Tesla Motors' biggest strength could become its biggest weakness
Tesla’s smartest move has been to try to deal directly with its customers. By cutting out the dealers it saves the dealer’s profit for itself and its customers and can control the transaction with no middle man. However, those financial benefits are not the main reasons Elon Musk decided to offer direct sales and service. He did it because people hate car dealerships.
Ask people you know to tell you a horror story about buying a car, or having their car serviced. Everyone has their own list of stories about how they felt cheated or tricked by a car dealer. How about the $275.00 “Dealer Documentation Fee” revealed at the end of the transaction after a price was agreed upon? How about going to pick up the car after the dealer said it was ready only to find the car sitting unfinished with parts of it on the hood? These are just two of my real stories from the past few years. Tesla had the first chance at a fresh start in the car business and was smart enough to know it could correct one of the worst parts of car ownership. I say “good for Tesla.” And I mean it.
However, there is one little problem. So far, Tesla has sold cars almost exclusively to very, very wealthy men. The majority of the cars it has sold are second cars, specialty cars if you will. They are prized possessions and they are awesome. They are not are daily drivers. Not the car you take when you have to go to work in the morning, it’s icy and the sanding trucks have been out all night. Not the car you take to the town dump. Not the car you take to pick up your kid who is at school and has thrown up twice in the past hour. Nope. You take “the other car.” Whatever that might be. I have owned a second car for many years and I am not mocking the people that buy fancy cars like Teslas. I have tried hard my whole life to be one of them.
The problem is, Elon Musk didn’t start Tesla Motors so George Clooney could have a toy. In his own words “I suspected that this could be misinterpreted as Tesla believing that there was a shortage of sports cars for rich people, so I described the three step “master plan” for getting to compelling and affordable electric vehicles in my first blog piece about our company.” In this recent message, and in others, Tesla has continuously pointed out that its real mission is “bringing compelling mass-market electric cars to market.” In recent interviews Musk clarified that as meaning he thinks Tesla will be selling about 500,000 cars with the main seller being the Gen III, which will SELL at about $35,000. In other words, Tesla plans to be bigger than Volkswagen is in the USA, plans to sell huge numbers of cars costing about $10,000 more than most people spend on a new car, and it plans to begin doing that in earnest in a just few years.
So far, here in New England Tesla has one store where buyers can learn about Tesla’s single model for sale, test-drive it, and then order one. When I visited earlier this year Tesla even had some vehicles for sale that could be purchased on the spot - as long as they brought about $105,000 (not including sales tax). One store for 5 of the richest states on the planet Earth. Tesla also has one service center in all of New England. It is located in Watertown Mass. That is a very convenient place, but only if you actually live in Watertown. It is basically gridlock getting into and out of Watertown from 6 to 9 am and from 3 to 7pm every workday. So, even though I am only about 20 miles from Watertown, I would never, ever go there on a workday, for any reason. Period. As Yogi Berra is credited with saying “Nobody goes there anymore, it’s way too crowded.” New Hampshire, Vermont, Maine, Rhode Island and Connecticut have no Tesla service centers. In fairness, the New York Tesla service center could reach up to the super-rich in the Fairfield County, Connecticut suburbs of NYC.
Given this reality, how can Tesla plan to service the 500,000 cars it plans to sell annually starting in a few years? Many Tesla fans, who have had a little too much Kool-aid, will say “Tesla’s don’t need service. Remember, they are electric.” To which one might replay “Remember, Tesla sells maintenance agreements.” Tesla has also had a recall requiring cars be brought in for service. It has also modified the suspension of every single one of its Model S cars remotely as a result of recent hysteria over fires. A Model S also stranded an Autoweek journalist at home when his Model S would not decouple from the mothership’s nipple (charger). When I drove a Models S the voice controls for the navigation system did not work, and the Tesla employee in the car with me could not make it work. We were at the Tesla Store. The rear-view camera also did not work (design defect). So, let’s not pretend that Tesla’s mass-market cars won’t have mass-market service needs. Tires need rotating. Cars that hit huge pot-holes and then need a wheel bearing will have to be left overnight. Navigation systems might need replacement. People from Maine are not driving to Watertown, MA to have this stuff done. I once lived in Watertown, and even I won’t go there.
There is no amount of money in Elon Musk’s Paypal account big enough to solve this problem. There is no amount of investor money big enough to solve this dilemma. The fact is Tesla is setting itself up for a very nasty situation. If people start buying Teslas and plan to drive them to work in winter every day, to pick up the kid with projectile vomiting, and take their stuff to the transfer station (dump) they are going to break those Teslas. Let’s not pretend the company is going to be profitable enough to send a Tesla Ranger to each of those half-million people. After 6 years it would be 3 million, and on and on.
Presently, Tesla Motors is fighting dealership groups in court. They want to force Tesla to sell through their old-boy network. They helped finance those politicians' campaigns, and gosh darn it, they expect results. In some states Tesla is winning, or has won the right to sell and service directly. In Mass. Tesla is winning, but has not yet won. In Texas it is losing. Texas is a massive car market. Maybe the situation will solve itself and Tesla will have to use dealerships against its will. If so, that $35,000 car now costs $42,000 after dealer’s mark-up. Now it isn’t even close to mass-market pricing. No car dealer can stay in business without at least a 20% profit (Thank you Wheeler Dealers for that automotive factoid).
Tesla makes an amazing car. It is one of the best cars in the world at its $100,000 price point. Tesla also has the smartest sales and service plan for those vehicles of any automaker in both my opinion and in Elon Musk’s opinion. Sadly, neither of those things will help Tesla achieve its mission.