As I wrote one week ago, an unexpected executive order from the Christ Christie administration means that Tesla Motors will not be able to sell its cars in New Jersey starting April 1, 2014. In that article, I tried to summarize in one paragraph the backstory as to why Tesla sells its vehicles itself rather than through conventional auto dealerships. However, if you want a much better and more detailed explanation from the CEO of Tesla Motors himself, Elon Musk has a great write-up on that in a letter "To the People of New Jersey" that was published on the Tesla blog on Friday. The letter goes all the way back to why dealerships were started in the first place.
Of course, Elon also discusses the New Jersey story in particular. In that section, Elon makes a crack about Christie's infamous bridge closure and also compares the Christie crew to the mafia (well, just a little bit).
First, let's tackle some of the key reasons Tesla doesn't sell through dealers.
Auto dealers don't know how to sell or don't want to sell electric cars
Elon notes that auto dealers "have a fundamental conflict of interest between promoting gasoline cars, which constitute virtually all of their revenue, and electric cars, which constitute virtually none." In other words, why would you focus on the problems of 99.999% of you products in order to sell a competing product? "Moreover, it is much harder to sell a new technology car from a new company when people are so used to the old. Inevitably, they revert to selling what’s easy and it is game over for the new company."
It's common knowledge within the electric car world that most auto dealers are horrible at selling electric cars. I've heard countless stories of people going in to ask about or test out an electric car and being told all kinds of negative things about the cars, with little or no focus on their benefits. Furthermore, I've heard of dealers leaving the car without any battery life and having to push it to the charger before charging up a bit and providing a test drive, dealers giving test drives with almost no charge left (which would be like giving a test drive of a gasmobile when it's on "empty"), dealers not really knowing anything about the electric car model or models they sell, and dealers saying ridiculous things about the cars that aren't even true. As people who own electric cars tell their friends and relatives when they are going to a dealer for the first time, "be prepared for the worst, and don't expect them to know anything."
Elon goes on to mention some of the auto startups that have had short lives while trying to sell through dealerships: "The evidence is clear: when has an American startup auto company ever succeeded by selling through auto dealers? The last successful American car company was Chrysler, which was founded almost a century ago, and even they went bankrupt a few years ago, along with General Motors. Since the founding of Chrysler, there have been dozens of failures, Tucker and DeLorean being simply the most well-known. In recent years, electric car startups, such as Fisker, Coda, and many others, attempted to use auto dealers and all failed."
Granted, there are other reasons that contributed to their failures, but as the record shows, auto startups selling through dealerships have had 0% success since Chrysler was founded in 1925.
Electric cars require minimal maintenance and servicing, which is not good for dealers' bottom lines
This is a big one. Aside from the above, the fact of the matter is that dealers make a lot of money through maintenance and servicing of cars, and electric cars require a ton less maintenance and servicing than gasmobiles.
An even bigger conflict of interest with auto dealers is that they make most of their profit from service, but electric cars require much less service than gasoline cars. There are no oil, spark plug or fuel filter changes, no tune-ups and no smog checks needed for an electric car. Also, all Tesla Model S vehicles are capable of over-the-air updates to upgrade the software, just like your phone or computer, so no visit to the service center is required for that either.
Maintenance and servicing makes very little sense as a profit center for electric cars, and Elon personally made a firm decision that he didn't want that to be a part of Tesla's profit.
Going a step further, I have made it a principle within Tesla that we should never attempt to make servicing a profit center. It does not seem right to me that companies try to make a profit off customers when their product breaks. Overcharging people for unneeded servicing (often not even fixing the original problem) is rampant within the industry and happened to me personally on several occasions when I drove gasoline cars. I resolved that we would endeavor never to do such a thing at Tesla, as described in the Tesla service blog post I wrote last year.
Honorable. Welcomed. And also another great business decision. Nobody wants to support a company that is interested in ripping you off. We want to support companies that care about us and do everything the can to make our customer experience better. It may have been driven by basic morals, but this was also widely considered a very good business move. Of course, it simply doesn't mesh with the way dealerships earn their money.
