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COMMENT By John Mellor

Elon Musk

ELON Musk has been taught a lesson many a car-maker has learned before him: running your own retail network is very expensive and best left to a network of independent car dealers.

Having scoffed at OEMs using car dealers to represent their products as yesterday’s solution to modern car retailing, Mr Musk has effectively conceded that he got it wrong by choosing to own his own Tesla retail stores – all 380 of them.

In many ways Tesla had the right idea by emulating Apple stores taking on the mantle of the brilliant brand cachet created by Steve Jobs.

But these stores are in some of the most expensive areas of real estate in the world and Mr Musk chose to take on that cost when the conventional wisdom in car retailing was that was an expense an OEM leaves to dealers.

Desperate for money, he saw those stores as a big cost to the bottom line and went for the saving, announcing he was closing all his retail outlets and that he could get by selling his cars online.

The decision to change from owning its own stores to not having any must have been made on the spur of the moment because only weeks before Tesla was still signing leases on new stores out to 2025.

“I wish there was some other way,” he said.

It was a massive call and one that was quickly reversed (sort of) in that not as many stores would close but a shift to selling cars on the internet was still going to be the future for Tesla buyers who will source demo cars from somewhere and return them a week later to somewhere if they decide not to buy.

But how does that work?

Tesla Model X

So far Tesla has been selling cars within the congregation. The disciples of Mr Musk believe in him so much they will pretty much accept anything he has to offer at face value.

About 400,000 people were happy to put a $US1000 deposit on the Model 3 virtually sight unseen and many are only just getting into the position where they might get to buy one at the $US35,000 they were promised. While many have sought refunds over the years (yes, years), around 200,000 Model 3s have found their way into owners’ hands.

And while Mr Musk said, to justify his confidence in online selling, that 70 per cent of Model 3 buyers ordered their cars online, what he did not say, and may not know, is how many of those checked out the car at a Tesla store before signing up?

What he does not know is how much residual goodwill he has left within the Musk camp. People have waited a long time for their Model 3s at the promised price and he will have sorely tried the loyalty of the owners of the Model S and the Model X when he undercut their resale values so savagely.

And he does not know how much value Tesla owners put in the brand’s sumptuous showrooms. Do those Tesla brand attributes make them feel good about their decision to be a Tesla owner?

Can you get that same feeling on a website? Is there a risk those brand values will wilt, especially as more Tesla owners appear in the neighbourhood and undermine the first-mover image of current owners who may not come back for more.

But even more serious for Mr Musk are the rash of direct competitors to his model line-up from Audi, Mercedes-Benz, Jaguar, Porsche and others, all with products aimed at the Model S and Model X which are the only cars that (hopefully) make money for Tesla.

Mr Musk no longer has the field to himself as his time in the sun runs out.

To be closing the very places where buyers can compare his cars with the new direct competitors just up the road seems counterintuitive when they have all the established support and brand strength of prestige car dealerships and showrooms.

These new offerings from the prestige OEMs are going to put a lot more people in mind of buying an EV but it is just not clear exactly how Tesla buyers will do that whereas it will be bleeding obvious where you will go to sit in and drive the EVs from Porsche, Merc, Jag or Audi, etc.

Tesla Model Y

So it is curious why Mr Musk chooses this time for Tesla to effectively duck from public view.

Indeed, as much as it would be galling for Mr Musk, it is probably time for Tesla to start appointing dealers.

The CEO of the Australian Automotive Dealer Association (AADA), David Blackhall, says appointing Tesla dealers would make sense.

“The economics of this are well established by many players over many years,” he said.

“We know that if you produce a vehicle in volume at reasonable scale and you need to distribute that vehicle globally then there is a 29 per cent margin between the manufactured cost and the retail price. The retail price is set by the market.

“You might have the fanciful idea that you can enter into a market and reprice the segment. Sometimes you can, if you have an absolutely fantastic product that is an absolute segment leader. So if you can invent a segment you will get what I call a temporary economic moat. But eventually that is washed away because competitors enter.

“A lot of people, including Jac Nasser (at Ford) and many others saw that 29 per cent and thought there was a way to collapse this cost ladder and the factory could have a bigger margin, inevitably their eyes turned to the dealers.

“It is an alluring concept academically; theoretically tempting sitting in a strategy office or in a boardroom.

“But every single attempt at this that I have ever seen in 40 years in this business has failed.

“And the reason it has failed is that you cannot beat the guy with his entire net worth on the line and going to work with his suit and tie on getting out on the concrete and driving that dealership forward and driving the distribution of your products accordingly.

“You have to remember these car-makers get worldwide distribution through dealer networks for free. Other than the dealers’ margin, they get it for free.

“Musk is a brilliant guy but he did not reinvent the model. He just substituted his ownership in place of dealer ownership and got hit with the costs accordingly. So the outcome is not surprising,” Mr Blackhall said.

Footnote: Ford Australia’s retail joint venture 20 years ago involved 19 dealerships. After four months it was losing $2 million a month and it took four years for it to get the losses back to zero. Once they got it back into the black it was sold.

Ford Australia paid $119 million for it and sold it for $16 million.

COMMENT By John Mellor

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