|September 13, 2016|
The battle between Tesla and your neighborhood car dealership
|The first Tesla store opened in Columbus, Ohio, 72 miles away. Then one popped up in Cincinnati. Soon, another was in Cleveland. Tesla's Ohio invasion was swift and --- to longtime auto dealers such as Blake Arbogast --- a growing threat, creeping ever closer.|
In Ohio, dealers sued and lobbied their legislators. One called Tesla's spread into his territory "Armageddon." All to no avail. Tesla, the electric-car manufacturer, and its boutique "galleries" are here to stay. The question now: Are traditional dealers?
Tesla, the California company founded by tech entrepreneur Elon Musk, plans to not only make electric cars as cool and fast as gas-guzzling sports cars but also to upend the way cars are sold. For generations, automobile manufacturers from Ford to Toyota to General Motors have been banned by state law from selling directly to consumers. Instead, their vehicles are sold by third-party dealers, many of which have deep ties to their community and political leverage.
But Tesla has been steadfastly eroding the traditional model, persuading an increasing number of states to allow it to sell vehicles directly to customers through its boutique stores and even over the Internet. In April, through little more than online viewing galleries, customers committed to buying 400,000 cars they had not seen in person.
Its stores are chic and small. A single model sits in the middle. And unlike Arbogast's dealership in Troy, Ohio, there's no lot outside with cars ready for sale.
Now, legacy auto manufacturers, including Arbogast's supplier, General Motors, are moving toward a future of sales directly from carmaker to driver, industry analysts say. That has triggered a standoff involving dealers, manufacturers and Tesla over the future of car sales, the role of the Internet and whether it is legal to sell a car --- often the second-largest purchase in the lifetime of an average American --- online.
If other carmakers followed Tesla, "essentially, it would put us out of business," Arbogast said.
The battles have been breaking out in capitals across the country over laws that prohibit manufacturers from selling directly to consumers. Arguments have occurred in statehouses in Texas, Ohio, Washington, New Jersey and more than 20 other states, with mixed results. Legislatures want to open up markets for electric vehicles but are wary of undercutting dealers, which are local economic and political engines.
A Missouri judge, for instance, ruled this month in favor of the state's auto dealers, saying Tesla could continue operating showrooms but could no longer sell cars directly to consumers. The company said it plans to appeal.
Tesla has had notable success, gaining the right to sell in about 20 states, including Washington state and Maryland.
"The reason they're Tesla so successful is because everybody is fed up with the traditional dealership model," said James Albertine, senior auto analyst at Consumer Edge Research. "If BMW or Audi or Lexus isn't working on that, then they're at a loss."
But it is not yet clear that the disruption of the auto industry will lead to the shuttering of dealerships the way digital sales of music and books led to the death of record stores and bookstores.
Tesla has struggled recently to meet earnings projections, and it posted a $293 million loss last quarter. It has also missed past production deadlines for vehicle orders, which has made investors wary of the company's rollout of the Model 3, a $35,000 electric vehicle set to come out in 2017.
Auto dealers are widely considered one of the most politically connected groups in the United States. The National Automobile Dealers Association has spent more than $4 million on lobbying since 2015 and year after year is the largest spender in the entire auto industry, according to the Center for Responsive Politics, an independent research group that tracks political donations. And in the fight for their survival, dealers are not giving up.
Dealers can also bank on their deep ties to their communities, where they have built up name recognition and goodwill, for decades in some cases.
"A franchised auto dealer, they're involved with all the banks that are around," said Zach Doran, president of the Ohio Automobile Dealers Association. "They've obviously got a significant customer base they've built over time. They have a tremendous amount of goodwill they've built up with charitable organizations."
Arbogast sells GMCs and Buicks at a dealership his father started in the 1990s. His cousins own a dealership down the road. Their children are in the business now, too.
He said he is relying on the Troy community and Ohio's government to see the long-term affects of potentially losing the business. Arbogast employs 220 people in a city of 25,000. He also contributes to local churches and sponsors youth sports teams and schools.
But he is worried about whether his business will be around for another generation of car buyers.
If other manufacturers started selling direct --- dealers' main fear --- it could put his business in jeopardy. Arbogast said: "You can only put so much trust in General Motors right now."
This is not the first time the automotive industry's analysts have said dealerships such as Arbogast's could soon be extinct.
Philip Evans and Thomas Wurster wrote in their 1999 book "Blown to Bits" that the new online era meant car dealers were "doomed to destruction." That same year, a General Motors vice president predicted that 70 percent of his customers would prefer custom online orders.
But that online marketplace model fizzled out. Buyers in the dot-com era did not take to purchasing cars online. They couldn't get up close and personal with the vehicles. Seeing how the car handles or testing the armrests is impossible to do online.
But today's consumers have now grown accustomed to buying all sorts of things on the Internet, even cars, no matter that they can't kick the tires.
"There's so many guesses you have to make about what consumers will want that it can be more efficient if you let the customers build them to order," said Brian Johnson, a Barclays automotive-industry analyst. "There's huge logic as to why a different distribution model makes sense."
Customers don't like haggling over pricing, dealers say. And they don't like shopping around looking for the best deal across different dealerships --- they want to go to one location, find the car they are looking for and drive it home.
Dealers say they have made substantial changes in everything from their sales practices to how they train staffers to meet those demands.
When Tesla debuted its Model S electric car in 2012, it quickly disrupted the traditional car-sales model. Its Model S sedan starts around $70,000, and with added features can cost about twice as much. The Model X, an SUV, starts around $80,000 and can be just as expensive with added components.
But you don't find these vehicles at Tesla shops or "galleries." Aside from a couple of showroom models at small stores for prospective customers to try on, buyers build their vehicles online, customizing everything from the paint color to the interior styling.
That process can happen on a computer or with the help of a salesperson. And customers can arrange test-drives at certain Tesla facilities.
After a $2,500 down payment, the design is sent off to the company's Fremont, Calif., factory for assembly and is delivered to one of Tesla's 67 nationwide service centers for pickup two months later.
"It's fundamentally an idea where if we woke up today, this might be the model that we have" to buy cars, Johnson said.
In 2014, Tesla's Musk said he would be open to a "hybrid system" of independent dealerships and company stores. But he has since doubled down in legislative battles. Car companies want to see how Tesla fares distributing the more affordably priced Model 3 before starting new distribution channels.
"The dealer groups in this country, they're strong," said Jessica Caldwell, director of industry analysis at Edmunds. "They have a lot of laws in place and have a lot of power. And though Elon Musk is ambitious, it might cause too much trouble for him than it's worth."