Skip to main content

Why Tesla should stop fighting auto dealers

By John O'Dell
updated 6:08 PM EDT, Tue March 18, 2014
Under a new law, Tesla Motors cannot sell cars directly to consumers in New Jersey effective April 1. Under a new law, Tesla Motors cannot sell cars directly to consumers in New Jersey effective April 1.
HIDE CAPTION
Tesla's electric car
Tesla's electric car
Tesla's electric car
Tesla's electric car
Tesla's electric car
Tesla's electric car
Tesla's electric car
Tesla's electric car
Tesla's electric car
<<
<
1
2
3
4
5
6
7
8
9
>
>>
STORY HIGHLIGHTS
  • New Jersey's new law makes it illegal for Tesla to sell cars directly to consumers
  • John O'Dell: Tesla is not about to upend the franchised dealership system
  • He says as selling and servicing cars is an entirely different business from making them
  • O'Dell: As Tesla grows, it will also need to use the traditional dealership model

Editor's note: John O'Dell is senior green car editor at Edmunds.com, an online resource for car shopping and automotive information. Edmunds.com has purchased a Tesla Model S for long-term review purposes. Follow the website on Twitter: @edmunds

(CNN) -- Tesla Motors prides itself on promoting a disruptive technology -- electric cars -- but it was Tesla itself that was disrupted recently as New Jersey said it is illegal, effective April 1, to operate factory-direct car sales in the state.

New Jersey is not alone. Arizona, Maryland, Texas and Virginia also ban direct sale of cars to consumers.

Understandably, Tesla CEO Elon Musk was upset and has encouraged people in the Garden State to go to New York or Pennsylvania to buy Tesla cars.

John O\'Dell
John O'Dell

Many wonder whether Tesla has been out to turn the car-marketing world on its head, do away with the franchised dealership system and change forever the way people in the U.S. buy cars.

It can seem that way as Tesla fights to keep selling its cars direct to its customers, but missed in the speculative fervor is that Musk himself has said that as it grows, Tesla probably would be looking at expanding its presence -- and sales -- through franchised dealerships.

Today, progressive dealerships around the country representing every automaker are creating experiences that make car buying easier and deliver a high level of customer satisfaction. Musk could cherry-pick dealers who can deliver the experience he wants for his customers, just as Lexus did when it launched its brand in the U.S. in 1989.

Selling and servicing cars is an entirely different business from making them. Using franchised dealerships relieves the car manufacturer of the tremendous capital burden of paying for and staffing brick-and-mortar facilities. That's one reason the auto industry went with that model in the first place.

Besides, car dealerships are important corporate citizens, pumping into the national economy hundreds of millions of sales-tax dollars, tens of millions of dollars in charitable contributions and billions of dollars in paychecks. That makes them valuable economically. It also gives them clout that few politicians want to challenge.

Elon Musk: Affordable Tesla on the way
Automakers show off new cars in Detroit
On GPS, Musk talks about future of Tesla

More importantly for car buyers and car owners, a national network of franchised dealerships with local sales and service facilities can make buying and caring for a new or used vehicle relatively easy.

You can see why the idea might ultimately appeal to Tesla.

Tesla -- as innovative, different and disruptive as it may be -- is still a small player in a very large arena. It sold just under 25,000 cars last year globally. General Motors sold more than that every day. If Tesla has an eye on significant growth, the traditional dealership model, in its most progressive form, is a path the brand shouldn't ignore.

Today, Tesla is arguing that it has no existing franchised dealers with which its factory sales compete, and that it is selling something so unique that an entirely different sales model is necessary at the beginning. That won't always be the case.

So far, Tesla's game plan to make its money purely on car sales. (Electric cars bring in almost no service and maintenance income, which is lifeblood to most car dealers.) There also is no bargaining at Tesla, where the manufacturer's suggested retail price is the sales price, take it or leave it.

That works when your customer base is largely a high-income group of "early adopters," you have no real competition for your $70,000-$120,000 vehicles, you don't take trade-ins and the profit per vehicle allows you to pamper your customers with personalized services.

That will change in a few years, though, when Tesla begins selling its planned third-generation electric car, one priced to compete with the likes of BMW's 3-Series. Reaching out to the mid-to-upper mass market where there is a lot of competition for the consumer's attention -- and dollars -- takes a different kind of approach. When Tesla scales to reach that more mainstream audience, turning to a more traditional sales format may indeed be necessary.

Until then, the company has a high-profile battle on its hands. The courts, and the market, will decide the merits of Tesla's arguments. Even if Tesla were to prevail on the legal front in every case and win the right to continue selling direct to car shoppers in every state, that decision would hardly override the existing franchise protection laws and the value that locally owned and operated dealerships can bring to the equation.

