When Tesla takes hold in Australia, your car dealer won’t like it

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Tesla’s introduction to Australian roads promises to change both the type of cars we drive and potentially the way we buy them.

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The Conversation

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Tesla’s direct-to-consumer showroom model has been the subject of legal challenge in the US. Paul Swansen/Flickr, CC BY-ND

Electric vehicle maker Tesla will soon deliver its cars to Australian roads. This promises to change both the type of cars we drive and potentially the way we buy them.

Tesla remains a relative oddity in the US auto market. It is on target to sell around 35,000 cars in 2014, in comparison to GM’s 10 million. But Tesla’s market capitalisation (which is a shade below US$30 billion) is around two-thirds of GM’s – so the pundits see plenty of upside for its EV technology.

Interestingly, it is not just Tesla’s cars and its pioneering technology that have captured the interest of many industry observers, but also its challenge to traditional industry selling practices.

Tesla’s new generation cars

Tesla was founded in 2003, and has been led by Elon Musk since 2004. The South-African born Musk is in the mould of Howard Hughes. He made more than US$100 million as a major shareholder in PayPal (which eBay later acquired), parlaying this into a cornerstone investment in Tesla and another company involved in space exploration, SpaceX.

While the word “eccentric” may be too strong for Musk, he is certainly unbound by convention. For Tesla, Musk has chosen to bypass the traditional automotive retail model in the US. His distribution business model markets its cars directly to consumers. This is generally done through gleaming showrooms in upmarket retail malls – somewhat akin to Apple’s stores with their (ahem) “Genius Bars”.

Surprisingly for some, Tesla’s retail distribution model has been subject to legal challenge in the US. Legislation in many American states tightly regulates the manner in which cars are sold. This legislation was instituted to protect auto retailers from the market power of the auto makers, but has provided the basis of numerous legal appeals aimed at requiring Tesla to adopt a franchise dealer network much like its competitors.

In essence, a move by Tesla to sell cars directly to consumers sets a worrying precedent for many US auto retailers. They can see the possibility of other new entrant car makers (or worse, legacy car makers like GM and Ford) completely bypassing them, eroding their margins and destroying their industry’s viability.

Direct to customers – a better way of selling?

The rise of the internet has caused the role of retail franchisees in many industries to decline in importance. Once an important conduit for information, most customers can now access extensive comparative information online.

In Australia we’ve seen a number of similar approaches, including by furniture firms Matt Blatt and Natuzzi. Here, customers visit company-owned showrooms, but order and have their products delivered direct from the factory.

This approach has reduced inventory and wastage. It also cuts out the retail intermediary level, with its markups and margins. It’s an attractive model for companies like Tesla with strong brand awareness and loyal customers.

Recently, large US-based clothing retailers like Macys have slashed their shipping fees for products sent from their US-based warehouses to Australia. Firms like Kogan have established business models that link Asian factories to Australian consumers, entirely bypassing brands, wholesalers and retailers. Similarly, in grocery retailing, branded manufacturers’ margins are being targeted by retailers like Aldi and Coles who are going directly to generic producers for their own-branded products.

Creative destruction of business models

What we are seeing, from Tesla and elsewhere, is the terminal decline of many of the business models we’ve become accustomed to. Like any major change, this will have both positive and negative impacts – depending on where you stand.

For Australian car buyers, the entrance and potential success of Tesla’s retail distribution model should put downward pressure on Australian car prices. Australians pay among the highest prices in the world for new cars (after controlling for tax variations). In many Australian capitals, car dealers have been outdoing themselves to create ostentatious showrooms, passing on these costs by adding among the highest dealer margins in developed economies. The key problem is no-one asked the customer if they wanted all of the fripperies, or would prefer a lower price.

With a new Model S costing around A$90,000, Tesla is not operating in the discount car market, but a likely trajectory for the Australian automotive retail industry will be the growth of business model innovations that bypass expensive wholesale and retail arrangements. New (and small) entrants like Tesla may be pioneers in this respect, but it’s likely a large player will follow suit once the economics and consumer acceptance of this way of buying cars becomes established.

The Conversation

Source: The Conversation. Reproduced with permission.

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13 Comments
  1. Marka 5 years ago

    Test drove the Model S yesterday, I know have no doubt that it is the future

  2. john 5 years ago

    Just a note, not one dealer likes electric cars.
    Except for front end mark-up they do not have a business case.
    Electric is the commute vehicle of choice.

    • blocker 5 years ago

      business case for who? the dealers? of course they dont. research a bit and you may find out there are a few big name car makers that have plans to rollout their range in EV only. have you driven one? do you realise the power they get from less kW?

      • john 5 years ago

        mate I rung Nissan in Australia and told them they will be selling the Leaf…… stunned silence they had no idea what I was talking about they put it on sale at $52k while I could get it anywhere in world at $32k so perhaps I am totally across the electric car

        • blockerroach 5 years ago

          You will have that price difference on most cars now.
          I’m taking about ev for existing range of models.

          • john 5 years ago

            The reason for the price difference was front end loading.
            At the time the Aussie $ was at parity
            It is still a no brainer if you are about 30 and live in a city get EV and you will be very happy saving lot of money for 20 to 30 years as a commute vehicle.

        • Rob G 5 years ago

          I went into my local Nissan dealer and they all shrugged their shoulders and said I’d have to go to Cambelltown as they don’t sell the leaf. Tragic, as I live on the other side of Sydney, over an hour away. I doubt Tesla will be so ho-hum.

  3. Ken Dyer 5 years ago

    After checking out the website, I found I can buy a Model S online. I know the price, the discounts, the costs. I don’t have to talk to a saleman as all the information is right there. Works for me.

  4. Chris Fraser 5 years ago

    While it may be economic for Tesla to bypass franchise style dealers I guess that, sometime in the future, Tesla will be able to close down the showrooms completely. Since very few of us would buy a new car without getting close to it, feeling it and driving it (fast), Tesla could offer a system where they reward existing Owners to demonstrate the cars to the aspiring owner (whether it results in an order or not). The Owner writes a list of those they would be comfortable demonstrating to, the aspiring owner registers their interest … and in a moment they are connected to each other by Tesla. The new owner has a benefit of being nearby, getting an experience and an objective testimonial from the current Owner, and product information for options, etc.

    • Peter Thomson 5 years ago

      Write to Elon mate, that is one seriously cool idea!
      I would be happy to make my new car available for demonstration for a commission. just have to sort out the insurance side…

      • Chris Fraser 5 years ago

        Cheers Peter. Elon should be able to throw in some capable insurance for the first two years at least …

    • Miles Harding 5 years ago

      Really good idea.

      Other reasons to be cheerful include Tesla’s policy on pricing the car which seems to be along the lines of ‘what it actually costs’. This is bound to make the Merc and BMW dealers unhappy.

  5. Rob G 5 years ago

    No more dodgy car salesmen, hooray! Now if we could just get rid of lawyers and right wing idealogues politicians…

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