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Tesla's Biggest Advantage in the Auto Industry

By Travis Hoium – Feb 21, 2020 at 8:19AM

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Building a new car company is hard, but it has a lot of advantages that Tesla is leaning into.

One of the advantages of being a new, disruptive company is that you can change the business model that legacy companies are stuck in. Marketing, distribution, and even production can be rethought in a way that makes sense in 2020, instead of being built for 1950. 

Tesla's (TSLA -1.11%) biggest advantage over competing automakers today is how it has updated the auto business model. Bloated dealerships are out of the picture, marketing budgets can be slashed, and Tesla can now generate more money on each sale than competitors can. And the new model might give Tesla a financial advantage for a while. 

Tesla Model Y driving on an open road.

A Tesla Model Y. Image source: Tesla.

Dealers are a legacy big auto can't get out of

When it came to rethinking the auto business model, Tesla started with where we buy vehicles. In the case of the auto industry, dealers have always played an outsized role in the sales process, but for relatively antiquated reasons by 2020 standards.

Dealers at one time gave scale to manufacturers and allowed for local service and sales that theoretically gave local communities better choice and service, rather than being controlled by a global behemoth. But with information so readily available in 2020, the dealer model is looking very out of date. 

Manufacturers like Ford (F -1.20%) and General Motors (GM -0.60%) are stuck with the existing dealer model, and that can actually hurt their margins. Dealers take part of the profit of each sale, so you can see that margins are lower than at Tesla. 

TSLA Gross Profit Margin (Annual) Chart

TSLA Gross Profit Margin (Annual) data by YCharts.

Even if legacy manufacturers wanted to get out of the dealer business, it would be very difficult. Franchises have contracts that are nearly impossible to get out of, and there are hundreds of dealers to negotiate with if they wanted to move in that direction.

To make matters worse, dealers can be the reason that companies don't make big product and culture shifts quickly. Look at the Chevy Bolt, which was a focus of GM corporate but was drowned out by dealers who are more interested in selling SUVs and trucks. Tesla can change on a dime if it wants to, while companies like Ford and GM are forced to handle dealerships all over the country if they want to change strategies. That's a big advantage to Tesla as the auto industry changes. 

Elon Musk is Tesla's marketing strategy

One of the big advantages Tesla has is that it doesn't have to spend on marketing the way other manufacturers do. Automakers spend billions on TV, radio, print, and search ads just to tell customers about their products. When Tesla launches a new product, it has a direct line to customers and gets lots of free media attention. 

Elon Musk is arguably the most valuable CEO in the industry today, and his ability to market Tesla's products without spending any money is a big reason why. 

Turning a giant ship is harder than it seems

The argument for Tesla disrupting the auto business is that it's simply too hard to turn a giant automaker like Ford, GM, or Toyota, which have spent decades perfecting their existing business model. Changing to electric vehicles involves everything from design to manufacturing to building a charging network -- and that's before we make it to the dealer network. 

Tesla has been able to rethink enough of the auto business that it could grow faster and have higher margins than competitors. That's the bullish case for the stock and why investors keep pushing it higher right now. 

Travis Hoium owns shares of Ford. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

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Tesla, Inc. Stock Quote
Tesla, Inc.
$238.13 (-1.11%) $-2.68
Ford Motor Company Stock Quote
Ford Motor Company
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Toyota Motor Stock Quote
Toyota Motor
$136.17 (-1.39%) $-1.92
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General Motors Company
$34.63 (-0.60%) $0.21

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