Are Third-party Dealers Killing Big Auto?

Are Third-party Dealers Killing Big Auto?

We already know that Tesla has some serious advantages over Big Auto:

One of the many advantages I listed was "no third-party dealers" for Tesla.

Why are third-party dealers so toxic for Big Auto?

As you can read below this original post was inspired by @Red Sage's and @mntlvr23's remarks. It got me thinking, why does Big Auto insist on a losing strategy even after Tesla has shown how broken that strategy is? Here are a couple of main reasons I will explore:

 1) Mis-placed loyalty—Big Auto's customers are third-party dealers NOT the driver of their cars
 2) Legacy agreements and conventions—Dealerships are legislated and contracted mini-monopolies




One reason why Apple is so successful is that Steve Jobs insisted on making the customer's experience the primary concern of their designers. Big Auto's customers are third-party dealers not the drivers of their products. This is not to say that Big Auto completely ignores the needs & wants of drivers, but they do make decisions clearly focused on helping Dealerships instead of the end-user.

Here are few examples:

Planned obsolescence -- Dealers make most of their money on service; Big Auto wants people to buy as many versions of their car as possible, a 5-to-10-year life cycle "ensures" repeat sales

The Wrong Way
In the U.S. brand loyalty and halo effect of high-end cars used to drive buyers to dealers. People often simply bought the new version of their last car since it's what they were used to and it felt comfortable (literally). But the pressure first exerted by Japanese and German imports and the ability to share information over social media caused a massive drop in brand loyalty. This has forced Big Auto to adjust. Quality has increased dramatically, but the 100K to 300K lifespan of a typical ICE forces drivers to keep buying and repairing.

The Tesla Way
Why does Tesla care if their cars last or not? Tesla believes in sustainable transport. Elon believes it is immoral to force people to pay to fix problems w/ designs of your product. For Tesla, Service will not be a profit center.
Ludicrous mode is the result of trying to make a Million-mile drivetrain. Once they realized the extra power possible w/ this new technology they replaced Performance Insanity w/ Ludicrous Speed. This high-end feature will subsidize the improvement of this technology and at some point it will likely be available in all Teslas. You just might need to pay to turn on the ability to launch.
The final reason that Tesla cares if their cars last is that Transportation as a Service TaaS w/in the Tesla Network is part of the new End Game:
"Master Plan, Part Deux"

Over-the-Air (OTA) Updates -- Dealers want to charge you for updating the software/firmware in your car, and up-sell you other services

The Wrong Way
Driver: "There's something wrong."
Dealer: "We have an open appointment next Friday at 4:00pm."
Dealer: Plugs into diagnostics terminal... updates firmware.
Dealer: "That will be $200 please."

The Tesla Way
Driver: "Zzzzz" (asleep)
Tesla: Downloads new OTA update to car
Driver: "Cool I have more range and better driver profiles."

(This is not to say that changes go perfectly every time, but the fact remains most updates improve the car.)

In addition to the firmware/software/map updates available OTA, Tesla can also:

- Diagnose issues
- Open API to drive w/ your phone (recommended for emergencies since loss of signal is bad)
- Open API to pre-condition the car (hot or cold)
- Call back home w/ Autopilot data
- Catch a NY Times "reporter" in a fib or two ➥

and so on....




Dealerships are Mini-monopolies -- To ensure that a dealer's investment in building a sales floor, storage lot, and service center is viable for years to come they are sold exclusive rights to an area by Big Auto.

The Wrong Way
The car-buying experience is widely regarded as one of the most stressful and unpleasant experiences people go through. You are forced to interact w/ the next-up sales person who will try to convince you that the best deal is the car that has been sitting on the lot the longest. You need to drive around (or call around if you are able) to find cars that meet your specific needs/wants. Or you can get what's on the lot. Once you find a car you like you need to haggle endlessly to get a good deal. Then financing will try to up-sell you on car coatings, service plans, and loans.

The New Way
The car-buying experience has changed beyond Tesla. The Internet has enabled people to see what a car really costs and to avoid haggling (almost) entirely. But you still need to get what they have to sell you.

The Tesla Way
- Every car is priced the same (end of quarter and inventory deals do happen)
- Tesla will search the whole country to help find what you want/need.
- You get what is in inventory (for convenience or a slight discount) or;
- You have one built to order.

You get what you want/need.

Autoworkers and pensions -- Would you rather have a (unfunded) pension from GM or a matched 401(k) + Employee Stock Purchase Program from Tesla?

