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

Tesla Motors may get help from an unlikely automobile startup in the fight to fix the old-school car dealership model.

Jul 19, 2014 at 1:10PM

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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

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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.

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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.

Warren Buffett's worst auto-nightmare (Hint: It's not Tesla or Elio Motors)
As Tesla Motors and Elio Motors attempt to fix the car dealership model, Warren Buffett has his eyes on one disruptive technology. In fact, he recently called it a "real threat" to one of his favorite businesses. An executive at Ford called the technology "fantastic." The beauty for investors is that there is an easy way to invest in this megatrend. Click here to access our exclusive report on this stock.

Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolioCAPS pageprevious writing for The Motley Fool, or his work for SynBioBeta to keep up with developments in the synthetic biology industry.

The Motley Fool recommends Ford and Tesla Motors. The Motley Fool owns shares of Ford and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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