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Tesla defends direct sales model at FTC talks; cites unfair opposition from GM
Posted on January 23, 2016 by Matt Pressman
As outlier states continue to block Tesla from selling its cars direct to consumers, the Federal Trade Commission (FTC) has given the electric vehicle maker a "megaphone" in order to make its case. Thanks to @TeslaTap.com*, we now have the complete transcript (edited for readability) from Todd Maron, Tesla Motors' General Council, publicly discussing Tesla's right to sell its vehicles through company-owned stores. This event took place in Washington D.C. at the FTC's “Auto Distribution: Current Issues & Future Trends” conference earlier this week. We've added some titles below in order to help frame the different points made during Maron's presentation on behalf of Tesla Motors (NASDAQ: TSLA). Maron's comments follow below...
Above: Todd Maron, Tesla Motors General Council
Good afternoon. Thank you for having me. I appreciate the FTC inviting me here today to speak about this important issue and Tesla's position on it. Any discussion about why Tesla sells directly comes back to our mission. Our mission is quite specific. It's to accelerate the world's transition to sustainable transportation. You could say we're true believers and it wouldn't be an unfair characterization. That's our mission because we firmly believed that transitioning to electric vehicles is critical to the health of our planet and simply because we believe that electric vehicles are superior vehicles to their gas powered counter parts. They are efficient, higher performing and we track back to this mission and the decision to sell directly with no exception.
Before getting to the reasons why we've chosen to sell directly, it's important to face the changes we face. What is probably an obvious statement to everyone in this room is that starting a new car company is hard. Just look at the record of the U.S. auto makers. Putting Tesla aside, there are no successful new car companies in generations. Even the big three have had their struggles with Ford being the only one to never go bankrupt. This is not easy. Even more so for Tesla because we're selling a new product with new technology and a new brand with a public that's unfamiliar with all of it.
It comes as no surprise that the traditional distribution system used by established manufacturers is not automatically the right one for us. We have unique factors at play here. So why do we choose to sell directly? The answer is for a great number of reasons and many have to do with the traditional dealer model. They simply have to do with what we believe provides the best customer experience in our estimation. Our belief is that in order to achieve our mission we ought to be the ones [selling], not out-sourcing that responsibility to someone else, someone who is not a true believer. I'm also going to focus on the very many reasons why the franchise dealer model simply would not be viable for us. Here are seven key reasons.
1. Dealership Locations
First, traditional dealerships are large and [often found] at out-of-the way locations. This wouldn't work for Tesla which is why our stores are small and often in high foot traffic areas such as shopping malls. We do this for a reason. It's not surprising that when new technology come out, consumers don't go to it. You need to bring the new technology to the consumer. That's a standard, well accepted thing. If you go to any business school and learn about new products and new technology you have to make it convenient for people.
2. Inventory Differences
Second, going back to the size points, traditional dealerships are large in size because they carry a lot of inventory. Inventory is the life blood of a traditional dealership. But we don't have inventory in the same way. Our cars are custom built for each individual customer -- meaning they don't get built until they are ordered. This is untraditional for the franchise dealer.
3. Longer Sales Cycles
Third the franchise dealer model is based on high volume of fast-paced sales where customers have already done their shopping and know what they want. Sales people are then paid by how quickly they close the deal. The longer it takes -- the worse it is for the salesperson and the worse it is for the dealership. There's an important process for new customers who come in knowing what they want. They want many questions answered, [for example] how to charge from home, away from home, what is range anxiety, how am I going to see it, what are the incentives, what is the difference between the price of gas and electricity, how does the car work, what is regenerative breaking, what is dual motors [etc]. For all these reasons our customers take a long time to study the car. It takes hours, hours of a patient education process that only we can afford them, while a traditional dealership model cannot. We do this because it's our mission to educate people and we're the best ones in the best position to do that.
4. Different Profit Models
Fourth, it is well-known that franchise dealerships derive relatively little profit from new car sales. Instead profits come from other parts of the house: service and parts, trading in used car programs, financing products, insurance products, and other add-ons. We can't offer that to any franchise dealer because we only profit in one way: from new car sales and new car sales alone. We can't make money and profit from service because our cars have far less parts than gas-powered cars. There are no regular service visits for engine tune ups and oil changes. We don't have oil, we don't have an engine. We don't make money off financing programs. We don't have insurance products or add-ons. A franchise dealer would look at this and scratch their heads. They would not know how to make money on this model.
5. No Advertising
Fifth, traditional dealerships rely on manufacturers to fund their advertising which we see on TV, radio and on print media. We don't advertise and we certainly wouldn't allow someone else to advertise for us. What franchise dealer is going to accepted not being able to advertise?