Making fun of "customer protection" claims
Those supporting the laws requiring that all car companies sell their vehicles through dealerships have claimed that such laws protect the customer. The idea is that dealerships increase competition and act as important middlemen that are more willing to identify manufacturer defects and stimulate recalls that hurt manufacturer bottom lines. Manufacturers would theoretically prefer to ignore problems and avoid recalls, while dealerships are actually incentivized to find problems (as discussed above). Elon's take is that that's a bunch of bull:
The rationale given for the regulation change that requires auto companies to sell through dealers is that it ensures “consumer protection”. If you believe this, Gov. Christie has a bridge closure he wants to sell you! Unless they are referring to the mafia version of “protection”, this is obviously untrue. As anyone who has been through the conventional auto dealer purchase process knows, consumer protection is pretty much the furthest thing from the typical car dealer’s mind.
Indeed, auto dealers have one of the worst reputations around. It's common knowledge that many of them rip people off left and right. But it's hard to know which you can trust and which you can't, so competition doesn't really help here. Now, if a manufacturer was known for ripping people off or selling faulty products, their reputation and sales would crumble. So, one could argue that they are even more incentivized than dealerships to provide good, low-priced service when things go wrong.
Of course, in the case of Tesla, the company is known for its excellent customer service and customer satisfaction. "Consumer Reports conducts an annual survey of 1.1 million subscribers, which factors in quality, reliability and consumer satisfaction," Elon notes. "The Tesla Model S was the top overall pick of any vehicle in the world, scoring 99 out of 100. This is the highest score any car has ever received."
How do conventional auto manufacturers tend to do? Ford got a score of 50. BMW, which sells more cars in Tesla's luxury segment, got a score of 66. So, wait, who has the happier customers?
Following the Tesla Model S, the best results were for the Porsche Boxter at 95, and then the Porsche 911 and Chevy Volt — another plug-in car — at 91. Of course, the Porsche Boxter and Porsche 911 are extremely high-end, high-quality products that people pay big money for — one would assume they do well. The Chevy Volt, oddly, is a compact car that costs less than the average new car after the federal electric vehicle tax credit. Despite its amazingly high rating, I've heard numerous stories of dealers essentially trying not to sell the Volt to interested customers, let alone its fully electric cousin the Chevy Spark EV.
Lloyd passed along a great article from NJ.com that includes a number of interesting points regarding the dealership lobby, and which also discusses how even many in the right wing are pissed about the Christie administration's move. Before delving into those points, here are a few quick ones of my own:
It's well known that Tesla is adored by people on both the right and the left. It makes the best mass-manufactured car in the world. Plus, Elon is a pretty "free market" kind of guy. So, this move was sure to piss off some righties. Plus, it's very obviously a move against "free market capitalism." However, I think there are two subtler points to make here. One is that the right wingers who are supposedly big fans of a free market often do and support things that are very anti-free market when it helps them or their buddies. So, being on the side of specific regulations isn't automatically going to land a Republican in political prison. Furthermore, although I'm sure it will surprise many readers here, a nationwide survey conducted last year found that only 22% of respondents were familiar with the Tesla Model S. Only 22%! So, perhaps Christie's crew thought that an anti-Tesla move wouldn't generate too much publicity. (Woops.)
Now, getting to the NJ.com article, Daniel O’Connor of the free-market Disruptive Competition Project in Washington, is paraphrased as saying. "If other governors follow Christie’s lead, Tesla will be driven out of business.... But if Christie were really the free-market advocate he pretends to be, this would have been a great opportunity to prove it."
He also mentions the Richie Rich dealership club that is at work here. "They have an average of 17 millionaires in every legislative district," he said.
Furthermore, he backs up Elon's underlying thesis discussed above. He notes that Tesla is selling about 20,000 cars per year, which equates to about 1 car per dealership. Selling one single unit of one model — a model built completely differently from most cars — means a loss for the dealerships. It wouldn't happen.
But rather than support the free market and let an unhelpful rule die through neglect, Christie's self-appointed administration slipped in an obscure item for a Tuesday meeting. "Approval of Item 1403-03 — Licensing Service Regulation." Some people in the EV community reportedly noticed. And hence Tesla's statement last week and the drama that has ensued.