Follow @CNNOpinion on Twitter.

Join us at Facebook/CNNOpinion.

The opinions expressed in this commentary are solely those of John O'Dell.

ADVERTISEMENT
Part of complete coverage on
updated 8:59 AM EDT, Mon September 22, 2014
You could be forgiven for thinking no one cares -- or even should care, right now -- about climate change, writes CNN's John Sutter. But you'd be mistaken.
updated 5:32 PM EDT, Sun September 21, 2014
David Gergen says the White House's war against ISIS is getting off to a rough start and needs to be set right
updated 9:00 AM EDT, Mon September 22, 2014
John Sutter boarded a leaky oyster boat in Connecticut with a captain who can't swim as he set off to get world leaders to act on climate change
updated 9:53 AM EDT, Mon September 22, 2014
Ruben Navarrette says making rude use of the Mexican flag on Mexican independence day in a concert in Mexico was extremely tasteless, but not an international incident.
updated 9:59 AM EDT, Mon September 22, 2014
Michael Dunn is going to stand trial again after a jury was unable to reach a verdict; Mark O'Mara hopes for a fair trial.
updated 7:22 PM EDT, Fri September 19, 2014
Is ballet dying? CNN spoke with Isabella Boylston, a principal dancer at the American Ballet Theatre, about the future of the art form.
updated 5:47 PM EDT, Fri September 19, 2014
Sally Kohn says it's time we take climate change as seriously as we do warfare in the Middle East
updated 8:56 AM EDT, Mon September 22, 2014
Laurence Steinberg says the high obesity rate among young children is worrisome for a host of reasons
updated 9:02 AM EDT, Fri September 19, 2014
Dean Obeidallah says an Oklahoma state representative's hateful remarks were rightfully condemned by religious leaders..
updated 3:22 PM EDT, Fri September 19, 2014
No matter how much planning has gone into U.S. military plans to counter the Islamic State in Iraq and Syria, the Arab public isn't convinced that anything will change, says Geneive Abdo
updated 11:44 AM EDT, Fri September 19, 2014
President Obama's strategy for destroying ISIS seems to depend on a volley of air strikes. That won't be enough, says Haider Mullick.
updated 9:03 AM EDT, Fri September 19, 2014
Paul Begala says Hillary Clinton has plenty of good reasons not to jump into the 2016 race now
updated 11:01 AM EDT, Fri September 19, 2014
Scotland decided to trust its 16-year-olds to vote in the biggest question in its history. Americans, in contrast, don't even trust theirs to help pick the county sheriff. Who's right?
updated 9:57 PM EDT, Thu September 18, 2014
Ruben Navarrette says spanking is an acceptable form of disciplining a child, as long as you follow the rules.
updated 11:47 AM EDT, Fri September 19, 2014
Frida Ghitis says the foiled Australian plot shows ISIS is working diligently to taunt the U.S. and its allies.
updated 3:58 PM EDT, Fri September 19, 2014
Young U.S. voters by and large just do not see the midterm elections offering legitimate choices because, in their eyes, Congress has proven to be largely ineffectual, and worse uncaring, argues John Della Volpe
updated 9:58 PM EDT, Thu September 18, 2014
Steven Holmes says spanking, a practice that is ingrained in our culture, accomplishes nothing positive and causes harm.
updated 2:31 PM EDT, Thu September 18, 2014
Sally Kohn says America tried "Cowboy Adventurism" as a foreign policy strategy; it failed. So why try it again?
updated 10:27 AM EDT, Thu September 18, 2014
Van Jones says the video of John Crawford III, who was shot by a police officer in Walmart, should be released.
updated 10:48 AM EDT, Thu September 18, 2014
NASA will need to embrace new entrants and promote a lot more competition in future, argues Newt Gingrich.
updated 7:15 PM EDT, Tue September 16, 2014
If U.S. wants to see real change in Iraq and Syria, it will have to empower moderate forces, says Fouad Siniora.
updated 8:34 PM EDT, Wed September 17, 2014
Mark O'Mara says there are basic rules to follow when interacting with law enforcement: respect their authority.
updated 9:05 AM EDT, Tue September 16, 2014
LZ Granderson says Congress has rebuked the NFL on domestic violence issue, but why not a federal judge?
updated 7:49 AM EDT, Tue September 16, 2014
Mel Robbins says the only person you can legally hit in the United States is a child. That's wrong.
updated 1:23 PM EDT, Mon September 15, 2014
Eric Liu says seeing many friends fight so hard for same-sex marriage rights made him appreciate marriage.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT