Auto dealers vs. Tesla: Why the market will decide

Brad Copithorne

The European Union, the United Kingdom, Australia and the State of California have all set ambitious targets to reduce greenhouse gas emissions 80% by 2050. Given that a large share of global greenhouse gas emissions comes from transportation (including 29% of U.S. emissions), it will be very tough to meet this goal without “decarbonizing” our cars and trucks.

The most obvious solution is electric vehicles (EVs) charged by clean energy sources like solar or wind. While several startup EV companies – including Fisker, Coda and Better Place – have struggled, the Tesla car company seems to be succeeding. At least that’s the current view of the markets: Tesla shares have more than tripled since March and in May the company raised almost $1 billion in new capital.

Test driving the Tesla

In June, I decided to see what all the fuss was about and went for a test drive. The Tesla Model S is the kind of revolutionary idea that can only happen when a product is designed with a clean sheet of paper. Most EV designs start with a conventional car and have the batteries stuffed in the trunk or under the seats. A Tesla battery is part of the undercarriage of the car. This lowers the center of gravity and creates a car that handles like a supercar. Tesla also replaced all the buttons on the center console with a 17” touchscreen that doubles as the most beautiful and functional navigation system that I have ever seen. The Tesla received the highest score ever from Consumer Reports for a car and won car of the year from Motor Trend and Automobile Magazine.

Another Tesla innovation is their sales process. Tesla owns their own showrooms. Cars are generally built to order and salespeople are not paid on commission. This allows the company to save a great deal of money by reducing inventory, costs and the profit margin of the middleman (the dealer). Unfortunately, the conventional auto industry is fighting back and they are using dirty tactics by invoking franchise laws.

Push back from dealers

Other than Tesla, most all cars are sold through networks of dealers. The dealers take risks by owning inventory and building local relationships. Franchise laws exist in most states to protect dealers from the risk that suppliers could try to wipe out the value of their investment by cutting them out of the sales cycle. The laws were created to protect a Chevy dealer from GM, not to protect the dealer from someone introducing a better product.

As outlined in a recent article in the Wall Street Journal, gasoline car dealers are attempting to use these laws to prevent Tesla from directly selling cars in Texas, North Carolina, Minnesota and Virginia. I would rather the incumbent car companies spend the effort on designing an EV that can compete with Tesla. If you agree, a petition has been started that asks states to allow Tesla to compete directly.

Sticker shock

One criticism of Tesla is that their products are only practical for wealthy consumers. With a current minimum price north of $60K, it seems hard today to argue with that position. On the other hand, most electronic consumer products tend to be extremely expensive in their early incarnations. How many people had cell phones 25 years ago?

I had the privilege of hearing Stephen Chu, the former Secretary of Energy, speak about the topic recently. He said that at current rates of improvement in battery technology, EVs would be clearly superior to gasoline powered cars by 2020. Chu showed a graph of declining battery prices over time. In 2007, it cost about $1000 to buy a battery that would store 1 kilowatt-hour (kwh) of energy. This is enough to power an EV for three to four miles. In 2012 the market price was down to $500 per kwh and he expected that to be near $200 by 2020. Additionally, he believed that Tesla may be ahead of the game and be currently producing these batteries at around $300 per kwh. The future is coming.

So, how was my test drive? In a word, it was outstanding. The car is fun, fast and stylish. I put my deposit down in June and took delivery in late July. With solar panels on the roof of our house, I am now driving the zero-carbon vehicle of the future.

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