The rapid rise of Tesla is putting many dealership owners on edge as a witness, possibly the beginning and end of their control in the auto industry. Dealerships control the price of a car, the cost of service, and the cost of replacement parts.
Also, they can mark up your qualified interest rates when financing, sell you overpriced warranties, and use any tricks necessary to make you pay more for a car than you should. Elon Musk wasn’t a fan of how this dealer model works, so Tesla doesn’t have any dealerships.
Why can tesla sell direct to consumers?
All major car manufacturers and consumers are forced to make transactions via a third-party-owned franchise in the US. It’s the law, and changing the rules is very difficult, even for consumers’ benefit. Not even a retail giant like Costco had the power to disrupt this sales model as their version of selling cars relies on getting special pricing through dealership partnerships and not directly through the manufacturer.
Ultimately, it makes them an additional middleman between you and the manufacturer. As a new car company in the modern age, Tesla was lucky enough to have the opportunity to avoid the traditional dealership model.
Tesla is the only major automaker in the US that can sell cars directly to consumers. Is that true? Yes, it is becoming a growing problem for traditional automakers, dealerships, and a vast industry of companies that support dealers like Cox Automotive and TrueCar. Ten years ago, Tesla was no longer a small company selling a few luxury sedans with a niche powertrain.
Every automaker is shifting towards electric vehicles, and Tesla is far ahead of the pack, especially with costs. Tesla has a cost advantage in manufacturing EVs. It also has the opportunity to create a significant cost advantage through its direct sales model, avoiding a lot of additional dealer costs.
The more cars Tesla sells, the bigger the problem becomes for dealerships. Tesla is slowly becoming a major player in the auto industry, and as the only automaker in the US, it can sell cars directly to consumers. An unfair advantage puts the spotlight on the laws forcing other automakers to play by different rules rather than force them to use dealerships.
How can Tesla sell directly to consumers?
With some good intentions, these outdated laws appeared long before Tesla was founded. Since dealership owners invested millions of dollars in starting a dealership, it made some sense to protect them. Plus, manufacturers relied on these dealerships to sell cars in every corner of the country. Today, Tesla can sell cars online and deliver them directly to a customer’s home. So the need to have franchises in every corner didn’t exist.
Since Tesla didn’t have any franchised Tesla dealerships that it could put out a business by operating its stores, they never violated these laws designed to protect dealerships. It meant Tesla could build its stores and service centers and even take orders online from its website. Web pages from other manufacturers must refer you to contact dealerships to get a price. Or maybe they’ll redirect you to a local dealership’s website.
A direct sales model is a costly and often overwhelming task for Tesla’s sales and service teams, and this is an advantage that gives Tesla a chance to cut out the costs of having a middleman. Naturally, manufacturers that can’t enjoy such benefits and dealerships that can’t capitalize on the sales of Teslas are firmly against this. So they have pushed regulators to limit or outright ban Tesla from selling its cars.
Many states still ban Tesla for not using a middleman, saying they want to create an equal playing field for automakers rather than giving Tesla a leg up on everyone else. A direct sales model can be advantageous, especially if you know what you’re doing.
Dealership Vs Direct consumers (Tesla’s pros and cons)
When someone has a problem with their car, they can usually find a nearby dealership to help them as quickly as possible. Dealers can also help with quality control, which Tesla suffers from. It’s not that Tesla can’t produce quality cars. It’s only that there’s not much of an incentive for them to do so.
Since dealerships buy their inventory from manufacturers to resell, they carefully inspect their cars and ensure that the manufacturer pays for any flaws before selling. It means that manufacturers have a quality they need to uphold, or dealerships will penalize them. These are excellent benefits for consumers, but unfortunately, that’s the end of the smooth road.
When a market is run exclusively by independent middlemen, manufacturers lose control over their sales process. Automakers can’t even control the price of their cars. They can set a manufacturer’s suggested retail price that nobody pays. Even though the FTC states that manufacturers can create pricing agreements with dealers or cut them off if they break the rules. It is how Sony can control the price of their highly sought-after and limited supply.
Consumers are getting tired of the way cars are being sold, and the only thing that makes haggling a car tolerable in the first place is because it’s the industry standard. Traditional automakers are already considering the way their cars are being sold.
Ultimately, with Tesla’s rise, we could see the beginning and end of the unwanted car dealership-only sales model. One day, traditional automakers and regulators will work together to improve how we buy a car. But most importantly, consumers will be given the option to choose between a dealership or a manufacturer’s store.
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