I have no idea if Tesla does that, but that is common at tech companies in Silicon Valley. A big part of GM's bankruptcy was figuring out what to do w/ legacy pension and healthcare costs.

Protective dealership legislation will fail...soon -- At some point the U.S. will open up direct-to-consumer sales for cars across the nation.

Even before Tesla is able to sell directly across the U.S. they already are out-selling the MB S-Class and BMW 7-Series, *combined*. See @Red Sage's sales numbers regarding Cadillac below for even more.

Make & Model choices -- The conventional wisdom at the dealership is you need variety to cover your bases.

Before The Great Recession Big Auto had a variety of both Makes and Models that basically competed against each other. Differentiation in the market varied for GM from Chevy to Buick to Cadillac w/ other marks, Saturn, Saab and Hummer, squeezed in between.

Check out the list of Ford hybrid/Energi/electric options:

Realize that the prices range from $24K to $39K depending on what size and trim package you choose. Which one is Ford making the most on?

BWM has a "Series" for every taste:
1, 2, 3, 4, 5, 6, 7, X, Z4, M, and i
or these categories:
Sedans, Coupes, Convertibles, SAVs & Sports Wagons, Diesel, iPerformance, and Electric

It will be interesting to see how Tesla diversifies over time. We know they are planning:

Model Y (CUV, smaller cousin of Model X)
Pickup Truck
Next-gen Roadster
Urban Mover




Elon has mentioned that he believes he does not need to go "down market" to succeed. He wants to build cars obviously better than the competition. TaaS means that high-quality, efficient options will draw customers while others can pick up the scraps. When most people do not even own a car, dealerships will be completely obsolete.




@mntlvr23 combined some comments from me and @Red Sage, "Notice how GM spends ~$3B on ads per year in the U.S. alone" ... "that means they spent at least $1,000 in advertising for every vehicle they sold in the U.S."

Then added: "I would imagine that this figure only includes corporate advertising - and that there is an additional few (to several) hundred dollars per car spend by individual dealerships."

@Red Sage added:
"Here is how the Model S is doing versus Cadillac in 2017 YTD, through the end of April:"

__ UNITS ___ Model____
___ 4,751 ___ Cadillac ATS
___ 3,382 ___ Cadillac CT6
___ 3,359 ___ Cadillac CTS
_______7 ___ Cadillac ELR
___ 5,592 ___ Cadillac XTS
___ 7,200 ___ Tesla Model S

"[@Red Sage] sees this as an indictment of the 'franchised dealership system' as well. GM has over 900 locations for their Cadillac division. Tesla has barely over 100 locations in the U.S., and is allowed no Sales presence at all within 24 States."

Coastal Cruiser. | May 21, 2017

If you build it they will come...

mntlvr23 | May 21, 2017

I will need some free time to read the whole thing, but the first third of it is great

Red Sage ca us | May 21, 2017

Technology allows communication and access to information and is something that comes with the passage of time.

Many decades ago, when most people in the U.S. lived on farms, the Detroit Big Three were getting their start. Someone came up with the great idea of not using their own corporate capital to set up retail locations. They could instead sell franchises licenses that would make people pay them for the privilege of offering their products. And, those products would be delivered to them on consignment to locations they would need to construct and decorate and fill with employees themselves, reducing the costs to the corporate entity that much more.

These 'independent franchised dealerships' did well and sold a lot of cars. Some of them did so well, that their hard work was noticed by pencil pushers and number crunchers in Detroit. So, at some point it was determined that a market was enjoying sales so well that it was actually 'worth it' to spend corporate bucks to open a showroom in the area. So, without any warning at all to the existing franchise owner, the manufacturer would begin to 'unfairly compete' with what was after all 'the little guy' and everyone in the local community felt that was downright 'unfair'.

The 'independent franchised dealership' may have had a contract, and perhaps not a single provision of the contract had been violated, but he still complained to Friends, Neighbors, Newspapers, Radio Stations, Congressmen, Senators, Governors, Judges, anyone at all that would listen, and State Legislators that 'There Oughtta Be A Law!' Eventually, laws were established to 'protect the little guy' and all was good with the world, as the big money grubbing carpetbagger big boys were run out of town and back to Detroit where they belonged.

