Way back in the late 1980s, I ran a company that imported computer parts from Taiwan, such as motherboards, cards, monitors, and keyboards. We assembled them into what were then the fastest PCs you could buy. CAD/CAM and accounts customers loved them, and we were able to sell our custom PCs for quite a good profit. As the years passed, MS-DOS became Windows 3.1 and we also sold Unix and file servers and networks. We exhibited at the major computer shows.
Then a storm cloud arrived in the shape of Alan Sugar, (yes, the same obnoxious one as in The Apprentice). He destroyed our business model virtually overnight, by one simple method:
Direct Sales to the consumer. No dealers.
We could either choose to do the same, and abandon our growing dealer network — or what — then the decision was made for us when several of our dealers went bust, taking a lot of our stock with them, and tipping us into liquidation.
It wasn’t long before the technically inferior but cheap Amstrad PCs put most computer dealers out of business and swamped the market. Then Sugar himself was driven out of the business when the Taiwanese established subsidiaries in the UK and began selling better machines direct, in their turn.
Now, I see the same thing happening in the car industry. Elon Musk must have been reading from the same playbook as Alan Sugar.
First, he simplified the design of an electric car. (The all in one screen is part of that. Another part is that the new model will be made in just two halves.)
Next, he decided to bypass the whole idea of a dealer network and sell the cars directly to the public. Now, I don’t know what margin a (say) Ford dealer gets on a F150. But if it’s less than 30% it’s not much of a business to be in. So I’ll assume that. It means that Tesla can sell cars 30% cheaper than any other manufacturer, from the get-go. A massive advantage.
Car dealers react negatively to price reductions because it’s less cash per sale, for them. So Ford’s efforts to reduce the extremely high prices seen recently were resisted by their dealers who began slapping on “market adjustments” of $thousands. And loading vehicles with unwanted but compulsory extras, such as $300 for nitrogen in the tyres.
Tesla isn’t bothered by all that. The policy seems to be: reduce prices, sell more, get economies of scale, reduce prices, sell more… I wonder just how much the boards of Ford, GM, and all the rest, realise that an unstoppable marketing force is going to roll them up. I don’t see any of those traditional vehicle makers building gigafactories. If I were a gambling man, I would be taking out some long-term put options.