Let Tesla Try Selling Its Own Cars

In 1895, attorney George Selden received a U.S. patent on a horseless carriage powered by a gasoline engine. The patent was written so broadly, anyone building anything that looked like a car with an internal-combustion engine would have to pay him royalties.

In 1888, Nikola Tesla was granted a patent on an alternating-current motor. It is at the heart of today’s Tesla cars, which have no connection with Nikola Tesla except as a namesake.

In 1899, Selden linked his patent to Electric Vehicle, a company that made and sold EVS intended for taxi fleets in major cities. As the company struggled to compete with gasoline-powered cars, it diverted its efforts to collecting royalties from all gas-powered vehicle manufacturers.

It helped form an association to collectively negotiate royalty fees paid to Electric Vehicle. In 1903, the group sued Ford for refusing to pay patent royalties. Ford ultimately prevailed, and the rest is history. No producer of gasoline-engine vehicles would be paying off Selden and Electric Vehicle.

Fast-forward about 100 years. In 2003, Tesla was founded to produce upscale EVs. In 2012, Tesla began facing lawsuits from state dealer associations. They claim Tesla violates dealer franchise laws by operating its own stores rather than selling through a franchised dealership network. That legal battle continues.

The irony is that over 100 years ago, an electric car company controlled the patent rights to the automobile and had control over the licensing rights of all gasoline-powered car manufacturers.

Much like the case of Selden and company going up against Ford, it seems misguided that some dealer groups are going after Tesla for setting up a system of operating its own stores.

While protectionism has its place, dealers currently face greater threats to the franchise system from existing manufacturer-image requirements and incentive-based programs that squeeze margins and erode dealer profits.

Through these programs, certain manufacturers are homogenizing their franchisees to the point that it is barely discernible that these stores are not owned by the factory. 

I understand the argument for protecting the franchise system and fighting perceived threats to it. I work for dealers. It is in my own interest that the dealer franchise system thrives.

The efforts to limit Tesla’s ability to retail its own vehicles are viewed with greater implications in mind, such as the possibility of a major auto maker launching a new brand and selling it at factory outlets.

If auto makers thought that would work, they would have succeeded at it decades ago. One manufacturer who went down that route in the U.S. was Daewoo. We saw how long that lasted.

People get up in arms about Tesla operating its own showrooms, a venture in which it takes all the retail risks. If Tesla went the way of the state franchise system, a good portion of the financial risk would be passed along to dealers.

Dealers would need to spend millions on facilities, branding, tooling and capitalization. Such an investment optimistically would garner only a few hundred vehicle sales and minimal service business per store.

If Tesla had gone the franchise route, many if not all of its dealers would be losing money. Worse, these dealers would not know when and if Tesla would pull the plug on the whole venture. Tesla’s losses have been escalating, and it has yet to turn a profit.  

How many times have dealers been burnt by speculative distributors or auto makers trying to enter the market? Look at a more recent case. Global Vehicles attempted to launch the India-made Mahindra pickup truck in the U.S. Hundreds of dealers each lost nearly $200,000 in franchise sign-up fees that totaled about $40 million. Not one Mahindra truck was retailed here.

I would rather see some of the legal efforts devoted to fighting Tesla instead go to protecting dealers from speculative distributors and manufacturers that take advantage of the dealer franchise system by disproportionately placing a significant part of their brand-launch investment on dealers who have no safety nets.

Many dealers take on these risks in the hope that they will have the next Toyota or BMW franchise. But it typically takes a successful brand about 20 years in the U.S. before it really starts yielding dealer dividends.

Let Tesla have a run at it. Let it try its Apple boutique concept. This will be short-lived if Tesla really expects to hit its volume projections this year of selling 20,000 units. It is trying to do so with a mere 30 retail outlets, many of them at shopping malls. If they somehow succeed at that, there are lessons for all of us to learn.

The mall locations and retailing like Apple are not unique to Tesla. Some dealers for years have operated off-site showroom locations at malls, with varying degrees of success. But none found enough success to even consider abandoning the traditional dealership location.

Not too long ago, there were similar fears among dealer trade groups when the publicly held dealership groups started buying up points. Detractors worried how that would affect the franchise and retail system. 

About 10 years after the bulk of the consolidation took place, most non-public dealers no longer felt threatened.

While public groups can achieve certain economies of scale, this doesn’t guarantee corporate-run enterprises will automatically succeed in the retail business.

Family- or independently owned stores are run with true entrepreneurialism, an element that is difficult for large publicly owned dealer groups (and Tesla) to replicate or compete with.

The franchise system is the best way to retail cars.

What do I expect from Tesla if it survives? By 2015, it will probably abandon factory-owned stores and assign franchise points to dealers. It will do that because of competitors’ market-share gains and investor pressure for higher sales and returns.

Phil Villegas is a Principal at Axiom Advisors, LLC, an automotive dealership consulting firm specializing in Mergers & Acquisitions, Enterprise Management and Litigation Support. He can be reached at [email protected] or 786-472-2800.