What These Risky Bets Reveal About Tesla

Electric-car maker Tesla Motors (Nasdaq: TSLA  ) has earned its reputation by making risky bets. After all, building a world-class car company from the ground up is not only capital-intensive but also seemingly impossible without the economies of scale enjoyed by traditional automakers. Despite these challenges and many others, Tesla is forging forward with a new pricing plan and a fresh take on selling automobiles.

Let's take a look under the hood to find out whether Tesla's risky strategies will pay off.

Taking on the big boys
Even some of the most outspoken critics were silenced earlier this month, when Motor Trend magazine named Tesla's Model S sedan the "2013 Car of the Year."

Unlike rival EVs from established automakers such as Ford (NYSE: F  ) and General Motors (NYSE: GM  ) , Tesla's Model S is an electric car you'd be proud to own. In fact, Tesla's car beat out non-electric vehicles and hybrid models from Ford, GM, BMW, and other established automakers for the coveted COTY award.

Then again, the Model S isn't just for tree-hugging environmentalists. The zero-emission Model S, which Motor Trend judges called "one of the quickest American four-doors ever built," can travel as far as 300 miles on a single charge.

For Tesla, it's not only the awards that are piling up these days. Rumors of an impending price increase on its Model S sedan have also gotten a lot of attention recently. While it's not yet clear why Tesla would suddenly raise the price, there's no shortage of theories floating around.

Some analysts believe the company is setting its sights on a less cost-conscious customer base, while others think the move signals Tesla's confidence in the demand for its cars. Would-be Model S customers will have to wait a couple of weeks to find out how much of a difference the price increase will actually make.

However, if you've already placed your Model S order, you won't be affected by the price bump. Of course, all varieties of the Model S will still qualify for a $7,500 federal tax credit. Today, Tesla has more than 12,000 reservations for the car at its current price points.

Earlier this month, management said it had increased production of the Model S to 200 cars per week. Tesla went on to say that it expects to double that rate by December. With the company currently ramping up production on the Model S, Tesla is now ready to tackle its next challenge -- transforming the dealership experience.

Disruption at its finest
If you've purchased a car before, you probably know firsthand how frustrating car dealerships can be. Just ask the late Steve Jobs. In 2001, the then-Apple (Nasdaq: AAPL  ) CEO, quipped: "Buying a car is no longer the worst purchasing experience. Buying a computer is now No. 1." With the help of a man named George Blankenship, Jobs changed that state of affairs for computers. Will Tesla do the same for cars?

Today, Tesla is following in Apple's footsteps and opening retail stores in malls around the world. Like Apple, the all-electric-car maker is in good company: George Blankenship has joined the team as Tesla's vice president of worldwide sales.

Under Blankenship's leadership, Tesla has opened 10 "new design" mall stores so far this fall. But that's just the start of it. By the end of the year, Tesla will have 24 locations up and running in the U.S. and 34 worldwide, according to a company press release.

Toronto is the location of Tesla's most recent launch. The store, which opened on Nov. 16, is the company's first international location to feature Tesla's new showroom design  -- complete with an 85-inch video wall.

And sure enough, by opening showrooms in busy malls around the country, Tesla has given the traditional dealership a facelift. Similar to Apple stores, Tesla's mall locations focus on the consumer experience more than anything else. Tesla product specialists who are excited about the technology and knowledgeable about electric vehicles staff the new stores. Best of all, they don't make a commission on reservations.

The bumpy road ahead
Sounds great, right? Not according to some existing auto dealers. Dealership associations in New York and Massachusetts recently sued Tesla, claiming that state laws prohibit auto manufacturers from selling their cars direct to consumers.

However, round one of the legal battle went to Tesla last week, when a Massachusetts judge denied the dealers' request for a preliminary injunction against the electric-vehicle maker. The ruling means Tesla gets to keep the lights on at its Boston store while the lawsuit proceeds.

As Tesla continues to race ahead with its new retail concept, I suspect we'll see many of the dealership conflicts fade into irrelevance, primarily because, as Tesla CEO Elon Musk points out in a blog post, the company isn't selling cars at its mall stores. Specifically, he notes, "our Product Specialists could not sell you a car today under any circumstances, as Model S is already sold out several months in advance and there is no inventory on site." 

In the end, Musk is confident that the real reward is in these calculated risks that he's taken. Given his stellar track record, I'm also hopeful. More than anything, it's encouraging to see an auto company that's brave enough to take risks and try something new.

Near-faultless execution has led Tesla Motors to the brink of success, but the road ahead remains a hard one. Despite progress, a looming question remains: Will Tesla be able to fend off its big-name competitors? The Motley Fool answers this question and more in our most in-depth Tesla research available for smart investors like you. Thousands have already claimed their own premium ticker coverage, and you can gain instant access to your own by clicking here now.


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  • Report this Comment On November 28, 2012, at 1:01 PM, bzhayes wrote:

    Saturn tried to redesign the dealership aspect of buying a car. They were very successful at that part, but the company never made a dime in its entire existence. You are talking about buying something for ten's of thousands of dollars (maybe even hundreds of thousands of dollars). A little shenanigans can make your car seem much much cheaper than the competition. That can make all the difference between a black or red bottom line. There is huge profit margin in the up-sell. Plus, because of non-linear profit potential car salesman as a whole work for pennies on the dollar. The kiosk in the mall might work great when demand outstrips there ability to manufacture cars, but at some point in time people are going to want to be able to drive away with there car.

  • Report this Comment On November 29, 2012, at 1:01 PM, 48ozhalfgallons wrote:

    If and when Ford, Honda, Subaru and Toyota introduce an all-electric with a 500 mile swappable pack and swap stations, Tesla will go the way of the Duesenberg. Tesla products are an afternoon's thought for the elite.

  • Report this Comment On December 02, 2012, at 12:45 AM, VermeerMtl wrote:

    Tesla has nothing to worry about from Ford, GM, Honda or Toyota. These guys want high-volume, sure-fire hits & EVs are not there yet. The Germans are in love with diesel and will only go electric once there's a solution for rapid urban charging.

    As for the auto dealers, US (and Canadian) laws are skewed in their favor but the public doesn't like them. In the end, laws will be changed to accommodate something that's in the public's interest.

    Critics cannot believe that Ford + GM + Toyota cannot out-engineer tiny Tesla, but remember that in the past 3 years GM and Chrysler almost disappeared because of bad management.

    Companies are made of people and quality people will always win, no matter what their last name is.

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