Tesla fans should rejoice at Michigan's ban on direct sales

A hybrid system with some franchised dealers could be a big advantage for the EV maker in a few years.

This past week Michigan cleaned up a little mess in a state law it had on the books that prevented automakers from selling direct once the automaker had established dealerships. The mess was that for a long time nobody figured any new automakers could possibly come into existence. Well, Tesla did, and its direct sales model was an advantage that the established automakers figured needed a little smack-down. So they changed the law to simply say that no automaker can sell direct. To make matters worse, John McElroy of AutolineTv reports Elon Musk has said to him in an interview “We may need a hybrid system, with a combination of our own stores and some dealer franchises.” The horror. Tesla Evangelists cried foul (again) and have been stamping their feet and bellowing on every blog and forum. They should be rejoicing.

Our own Luke Ottawy has covered the Michigan flim-flam in great detail.

Tesla's Direct Service Model Won’t Work In Six Years
In a few years Tesla promises to be selling about 500,000 cars per year. Let’s for the sake of argument say that Tesla does leap ahead of VW and Mazda in sales in that short span of time. Now let’s go further and consider the situation three years after that. Tesla will have 1,500,000 cars on the road. Cars that will hit potholes and need a wheel bearing. Cars that Tesla can sell service for (as it already does). How will Tesla service those vehicles? You can’t download a wheel-bearing, just like you cannot download a titanium debris shield.

In my state of Massachusetts there is one Tesla service center. Mass. had a slow start, but we are rich, and we are pro EV. We give away $2,500 for every EV purchased, and we are one of the eight cartel states forcing automakers to make EVs. The one Tesla service center in my state is in a place almost impossible to get to for most of the population. Tesla is going to need a lot more service locations if it plans to handle success. Does it have the capital to build and staff them all itself? Is that the best return on investment?

Tesla’s Sale Model Will Struggle With the Mass Market
Right now, affluent EV buyers, and those who want a Model S regardless of the financial sacrifice, are pretty happy to step up and pay full sticker price for one. They brag about it. They correctly point out that everyone hates negotiating to buy a car. They forget a couple things though. One thing they forget is that the only thing worse than negotiating for a car is paying full price. Anyone can do that now, on any model car, at any dealership in ‘Murica. They also forget that Saturn did this one-price thing and it became know that Saturn had a higher profit per vehicle than other GM brands selling similar equipment. The myth that the consumer wins when she pays full price won’t work when people living week to week start shopping for Teslas. They will be comparison shopping Leafs, Volts, BMW i3s, Camry Hybrids, and other vehicles already in or near the price range Tesla says is the place it plans to sell a half-million cars per year.

Tesla Will Need To Pull Out Cash
One reason dealers are helpful to automakers is that they hold inventory. The way this happens is insanely complicated. However, both parties benefit. The automakers call a “sale” the transaction that occurs when a car is shipped to a dealer. They show that revenue on their books. Dealers know they have 30 to 90 days to pay for the car, so they can be selling what they stock with no capital outlay. Neat trick. Tesla will want badly to do this if it starts selling 500,000 cars per year. Its alternative to actually have to sell the cars itself. Mainstream cars sit for a while. Some sit for months on lots. Tesla is not going to want to have that cash tied up. Dealers solve this issue.

Many Small Things
Dealers rightfully have a bad reputation. They do things we all hate. Dealer documentation fees, bait and switch, the dreaded “after-salesman” that sells grandma a service plan she won’t live to use. Worse, the sales staff doesn’t know its product, nor are they allowed to actually sell anything “Let me go talk to my manager.” On the service side they invent maintenance not found in your owner’s manual (nitrogen in tires, transmission flushes). However, they do one thing Tesla is already struggling with.

Tesla has had a tough time getting loaner cars for its service customers. Tesla owners consider the brand a premium brand like Lexus or Mercedes (two companies Tesla does a lot of business with). When they are given an “ICE” car to drive while they wait they complain on forums. Tesla has this problem now with less than 40,000 cars on US roads. What happens in six years when it has 50 times that number to handle? The Lexus dealer near me has 90 loaner cars, 2 for each service bay. Lexus has no loaner vehicles. The dealer does.

In my state and others EVs require an annual safety inspection (yup, it used to be called an emissions test). Dealers are a great place to have that done.

Here is the list of all the Tesla service locations in New England:
Mass. – Watertown
NH, VT, RI, ME, No service at all
CT – Milford (suburb of New York City in Southern CT)

Everything in life does not have to always be a bummer. Once in a while a situation we cannot change comes along that we think is going to be terrible and ends up being just fine. If I were a fan of Tesla, and were looking forward to owning one of those 1.5 million cars in a handful of years, I’d be pretty psyched if there was a dealer near me that could take care of it. Michigan’s law and Musk's admission just made that much more likely.

Related:
Why Tesla’s game of legislative Whack-A-Mole is so frustrating
Tesla direct sales victory in Massachusetts could pave way for similar rulings
Pennsylvania decides to allow Tesla stores, but not very many