Tesla (TSLA) is an interesting, multi-dimensional company. It took a gigantic step forward, in my view, a short while ago when it raised $2 billion+ to help fund the “gigafactory” it plans to build to make to build batteries that will feed the needs of the Elon Musk empire. The money came through a convertible bond issue whose buyers accepted ultra-low coupons in return for the right to buy TSLA stock at around $350 a share.
direct to consumer
One of the firm’s key profit strategies is to sell its electric cars direct to the consumer, bypassing third-party auto dealers. This is potentially very important.
The typical traditional car company has an operating margin of around 12%. Publicly traded car dealers mark the vehicles they purchase from manufacturers by another 10%-15% in selling them to the end-user. If TSLA is able to achieve the performance metrics of the typical auto manufacturer (it may be aiming higher), capturing the wholesale-to-retail markup would potentially double TSLA’s per unit profit. In addition, the current sales volumes for TSLA are extremely low–TSLA’s goal of selling 35,000 cars in 2014 would give it 0.2% of the domestic car market if it sold them all in the US. So it makes no sense for TSLA to set up its own dealerships. And what terms would a third party demand for a dealership that might initially sell only 100 cars a year?
traditional car dealer opposition
The biggest stumbling block for TSLA in direct sales is the obvious one: the auto dealers don’t like this, and they form an immensely powerful lobby in local politics.
For the dealers, TSLA itself isn’t that important. They see TSLA as the thin edge of the wedge–that if TSLA is able to sell direct to the consumer, sooner or later Toyota, Ford and GM will be doing the same. After all, their profits potentially double. There goes the traditional car dealership business.
In many states, there are already laws on the books that enshrine car dealers. They compel auto purchases to be made through traditional dealers and prohibit car manufacturers from obtaining dealer licenses.
That hasn’t quite been the case in New Jersey, where the Motor Vehicle Commission has allowed TSLA to operate …until this week. On Wednesday, the MVC revoked the previous permission it had granted TSLA and ruled that it can’t sell cars itself in the Garden State. TSLA must establish a third-party franchisee network to sell in the state.
The decision has been unpopular with both conservatives and liberals. The press is pointing out that the NJ change or heart follows very large political contributions to Governor Christie by car dealers. The result remains, however: no more TSLA sales in New Jersey, effective April 1.
This story is still evolving. The next chapter will be written in Ohio, where TSLA is fighting a similar battle against auto dealers. The lost sales in each state where TSLA is forced out will likely be negligible, although whether they amount to something in the aggregate is another question.
I’m not sure many holders of the stock believe the direct sales effort was anything more than tilting against windmills, given how deeply politically connected traditional car dealers are. I suspect the most lasting damage done may be in TSLA’s image. Its outlets in high-profile retail space help identify it as the choice for potential buyers of electric cars. If they gradually go away, does the cachet that gives TSLA one of its current sales advantages gradually fade away?