Not being a very farsighted group of fellows, the 'independent franchised dealerships' would periodically go back to the State Legislature/Assembly to request/demand certain revisions/changes/ to existing franchise law. They would ask for little things, like making sure franchise laws in the State could overrule the conditions of a signed contract, insisting that 'independent franchised dealerships' did not have to submit to the will of automobile manufacturers, expressing that anything a manufacturer wanted that was considered an 'unusual business practice' could be fully ignored by the franchise, ensuring that franchise laws for the sale of new cars were completely separate from those that covered other businesses, setting up regulatory review boards that were staffed by members of the dealership association, and so on... And, since just about everyone there was on the take/a treasured recipient of campaign funds, they typically voted in favor of whatever was requested/demanded by the 'independent franchised dealerships' -- often with very little discussion or debate, let alone dissenting opinions. After all, you wouldn't want to see those campaign funds distributed to an opponent in the upcoming election for your seat, would you? Of course not...

After quite a while, these 'independent franchised dealerships', which love to market themselves as 'Mom & Pop Shops' that barely make enough money to get by, became HUGE businesses that made truckloads of money hand-over-fist.

Because an automobile manufacturer could neither move a dealership location, nor add a dealership without direct oversight by a panel that was headed by existing dealership owners, they were unable to keep pace with the shifting demographics of Consumers. As decades passed by the population of the country moved to cities. And manufacturers were not allowed to close locations that were doing poorly, and they couldn't get more coverage in places that desperately needed it without some serious concessions. This resulted in a dealership network that was much larger than it needed to be, with far more locations in rural areas than were necessary.

Through the multitude of revisions and addendum they had proposed and seen passed to shore up the franchise laws in their States, they effectively had a monopoly on new car sales. So, if any new brand/marques of car company wanted to sell any number of units at all, they had to talk to THEM and no one else. It was a great racket, while it lasted.

Car companies came and went as the decades passed. It was always blamed on the usual suspects... Pencil pushers and number crunchers... Idiotic executives and evil management... Greedy unions that begged for 'too much' all the time... Horrible car design and pitiable mechanical engineering... But somehow, the 'independent franchised dealerships', the distribution system they represented, their refusal to negotiate openly with manufacturers or give any ground on terms, and the franchise laws that protected them were never called to task by anyone. Hmmm...

Then some upstart electric car company out of California, called 'TEZZLER' or something like that, started selling their little hopped up golf carts direct over the internet. It was no big deal, because, well... 'EVERYBODY' said they were bound to go out of business 'ANY DAY NOW'. Meh. Not even worth the effort. So, the 'independent franchised dealerships' ignored them while it took them around three years to sell barely 2,500 of their kit cars worldwide. No competition at all.

Tesla announced their next car as a 'luxury sports sedan' in 2009, right after the financial collapse in 2008, and everyone in the automotive industry laughed. There was simply 'NO WAY' they could sell an expensive luxury car that 'NOBODY ASKED FOR' and 'NOBODY WANTED', especially in this economy, where it was high end Sedans that had been hit hardest by the Great Recession. NO ONE was buying them anymore -- even the good ones. Besides, Tesla was asking $5,000 up front for a car no one would take Delivery of until 2011 at the earliest. They were burning through cash so fast, there was NO WAY they would survive. Guaranteed.

The Tesla Model S was a little later than originally stated... But it still made to smiling Customers beginning June 2012. Due to a change in the EPA's testing procedures, it did not get a 300+ mile range rating, but only 265 miles for its highest capacity battery pack, 208 for the mid range, and a lowly 139 miles for the bargain basement edition -- still a $50,000 car after 'green' incentives. The idiotic soon-to-be-bankrupt billionaire, Elon Musk, had the unmitigated gall to claim they intended to sell perhaps 15,000 to 20,000 of these kit cars worldwide each year. And the automotive industry pointed and laughed, bowled over, holding their bellies that much harder. There was NO WAY that would happen, heck, that was more than Maserati sold of the Quattroporte, AUDI moved of the A8, and Porsche sold of the Panamera COMBINED.

Somehow, Tesla had found around 10,000+ SUCKERS to put in Reservations for the Model S prior to its launch. Through the first six months after its launch, they built/sold around 2,600 cars. Then saw that their backlog had risen to 13,000 cars. So they redoubled their efforts to get the cars out faster and faster. That was rather challenging for a car company that had barely managed to build 600 cars per YEAR. So it was very hard for them to get to the 100 cars per week level.

