Good News for Tesla Motors: This 84 MPG Car Just Copied Its Business Strategy

Tesla Motors stores have been stuck selling t-shirts in some states. That may be about to change. Source: The Motley Fool/Flickr.

Some investors dispute the sustainability of the market valuation of Tesla Motors (NASDAQ: TSLA  ) . Some raise an eyebrow to the gargantuan obstacle facing the company aiming to infiltrate an automobile industry clinging to petrol-powered vehicles and the infrastructure that supports them. Some question whether going all-in on a lithium ion battery gigafactory is the best long-term decision in the fast-moving battery technology space. While those are all discussions worth having, I think everyone can agree that the way we buy cars is broken.

There aren't many things with fixed-production costs that vary in purchase price based on zip codes. Yet, we widely accept the fact that car salespeople operate on commission, which doesn't exactly align incentives with the customer, and fosters an attitude of mistrust. That mistrust has created a market niche for websites and companies such as TrueCar.com, which attempt to help customers get the best price for their car purchases based on location. Pretty pathetic, isn't it?

Tesla Motors is attempting to fix the problem at its source: the car dealership. Forget haggling with a sales representative paid on commission; each Tesla will come at the same fixed price based on model and options. That has attracted the much-expected ire of the dealership camp; but the company will soon be getting help from another unlikely automobile start-up, Elio Motors. The company is working with well-established parts suppliers such as Henkel, Lear Corporation, and Flame-Spray Industries -- which is working with Ford Motor Company (NYSE: F  ) to boost fuel efficiency -- to introduce an 84-mpg, $6,800 mass-market car sold with a "No Haggle" sales policy. 

Yo, that's an Elio

No, part of this car isn't missing. It's designed to have three wheels and a compact design. Source: Elio Motors.

The company's first car, the Elio, has three wheels, and seats two people (the passenger sits behind the driver). Some key specs for the ugly duckling car:

  • Fuel efficiency of 84-mpg highway, 49-mpg city with an eight-gallon tank.
  • Curb weight of just 1,200 pounds.
  • Expected to boast highest crash-test rating (50% larger crush zone than similarly sized vehicles).
  • A price tag of $6,800 that includes A/C, heater, radio, power windows and door locks, and more. Bluetooth and navigation can be added for additional costs.
  • Designed to fit drivers and passengers of all shapes and sizes.
  • Multiple color options.
  • Blazing 0-60 speed of 9.6 seconds!
  • No-haggling dealerships located across the nation.

Big things have small beginnings -- literally and poetically. While Elio Motors was founded by automotive engineer Paul Elio in 2008, the company expects to churn out and sell at least 50,000 cars by March 2016 if production begins next March. By 2021 the company thinks it can sell 250,000 cars each year. Ironically, production of the tiny, lightweight car will take place in a Louisiana manufacturing facility that used to build Hummers.

Ambitious vision? Yes -- although nearly 25,000 cars are already reserved. But Elio Motors does make a convincing argument with its technology and business strategies. The Elio is manufactured with trusted and respected automobile suppliers. For instance, Flame-Spray Industries has pioneered a novel thermal spraying process that improves the efficiency of the manufacturing process, and reduces the weight of vehicles -- therefore boosting fuel efficiency. The supplier produced a production-ready version of its technology with Ford Motor Company to enhance its ability to meet the nation's strict fuel-efficiency standards. Novel production methods will have to be combined with the Eco-boost engine from Ford Motor Company to reach national goals.

The Elio isn't as small as you may think. Here it is next to a Cadillac CTS. Source: Elio Motors.

The business strategy is also well conceived. While Elio Motors knows an Elio won't be the primary car for most households, selling at a fixed, low cost of $6,800 will certainly make it worth a second look as a niche vehicle. As VP of Sales Jerome Vassallo told Forbes: "As a commuter, 93 percent of the time you're in a car by yourself. You'd drive a small car like this to and from the office and leave a larger vehicle parked back home in the driveway for when you need to carry additional passengers or have more cargo room."

The economics could certainly work out for many households. If you're fetching at least 49-mpg driving an Elio, the fuel savings could add up tremendously over the long term, and more than cover the purchase cost. The company is also pushing Elios to government agencies, rental companies, and commercial drivers -- which could mean big business for the company. However, the most important part of Elio Motors' business strategy for investors to consider is how it affects Tesla Motors.

Help is on the way!
It's quite obvious that Tesla Motors and Elio Motors aren't competing for customers; but the Elio could greatly aid the electric-car company. As unlikely as it sounds, consider what a successful Elio Motors means for the big picture. If the company hits its goals, and sells 50,000 cars by early 2016 and more than 250,000 cars annually by the beginning of the next decade, then the current (and broken) car dealership model could be finished for good. Simply put, more companies subscribing to a "No Haggle" sales policy will create more customers who demand such a model, and increase the pressure on policymakers to reconsider archaic legislation.

