Complex Made Simple

Tesla shakes things up again, disrupting the automotive sales model

Tesla announced it will shut down its all of its dealerships, transitioning to an exclusively online retail experience.

Investors, experts, and the general market have mixed feelings about Tesla's decision Experts believe this is a very risky move, and that Tesla should have raised capital instead Should Tesla's transition progress unhindered considering the US laws in place, other automakers might push for a change in legislation to permit them to do the same

While we’ve come to expect some pretty unexpected decisions and conduct from Tesla’s CEO Elon Musk, this latest announcement has left the market perplexed.

According to Musk and Tesla, the electric automaker will no longer sell their vehicles at showrooms, instead selling exclusively online, in a move that is completely unprecedented in the automotive industry.

Cutting costs

Experts, investors and the market as a whole have been trying to make sense of this announcement since it was disclosed to the public last week.

Jim Appleton, president of the New Jersey Coalition of Automotive Retailers, labelled Tesla’s online plan “not a well-considered business strategy,” according to Automotive News.

This change in retail mediums has come as part of cost-cutting strategies Tesla has been adopting recently. The company believes its cost-cutting tactics would allow it to improve its cash flow and drop the base price of the Tesla Model 3 to $35,000, making its EVs even more accessible to the general public.

Tesla’s Model 3


Naysaying or harsh truths?

Experts and analysts have shown little faith in Tesla’s latest move, believing that a round of capital raising is what the company needed at this point, and not a change in its sales model, given weak US sales in the first two months of 2019.

“Gross margins will now be appreciably lower, and thus a significant amount of additional volume is needed to offset price cuts even considering the cost saves,” Barclays analysts said, according to the Wall Street Journal.

To add to Tesla’s woes, 1,600 Model 3s were held up at Chinese customs following a label printing error, according to Chinese media. As automotive news site Jalopnik explains, “this setback comes at an especially rough time—Tesla is trying to get as many new vehicles in the world’s largest electric vehicle market before any Trump tariffs kick in and the company’s factory in Shanghai is completed.”

As for stakeholders, they were not enthused either, and Tesla stock reflected it. Stock value plummeted 7.93% between February 28th and March 1st, dropping from $319.88 to $249.50, directly in wake of the announcement.

“Tesla had been talking about expanding stores, and all of a sudden they are closing them. To me, this signals a huge financial concern and a possible cash-flow issue for Tesla,” Alex Chalekian, the founder and CEO of Lake Avenue Financial, told Bloomberg in an interview. Chalekian’s firm had a stake in Tesla but sold its shares.

A pricy test drive

To mitigate the lack of a test drive, Tesla is offering a 7 day or 1,000-mile test drive window for a full refund, Forbes reported. Whether customers would be willing to go through the refund process just to attempt a test drive is still unclear.

The showroom experience has been a staple of car purchasing since the early commercialization of the automobile, and to see it foregone in favour of online purchases might be asking too much of consumers. Tesla is truly pulling an Apple with this whole situation, relying on its brand appeal and loyalty to carry it through questionable business decisions.

Everything else aside, there are laws to consider first

Besides the hundreds that will be laid off and stakeholders who might not be as open to such a change, there are laws to consider.

“From our discussions with [traditional automakers] over many years, most auto companies would love to sell vehicles the way Tesla does,” Morgan Stanley analyst Adam Jonas said in a note to investors this week, as reported by CNBC. “There’s just one catch. They can’t. It’s against the law.”

As CNBC explains, U.S. state laws require carmakers to sell new vehicles through dealers. The difference with Tesla is that its dealerships are not owned by third parties, like most other manufacturers, but instead owned directly by them. This means that currently, Tesla gets to keep all the profit it makes from selling vehicles at retail price. If they had to resort to a third-party dealership, they would have to sell them vehicles at wholesale price, and make less money through franchising fees and such.

“Tesla is the only [original equipment manufacturer] to our knowledge that is allowed to sell its wares through company owned stores,” Jonas said.

According to Jonas, should Tesla’s decision go through unchallenged, there could be a reaction from traditional automakers requesting for a reconsideration of current US laws and regulations regarding the sale of automobiles.

CNBC reported: “Because Tesla does not technically have any dealer franchises, and already sells without dealerships, Tesla’s move online will likely also be protected, Jonas expects.”