Then, a funny thing happened... Both MOTOR TREND and its Sister publication AUTOMOBILE chose the Tesla Model S as their CAR of the YEAR. Before long, those geeks over at Consumer Reports gave the Model S their highest rating ever, and stated that it was the BEST CAR THEY HAD EVER TESTED. And, as if that wasn't bad enough, the NHTSA was hot on the heels of that announcement by reporting the Model S had scored a five-star safety rating in every crash test category across the board -- something no other vehicle had managed to do -- EVER.

Meanwhile, the Model S had been leading the sales charts among flagship vehicles for months. Now, all of a sudden, those 'independent franchised dealerships' that had thoroughly ignored Tesla to this point began to take notice. Mostly because it was now taking several months longer to sell competing vehicles than they were used to, so that was a lot of cash to carry on the books without action. Then, those who didn't know beforehand, asked around and learned that no one among them had a franchise agreement with Tesla. They were selling all those cars DIRECT and keeping ALL THE MONEY [ GASP of ~*SHOCK & AWE*~ ] TO THEMSELVES!!!

Why, something had to be done! They ran to their lawyers because 'There Oughtta Be A Law!' But there was none. The sales were conducted over the internet. Perfectly legal. Paperwork was completely legit. All the cars were technically being 'sold' on a server in California. That's interstate commerce. Can't stop it. Illegal to even try to stop it, by way of the Constitution of the United States of America.

Panic ensued. Waitasec... WHAT IF GM, FORD, CHRYSLER, et al decide to do the SAME THING?!? 'There Oughtta Be A LAW!!!' Ultimately, they realized that in most States where franchise laws existed, those guys were all TRAPPED. They were obligated by law to not only fulfill their franchise contracts to the letter, but also remain attached to 'independent franchised dealerships' in perpetuity. They weren't going anywhere.

But... That didn't mean they couldn't launch a new brand and sell direct through that company instead... 'There Oughtta Be A LAW!!!' So they had their lawyers hastily scour existing franchise laws and then craft new versions that removed any existing loopholes in the language, so that no one would ever have a 'choice' beyond using franchises from then on -- no matter what. That way, they didn't have to worry about the resurrection of SATURN, OLDSMOBILE, PONTIAC, AMC, EAGLE, PLYMOUTH, MERCURY, or anyone else as fully electric car brands some day, launched through shell companies and with direct sales over the internet either. They then hastily cobbled together some [BOLSHEVIK] about this being a needed safety change in case the country were flooded with inferior Chinese or Indian vehicles -- because 'independent franchised dealerships' would have their ear to the ground to head off warranty/recall concerns. Then they called up one of their cabana boys in the State Legislature/Assembly and had him sponsor the revised bill in session to block Tesla.

Some of these passed rather quickly. Others were headed off at the pass when they attempted to pass them through regular channels because Tesla lawyers and an army of voting Consumers/Tesla fanatics showed up to raise unholy [HECK] and make everyone 'look bad' on television. So, most of the rest were introduced through more covert means after that. The Department of Motor Vehicles would be tasked with making a new 'interpretation' of existing law, so that Tesla could not be allowed a dealers license, even if they had one before, for instance. Under the bright light of day, the minions of the 'independent franchised dealerships' scattered like roaches from under a rotting log behind a dumpster. Under cover of darkness and deceit, they were able to take advantage of obscure rules of procedure to change laws without open discussion or debate, and certainly without public comment.

Wow, This is getting really long. Anyway... Yeah. The 'independent franchised dealerships' are killing any hope of innovation in sales because of their archaic business practices. I am convinced they were a factor in the deaths of both TUCKER and DeLOREAN automakers, in addition to CODA and FISKER. They want to kill Tesla the same way they have killed off countless other brands in the past 90 years. They suck.

mntlvr23 | May 21, 2017

holy crap, and I thought that the OP was long.
Too many deadlines this week - Maybe I will save this thread for the upcoming three day weekend ;)

Red Sage ca us | May 21, 2017

mntlvr23: I probably could have written three times as much, easy. This is the subject that first brought me to the Tesla forums. I think it is really [CRAPPY] what Tesla has been put through to sell their cars. GM in particular should stop fighting Tesla and instead lobby to sell direct themselves.

JeffreyR | May 21, 2017

@Red Sage +42 thanks for the follow up.

@mntlvr23 +1 thanks for the support. I do not have an editor so like Tom Clancy my work tends to go on and on....

tstolz | May 21, 2017

I agree with RS ... dealers are only needed and can only add value for ICE machines since they need to be serviced and repaired so often. Also we get our information now from social media and on-line sources instead of biased salesmen. The dealer model may have added value at one time .. but not anymore .. and certainly not for EVs.

