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Tesla's Revolutionary Business Model

Published June 24, 2013

Although this blog is dedicated to all things New York Lemon Law, occasionally we also focus on subjects affecting the broader automotive industry.  Before anything else in the industry comes the new car sale.  Lately there have been some trends which indicate that the way we buy new cars might be changing.  Tesla Motors has introduced a direct to consumer sales approach which circumvents the traditional dealership sales model.  And for some reason, this is controversial.

If you think about it, there are no particularly compelling reasons for the dealership sales model to continue to exist.  Why, for instance, can’t we pick out a car we want on a web site, chose options and colors, and have it delivered on a flatbed a few days later?   The dealership sales model might have made sense when information about automobiles was not as widespread and accessible as it is now.  But these days, a few clicks in a web browser from the comfort of your home is all the research you need.  Nonetheless, car manufacturers continue to introduce an expensive middle-man into the car buying process.  The reason is beyond me.

A year or so ago, I was at the Roosevelt Field mall with my wife.  We were waiting for a table at Houston’s and decided to walk around the mall to pass some time.  Imagine my surprise when I saw this:

Obviously, an auto dealership in a mall is unusual.  But this is no dealership.  A dealership sales department has hundreds of cars sitting on a lot generating finance charges that need to be paid.  In order to pay those bills, dealerships are staffed with dozens of sales associates, finance guys, managers, and support staff.  Dealerships are expensive.  This relatively small storefront I saw at the mall had just two cars and two sales associates.  The associates were demonstrating a beautiful electric car to hundreds of casual mallgoers, such as myself, attracted to the buzz.  Presumably, a few of these people get interested enough to plunk down 70k on a car.

It was brilliant marketing.  And it has worked remarkably too.  As of today’s date, Tesla Motors has an 11 billion dollar market capitalization, seeing its stock price more than double in the past three months.

So we see that a direct sales model can work.  And one has to believe that, from a financial perspective, the reduced cost of sales benefits consumers.  And it isn’t like you don’t have a chance to see the car in person, touch it, smell it, etc.  All you need to do is take a walk at the mall!

Does anyone then, other than the dealerships, still think that the value they add to the sales process outweighs the additional costs? 

Unfortunately, if a company like Tesla can succeed, and even thrive, without their services, the dealerships are going to feel threatened.  So teams of lobbyists, bought and paid for by dealership associations, are trying to make life difficult for Tesla in several different states including Texas, Virginia, North Carolina, and now, New York.  Specifically, they are trying to get state legislatures to outlaw direct to consumer sales by automobile manufacturers.  

Thankfully, at least, for the time being, the dealerships are being thwarted in New York.  A Bill pushed by dealership trade associations outlawing direct sales of cars to consumers had been expected to pass.  However, due to an apparent public outcry, the proposed legislation has been tabled until the next legislative session in January.  That’s great news for New York consumers.  Hopefully the bill is soundly defeated next year.

From a New York Lemon Law perspective, there is little difference whether cars are purchased at a dealership or directly from the manufacturer.  We’re typically more concerned with servicing of vehicles rather than sales.  Clearly, so long as manufacturers issue warranties they will need to make arrangements to fix their cars, and I don’t expect that this process will change any time soon.  Theoretically, they could de-emphasize dealership service departments along with sales departments.  They could even make arrangements with thousands of independent mechanic shops to perform warranty work on their vehicles.    This might impact our Lemon Law cases, particularly in terms of disparate record keeping by thousands of different independent businesses.  But there is a certain amount of efficiency that comes with specialization, and I don’t see any reason for manufacturers to switch from a network of exclusive authorized service facilities.  Even if their sales model goes the way of the dinosaur, dealerships can rest assured their service departments are probably safe.

Eugene Krukas, Esq.

2704 Grand Ave

Suite 4

Bellmore, NY 11710

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