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How Apple, Inc. Could Help Tesla Motors Take on Traditional Car Dealerships

By Evan Niu, CFA - Feb 22, 2016 at 9:33AM

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When it comes to direct sales, Apple could be a powerful ally for Tesla.

Apple Stores might eventually sell you a car directly. Image source: Apple.

Apple (AAPL -1.80%) is seriously considering making an electric car. This we know. What we don't know is whether or not the Mac maker will actually pull the trigger or not. But there's actually something else we know: We know how Apple would sell its Apple Car if it decides to move forward.

Much like Tesla Motors (TSLA -1.76%), Apple will pursue a direct sales model for all the same reasons it opened up its own network of retail stores 15 years ago.

Apple will be in Tesla's corner
Tesla's battle with incumbent automakers over the traditional dealership model has waged for years, with no signs of letting up anytime soon. In fact, General Motors (GM -5.05%) just authored a bill in Indiana (HB1254) that would push Tesla out of the state based on protectionist dealer laws. Despite the fact that the average consumer is overwhelmingly in favor of direct sales, local lobbying is a powerful force and a meaningful campaign contributor.

However, if Apple were to jump in, it would absolutely push for direct sales. And Apple has a significantly larger customer base than Tesla. The electric automaker does its best to rally support to pressure policymakers, but Apple could potentially tip the scales in Silicon Valley's favor. This fight is really about bolstering public perception, because that will force the hand of lawmakers.

Education, not sales
Tesla's retail sales reps are not primarily trained or compensated on sales. In states where Tesla is allowed to sell through showrooms, reps do earn a small commission for sales, but it's a very small fraction of their overall compensation. This gives them some incentive, but also removes the high-pressure sales tactics that characterize the industry.

Tesla focuses on education at its retail locations, just like Apple. Image source: Tesla.

Instead, Tesla retail reps focus on education. Selling electric cars requires a significant amount of education. How long do I need to charge? What does electricity cost compared to gas? Can I take long-distance road trips when I want to? What's the difference between all the types of chargers out there? This is why the traditional dealership model simply would not work for Tesla. Not only do electric vehicles require less service than gas cars, thereby undermining one of the dealers' primary profit centers, but it also just takes a lot more time to close a sale.

You'll note that this is precisely the model that Apple uses, too. Apple Store reps are also primarily trained to educate consumers about the product. The key to this strategy is that the product sells itself. Significantly, this reinforces the view that the absolute most important thing for a company to focus on is creating a compelling product. If you get that right, the rest takes care of itself.

Inventory is evil
Demand is so strong for Teslas that it doesn't even need to build inventory. Tesla can't even keep up with demand. This is how it is able to drive sales through Apple-esque showrooms at locations with high foot-traffic. Can you imagine General Motors selling cars in a mall?

It's not realistic for most automakers since they need to have inventory lots that take up a lot of real estate. But Tesla educates consumers about the car, and then they go order one online. It takes Tesla longer to produce and deliver the car, but it's worth the wait.

You can easily imagine Apple adopting an identical model. Apple allows customers to customize build-to-order Macs, and they're shipped directly from China to their doorstep. Apple wouldn't need a large inventory of cars on hand, and indeed Tim Cook believes that inventory is evil. Apple does have envious inventory turnover figures to maintain, after all.

It would be easy for Apple to implement a build-to-order model for electric cars, and it would have no problem with generating demand. Unlike Tesla, Apple's marketing machine is a beast (mostly because Tesla does no advertising).

To the death
Of course, dealers will continue to fight to the death (literally). The direct sales model is very much an existential threat. They'll cite things like "intra-brand competition" as proof that their existence is justified, even though the argument is fundamentally flawed.

Removing the middleman will reduce costs for consumers. Dealers compete to reduce their markup, but I think consumers would agree that they would prefer no markup whatsoever. This would also remove the whole haggling process, which is easily one of the most dreaded aspects of buying a car. Tesla doesn't negotiate because it doesn't have to.

Besides, can you imagine Apple negotiating on price?

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$136.72 (-1.80%) $-2.51
Tesla, Inc. Stock Quote
Tesla, Inc.
TSLA
$673.42 (-1.76%) $-12.05
General Motors Company Stock Quote
General Motors Company
GM
$31.76 (-5.05%) $-1.69

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