Tesla Motors Inc (NASDAQ:TSLA) is working to upend the traditional auto industry with its electric vehicle, or EV, business model. But its cars aren't the only area in which it's trying to innovate, and that's got some auto industry participants upset. As Tesla wages a state-by-state battle to gain the right to sell its cars directly to customers, many EV enthusiasts are left wondering why they can't even test drive a Tesla in their state. The answer has bigger implications than you might think.
The middle man
When you go to your local Ford Motor Company dealer you are actually visiting a company that has an agreement with Ford to sell its cars. Essentially, the dealer is just a middle man. The reason for that goes back to the auto industry's first days when having these franchise agreements allowed the auto makers to quickly expand their reach without having to sink valuable investment dollars into the effort. It's a lot like the McDonald's model, only states have enacted rules over time that protect the dealers from competition.
That's where Tesla comes in. It's taken a different approach to the auto industry. For example, partnering with other auto makers for parts that are generic and focusing its engineering effort on the parts of its vehicles that are unique. It's also been looking to upend the traditional sales model by bypassing dealers and selling directly to customers. Dealers, understandably, aren't too happy.
Tesla can sell direct in 22 states in some form, but is actually banned from doing so in 26 states, with another two under contention. In fact, when Tesla decided on Nevada for its massive battery Gigafactory, one of the side benefits was getting legal approval to sell direct (you know, in addition to gaining over a billion dollars worth of incentives). However, the company recently got shot down for direct sales in Michigan when a bill backed by auto dealers that essentially bans direct sales was signed by the state's Governor.
You might think this is all about money. Indeed, by cutting out the middle man, Tesla won't have to pay the middle man. But that's not the only reason and, in fact, may not be the most important one. Diarmuid O'Connell, Tesla's vice president of business development, explained to Bloomberg earlier this year that the company sees direct sales as, "...logical and pragmatic..." because Tesla isn't just selling cars, it's selling a new technology.
That makes total sense, because it would reflect poorly on Tesla's brand image if a salesperson provided the wrong information about the company and its products to a customer. But there's even more to it than that because Tesla isn't just selling cars. By selling directly, Tesla can control the entire Tesla experience. If you've ever purchased a car from a dealership, you know the process can leave a bad taste in your mouth. Tesla doesn't want to let someone else craft its image.
The best comparison of what Tesla is looking to do may be Apple (NASDAQ:AAPL). When Apple opened its first stores in 2001, then CEO Steve Jobs noted, "The Apple stores offer an amazing new way to buy a computer." Admittedly, Jobs thought everything Apple did was "amazing," but walking into an Apple Store is vastly different from walking into, say, a Best Buy.
Not only is it an Apple salesperson's job to know the ins and outs of Apple gear, but they are also there to push the hip factor, too. The company almost always offers a great experience, from sales person to iPhone. And Apple Stores selling and servicing tightly controlled and regulated Apple products is a core reason why Apple has such a loyal following.
Show me the love ...
Tesla, understandably, wants to build the same kind of loyal following and leading edge image. And making sure that it controls the entire experience, like Apple, is a good way to set its cars, and car buyers, apart from the pack. If you can't buy a Tesla in your state it's because auto dealerships don't want to cede control of what is a roughly $700 billion industry.
For Tesla, however, making sure its niche product stands out from sales experience, to product, to service, is worth every dime it costs to fight this entrenched middle man business. The direct sales issue alone won't make or break Tesla's business, but it will make a big difference in how the company, its products, and its customers are viewed by the world. With Apple proving just how important controlling one's image can be, it's definitely worth monitoring Tesla's state-by-state direct sales battle if you own or are considering investing in Tesla. Being able to sell direct is an image thing, but image is an increasingly valuable commodity these days.