It is criminal how the dealer lobby is holding Tesla back from opening stores ... funny how it isn't working though. Every new Tesla owner becomes a fan and every new owner wants to market and promote this wonderful car and company. No amount of FUD can stop social media ... we own these cars ... we know!

Due to TaaS dealers will die off starting as soon as FSD is legal ... est 2021.

tstolz | May 21, 2017

Read Tony Seba's rethinkx article on TaaS Eagles ... funny how you avoid that one.

Red Sage ca us | May 21, 2017

tstolz: GM will either have to concede, or hire a whole flock of pigeons to work 'round the clock filling these forums with poo. But then, all their IP addresses and MAC addresses will be blocked. So, GM will have to set up a fake Astroturfer site run by pigeons that no one in their right mind will ever visit. Eventually, someone at GM will notice they are paying around $2,000 per vehicle per year for Astroturfers, twice as much as they do for advertising, but their sales are still going down the drain. Then, their advertising firm will tell them they need to spend more money, to make money.

mntlvr23 | May 21, 2017

The short call must be coming soon

tstolz | May 21, 2017

Interestingly Tony Sebas predictions have proven to be conservative historically. Both solar and EVs are ahead of his past predictions. The arrival of compelling EVs and TaaS by 2021 will shrink the global car market to 1/6th its current size and will cause people to abandon their ICE age cars. This is amazing stuff!!

With EVs growing at 50% yearly and the compelling EVs only arriving en mass in 2018 ... and FSD by 2021 it is clear where this is going.

JeffreyR | May 22, 2017

@tstolz +1
I remember him pointing out that his coat predictions have already been exceeded by Tesla. And, lots and lots of BEV and PHEV options are planned for 2018-2019.

JeffreyR | May 27, 2017

*cost predictions

ReD eXiLe ms us | May 27, 2017

Traditional automobile manufacturers are filled with pencil pushers who are obsessed with quarterly results numbers. Their attitude about business is similar to that of having 10,000 different high sc.h.o.ol champions and 1,000 different co.l.l.ege champions in football. Every one of them wants to point to some metric that they can 'win' each quarter. None of them want to win with electric cars. Many of them want to 'win' the old fashioned way -- by cheating. Others are content to 'win' any sale that 'the other guy' didn't get. Hence, the 'logic' behind the 'loss leader' principle -- it doesn't matter if a vehicle is profitable as long as we sold more than everybody else. It is these ideals that will surely lead to the downfall and utter demise of traditional automobile manufacturers, who will stick by their current distribution scheme because 'it works'. They will not acknowledge or recognize the signs that the inherent inefficiency of the 'franchised dealership system' is going to be a hindrance to their advancement before very long.

FISHEV | May 27, 2017

@tstolz "Read Tony Seba's rethinkx article on TaaS Eagles."

I did. Some of his key dates have come and gone and his predictions didn't pan out.

ReD eXiLe ms us | May 27, 2017

And, once again, the exact same tactics of FUD are used to distract, delay, and deny... You'd think someone was trying to prove that Nicotine was being used to 'enhance the taste' of cigarettes, rather than make sure people were hopelessly addicted to the Cancer sticks... Similar things were said about Vice President Gore's findings and they were dismissed in a similar fashion... But not brought up again by FUDsters after Katrina and then Sandy. I wonder why...? Once again, if anything, Tony Seba's statements are too conservative. Technology is moving even faster than his disruption curve already, and accelerating. Which is fine by Tesla, as that is their goal.

KP in NPT | May 28, 2017

How do dates in the future come and go? Moron.

tstolz | May 28, 2017


ReD eXiLe ms us | May 28, 2017

This is the part where I cue up 'Killing Me Softly' by Roberta Flack.

FISHEV | May 28, 2017

@KP in NPT and various other forum names "How do dates in the future come and go?"

World turns, time goes by and the dates come and go.

@Red/SamO/THFX "This is the part where I cue up 'Killing Me Softly' by Roberta Flack."

Proving you never listened to song.

Sheesh the hacker gang is just falling apart lately and off topic as usual.

ReD eXiLe ms us | May 28, 2017

By the way...? Any of you who don't remember 1973, should probably have a listen, so that you know how Da FUGEES messed up my favorite song...

[ YouTube -- 5OyM0R5uRPQ ]

https://en.wikipedia org/wiki/Killing_Me_Softly_(Roberta_Flack_album)