6. Dealer Price Markups
Sixth, and this is probably most important in terms of the economics, franchise dealers could not make money selling our cars. Could not. And there's a simple reason why. If we hypothetically used a franchise dealer in a certain state, we would still be selling online and in neighboring states. We would [still] be selling to our customer through company owned doors. Franchise dealers make profits marking up the price of the car sold by the manufacturer. If a franchise dealer marked up the price of our car, no customer would ever buy it from them, they would simply go to us and buy it for less on-line or in a neighboring state. No franchise dealer would ever opt into this system for us.
7. Conflict of Interest
Finally, number seven. There's a clear conflict of interest. Returning to our mission, we don't simply believe that EV's represented a nice complement to gas-powered cars. We believe it's imperative they are replaced entirely by electric vehicles. Even if we were to outsource the responsibility of communicating this message, it would be impossible for traditional dealers to convey this adequately. This isn't a knock on them but dealers are not fundamentally committed to the mission of EV's like we are. And they make 99% of their revenue off gas powered cars. If you're opening a Yankees team store, are you going to ask a life-long Red Sox fan to manage it? What if he's still selling Red Sox gear out of another store down the road, or, even worse within the same store. You don't need to take my word for it as these factors make the franchise dealer system not viable. Independent studies have been done, including from Consumer Reports and others, and they've all showed that franchise dealers uniformly either decline to sell electric vehicles or are simply ineffective at doing it. So this is not a matter of principle.
But it goes further. It's the difference between succeeding and failing, between fullfiling our mission or not. In a few states where we can't sell directly there's harm to consumers. I'm going to go through them quickly. Customers have to travel out of the state if they want to touch and feel a car and learn about it. This is harmful to them. If they want to finance the car, they are unable to take advantage of the lower finance rates that we've negotiated for them with no profit to us. We have relationships with banks where we've negotiated good deals for customers. They can't do financing in states where we can't sell directly. Overall basic economics dictate when a competitor like us is excluded from the marketplace, prices rise, innovation declines and the consumer is harmed. This is the very essence of why competition is so important and why monopolies are harmful. There's one thing that no one disputes about, and, consumers have weighed in on this, surveys have been taken and it is overwhelmingly in favor of our ability to sell directly. I've put three surveys [as reference]. I believe the 86% is the lowest support we've ever received in any of these surveys. Usually it's in the high 90's. Consumers absolutely want the choice of how they buy their cars.
Now quickly I'm going to discuss the statutes. One might claim we're disadvantaged here. That's not true. There's a small minority of states that restrict our ability to sell directly. Most are all sensible from my perspective. They regulate the relationship. As we've heard throughout the day franchise dealers believe manufacturers are prone, their affiliated manufacturers are prone to doing unfair things to them so states have regulated that relationship. But of course that has nothing to do with us. States with laws that have a blanket prohibitions on manufacturer direct sales are in a clear minority. It should come as no surprised because dealer protection laws were never aimed at giving dealers a monopoly over everyone else. They were aimed at specific actions by their own affiliated manufacturers.
Unfair Opposition from GM
In the rest of the world, this is not an issue. The only place where this debate ever takes place in the U.S. -- we are totally unrestrained in our ability to sell anywhere else. Our opposition comes from two groups. Primarily from dealer groups and secondarily from General Motors. My view and the view many others is that the dealer’s opposition is driven by protectionist interests and a desire to present a monopoly on distribution of cars. Other reasons have been provided but they make no sense. None of them are correct. With respect to GM, their position boils down to this. Because they voluntarily chose generations ago to use a certain business model, everyone else that comes after should be required as a matter of law to use the same model. That's code. That's code for Tesla's able to sell the product to consumers for a lower price than we're able to through the franchise system. We don't think they should have that advantage and be able to serve customers in that way. This is bad policy.
Real quickly I want to show a quote that the CEO of General Motors just said: “Unlike EV customers, Bolt EV customers never have to worry about driving to another state to service their vehicles." This shows they [GM] are anti-competitive and touting their ability to try to block us from selling directly and then compare the fact that our customers can't buy our cars as easily as theirs.
Above: Mary Barra, CEO of GM
In conclusion, on the other side of GM dealers, there's an extremely large tent of consumers, economists, legal experts, and academic think tanks that have on weighed on this. In conclusion, whether you're interested in consumer protection and insuring the consumers’ choice and how they buy products. Whether you're interested in promoting competition in free market principles. Whether you're interested in promoting innovation and just think the best car should be capable of being sold. Whether you're interested in protecting the environment. Regardless of which of those angles you come from, you recognize direct distribution particularly for a company like Tesla is critically important. Thank you.
If you want to submit your own comments/feedback in support of Tesla Motors' right to sell direct, we recommend you write to the FTC here to be sure your voice is heard. For reference: the full-day FTC conference video can be found here. Maron's presentation on behalf of Tesla Motors takes place shortly after the 5-hour mark.