The automotive industry and the trend towards disintermediation
The US motor industry has been given a shakeup by the appearance of Tesla Motors, a company that certainly likes to do things differently.
The company founded by Elon Musk that builds luxury electric cars that are better equipped and outperform most conventional vehicles is no upstart. It has been around for a decade, and present on the stock markets since July 2010; the first quarter of this year produced its first profits. Its Model S has been judged the safest in the history of motoring (it even broke the crash test equipment), is the 2013 Car of the Year, and the biggest selling vehicle in Norway, ahead of the Volkswagen Golf.
A recent accident during which one of its cars caught fire after a collision initially sent Tesla shares plummeting by 12%, but confidence in its vehicles has soared after it was learned that the incident would have been much more serious in a conventional automobile. Aside from its financial results, with are no doubt interesting and thought-provoking, Tesla’s policy of selling without dealers is the real issue here, and is causing problems in many markets: its policy of online selling backed by its own outlets has been denounced in some US states for infringing laws that oblige carmakers to sell through dealers. The more than 18,000 new car dealerships in the United States earn their commission from each and every one of the almost 13 million vehicles sold annually there, supported by a powerful lobby able to reach US legislators.
Buying from a dealer is for many people a necessary evil. Most of us these days prefer to do our pre-purchase research online or by reading specialist publications, and only really visit the showroom to sit in the vehicle and negotiate its price. Cars are considered the epitome of the so-called ROPO market: Research Online, Purchase Offline, despite which carmakers continue to advertise heavily online. The car sales profession has for decades been among the least trustworthy in most countries, and carmakers have little say in how buyers make their decisions.
Tesla says that the success of the brand depends on it having total control over the client’s experience. Tesla showrooms offer a very different experience to anybody who has ever bought a car from a dealer. There is no negotiating the price, and the majority of outlets are in shopping centers with just a few vehicles on display or for test driving. All service work is carried out by garages owned by the company. For the moment, Tesla seems to be winning the battle: in states such as North Carolina and New Hampshire the company’s outlets can now carry out every aspect of sale, while the fight continues in others such as Texas; it has been accused of pricing trickery in California.
Tesla’s sales strategy has even prompted a supportive petition to the White House; while at the same time has recently been given a boost by some of its competitors. Two brands, General Motors and Audi, based on Tesla’s success, have decided to start trials to sell directly online, or through their own outlets. General Motors’ Shop-Click-Drive allows the customer to choose a car and set the price online, but still have to deal with a dealer, although not necessarily in person. Audi’s approach has been to announce the opening of some 20 showrooms around the world backed by huge online resources aimed at creating a client experience and to establish a relationship with its network of dealers, where the final part of the purchase process will still take place.
So, we have a scenario where the sales intermediary has been partially removed versus Tesla’s radical approach of no intermediary: the freedom of a relatively new brand versus other brands that for years have depended on powerful dealerships. The question is: will the older carmakers choose growth strategies that were laid out decades ago, or might they opt for direct sales models, á la Tesla, but which mean slower growth based entirely on their own resources? Is the independent dealership facing extinction, meaning a shift in the coming years toward total control of the client experience through the web, along with makers’ own network of retail outlets?