Tesla Motors Inc. struck a deal Wednesday with Ohio auto dealers that could allow the electric-car maker to ease a battle over its direct-to-consumer retailing model, at least for the near term.As I recently wrote, the auto dealers don't care about Tesla. It's currently a niche high-end product.
Under the agreement, Tesla would be allowed to keep operating two company-owned retail stores in the state, and open just one more. The deal requires approval from the Ohio state legislature. The proposed bill would bar all other auto makers from bypassing franchised dealers to retail cars.
What they're really worried about is the idea of Tesla's business model—selling direct to consumers. This Ohio deal, if approved by the legislature, confirms that. If Tesla sells direct to consumers? They don't care. If Ford or GM do, then they're history.
But why shouldn't manufacturers be allowed to sell to whoever they want? Why does the auto industry have a government-enforced middle-man costing consumers more money and leaving those car brands' images in the hand of sleazy dealers?
More below the fold.
Apple found that the best way to sell its products was to control the entire purchasing experience, from beginning to end. From their website to their Apple Stores, that direct-to-consumer shift was a major part of the company's turnaround and current success. Yet for Ford, GM, Toyota and the rest of those auto manufacturers, the first experience consumers have with their products is at decidedly unpleasant dealerships. So dealerships have plenty to fear. Consumers hate them, and would kill to have a way to avoid them!
Ironically, dealerships make the bulk of their money through their service departments:
For the Penske Automotive Group, which has operations in the United States and in the United Kingdom, service and parts represented 13 percent of annual revenues, but 44 percent of the gross profits. The gross margin for service and parts was 57 percent for the Penske group, vs. just 8 percent for new-vehicle sales.And that's the way forward: let manufacturers decide how they sell their cars, and transform themselves into pure service operations. But of course, 44 percent is less than 100 percent, so those dealerships will continue to use their lobbying power to distort the market and force consumers to use a service no longer needed.
Because they sure aren't winning customer loyalty by providing great service. Instead, they're making arguments like these:
This Musk guy, he wants all the profits for himself.... because what's important to dealers is squeezing out cash from a product they don't even produce.
"You tell me they're gonna support the little leagues and the YMCA?" [Bob Glaser, head of the North Carolina Automobile Dealers Association] demanded. Tesla says, actually, it will — not that sponsoring youth athletics is, or should be, required to do business in America.You know what else supports little leagues? Parents who have a few extra grand in their pocket, because they didn't have to pay a middle man.
"If they change the franchise laws, it allows every other manufacturer to come in and do what Tesla is going to — compete with our family-owned businesses."Oh, competition is bad? Then what's this about?
He said the state's law was originally enacted to promote price competition by forcing dealerships to compete with each other rather than allowing a manufacturer to monopolize the market and to prevent a manufacturer opening a dealership to compete unfairly with franchises, Appleton said.On one hand, dealers say "competition is good!"—but they don't really mean it. They don't want competition. In fact, try to set up a Honda dealership in an area already served by a Honda dealership. You're not allowed. Because there isn't a business alive that truly welcomes competition.
And that "competing on price" stuff is probably the worst of it—the haggling that makes an already unpleasant experience even worse. Saturn got lots of mileage for years on their "one price" model. People don't want to feel like they got ripped off. Having a set price is a good thing. And if you want competition, well, there are plenty of auto manufacturers in the biz, let them compete the way Apple competes with other PC manufacturers. There is nothing approaching a monopoly in the auto biz.
In the end, the problem is that auto dealerships don't provide any value to consumers. In fact, they're one of the most unpleasant commercial experiences consumers ever face.
[T]he Consumer Federation of America reported in 2013 that “[m]isrepresentation in advertising or sales of new and used cars, lemons, faulty repairs, leasing and towing disputes” was the top source of consumer complaints to state officials, as it had been in previous years.Auto dealerships are a plague. If auto manufacturers want to keep working with them, that's their prerogative. But if they don't, they shouldn't have to. That's the bottom line.
Auto dealerships know they are bottom feeders. That's why they're terrified of Tesla. They have a good thing going. They don't want business as usual to change.