There are many moving parts involved in buying, producing, and marketing a Model S or an Elio. Tesla Motors must continue to increase manufacturing capacity and enable the production of a lower-cost mass-market car. Similarly, Elio Motors has its work cut out for it in capturing safety ratings and proving its value to customers. Yet, while the two auto companies won't produce a sizable amount of vehicle sales in the United States, they could disrupt the car dealership model that so desperately needs to be reevaluated. In several years, Tesla Motors investors may be able to thank Elio Motors for saving a key part of its business strategy.

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Read/Post Comments (12) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 19, 2014, at 4:08 PM, JackB125 wrote:

    Does anyone know if the homologation has been completed on this first model?

  • Report this Comment On July 19, 2014, at 4:15 PM, phillipzx3 wrote:

    Too bad they didn't copy Tesla's strategy of building a decent looking car. If I wanted fugly, I'd find an old 60's Datsun and install a modern engine.

  • Report this Comment On July 19, 2014, at 6:03 PM, Mentallect wrote:

    Tesla' no haggle policy. Now, surely even a republican can like that about Tesla?

  • Report this Comment On July 21, 2014, at 11:16 PM, cobranut wrote:

    Car prices are set by the MARKET, not the dealer.

    If the price is too high, the car won't sell.

    I happen to enjoy the ability to actually go SEE and DRIVE an example of the new car I plan to buy.

    Without dealers, you'll be looking through a website and buying based solely on pictures and ad hype.

    I also enjoy the art of the deal, and seeing just how low I can get the dealer to go to make the sale.

    I've generally gotten better deals than most, simply because I'm willing to get up and walk if they don't meet my price. :-)

  • Report this Comment On July 23, 2014, at 8:57 PM, gymzplace wrote:

    I have one of these on order and if possible I will be selling them. I do plan on making some styling changes that will sharpen them quite a bit.

    Gym

  • Report this Comment On July 25, 2014, at 8:30 AM, shak01 wrote:

    The "Company-Owned Store" debate is ongoing, with Tesla leading the way to bust the "dealership sales only" model.

    It is a State issue, until someone successfully challenges it in a federal court. The "Commerce Clause" of the U.S. Constitution is the likely path.

    "Congress is empowered to regulate and protect the instrumentalities of interstate commerce for those (intrastate) activities that substantially affect interstate commerce."

    But, until that happens...Elio would have to deliver their cars/motorcycles through an existing state authorized dealer. Under most state laws, a manufacturer can not hold a dealership license and a manufacturer's license

    Attempts, by a manufacturer to form separate "dealership only" subsidiary companies, where the supervision and control is substantially vested in the manufacturer's parent company, will be considered a "subterfuge" in State courts.

    The car dealership lobby is very powerful in the states, having roots in every town, boasting a long track record of community involvement.

    They're a tough crowd, comprised of well-heeled family owned businesses, providing good local jobs in tough times! They will fight very hard. It's their kids who inherit the dealerships!

  • Report this Comment On July 30, 2014, at 5:03 PM, danwat1234 wrote:

    cobranut, you can SEE and DRIVE a Model S, just go sign up for a test drive and you'll go to a Tesla Store to drive 1 and also SEE it.

  • Report this Comment On July 30, 2014, at 5:05 PM, danwat1234 wrote:

    An electric version of the Elio should be much more efficient than the ~4700 pound Model S and I think it looks good. An electric version may increase the curb weight of the Elio which wouldn't be a bad thing. Of course first they have to be successful with their gas version to move on to more advanced cars.

  • Report this Comment On July 30, 2014, at 5:32 PM, GrumpyOldGuy wrote:

    <<Officially classified as a motorcycle because it has fewer than four wheels, the Elio is nonetheless mechanically more car than it is bike and is every bit as instinctive to operate.>>

    I don't see it as being a (big) problem but if it is classified as a MC then you would need a MC endorsement on your drivers license to even take it for a test drive.

  • Report this Comment On July 30, 2014, at 5:51 PM, videopage wrote:

    The no-haggle system of auto sales is nothing new: it was quite successful when used Saturn dealerships selling, and was a good idea that I was sorry to see go.

    It was revived by several large car-rental companies for use in their car sales divisions, where they retired their fleets of rental vehicles.

    I'm not against car dealers... I'm just not happy with the price-bickering process. Dealers provide a valuable service, and there's no reason they can't operate on the profit a fixed-price system provides: they could make up for any loss by a lower need for price advertising.

    Gene Grossman - author of the Peter Sharp Mystery book series

  • Report this Comment On August 16, 2014, at 4:13 PM, bob9876 wrote:

    Finally a super efficient car that's AFFORDABLE and has AC. The looks of the cars if fine and should only get better with newer models. Makes no sense when I see a new motorcycle for the same price or more and the typical motorcycle get's poorer MPG than this car. Great idea to go with PepBoys for maintenance arrangement. My fingers are crossed that the RELIABILITY. I hope they pay attention to Consumer Reports reviews because I base my purchases on what good-valued products.

  • Report this Comment On September 29, 2014, at 9:31 AM, tdubois65 wrote:

    The no haggle (used car) dealerships still haggle by ripping you on trade in values. They also set that no haggle price so high, that sometimes you can buy new for a better value than the price 2-3 year old car.

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