with too much capacity i the short-run. Would the company hold back production t to maintain a backlog? Bring on the Model X.
Other issues to watch include the recently raised question of R&D forecasts and as I noted above, increase in SG&A needs.