10 Times Elon Musk proved that selling cars directly to consumer was better than using traditional dealerships

  • Tesla is the only major automaker doing business in the US that sells vehicles directly to consumers, avoiding the franchise-dealership model that has been around for a century.
  • Tesla can't sell directly to consumers in every state in the US, but it has waged a battle for much of the past decade to change laws that govern the dealership system.
  • The company has gone from selling less than 20,000 vehicles in the US in 2014 to delivering almost 200,000 in 2019 — all without dealerships.
  • Tesla is also more valuable at $400-billion in market capitalization than GM, Ford, and FCA combined.
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Tesla is infamous for not having traditional car dealerships in America. Instead, the company sells vehicles directly to its customers — but only in US states that permit it to do so. 

All other major automakers doing business in the US, by contrast, sell vehicles on a wholesale basis to their car dealerships (in some cases financing those purchases), and the dealers sell to the retail consumer.

State franchise laws empower individual dealerships to operate this way. Auto sales have followed this model since before World War II, when lawmakers decided that it would be unfair for manufacturers to compete with their dealers.

Over the decades, dealers have defended this arrangement through state legislatures, and today, Tesla is the only automaker that doesn't have to go the franchise-dealer route.

But Tesla still doesn't sell directly everywhere. It's outright banned from selling to customers in 10 states, free to do its thing in 12, with eight states allowing a limited number of locations to do direct sales. In the states where Tesla can do limited direct sales and those where it's essentially free to pursue its own model, there's been a mixture of legislation and court cases since 2013 to determine what the company can and can't do.

Some critics thought that Tesla would have to give in to the franchise model to keep growing its sales, but thus far, it hasn't — and that hasn't undermined the company's business. Tesla has gone from selling about 16,000 vehicles in the US in 2014 to nearly 200,000 in 2019. At the same time, the young automaker has minted a market capitalization, at over $400 billion, that makes it the world's most valuable automaker, worth more than ten times Ford.

So Tesla hasn't needed dealers. Here are ten times when the company and CEO Elon Musk proved it:

1. When the Model S won Motor Trend's Car of the Year in 2013.

Tesla was selling fewer than 20,000 vehicles per year in the US when it debuted the Model S sedan in 2012. The Model S was Tesla's first "clean sheet" design, created in-house, versus the original Roadster, which has a Tesla drivetrain from a chassis derived from a Lotus sports car. 

Stunningly, the Model S captured Motor Trend magazine's prestigious Car of the Year award for 2013. "It drives like a sports car, eager and agile and instantly responsive," the editors wrote. "But it's also as smoothly effortless as a Rolls-Royce, can carry almost as much stuff as a Chevy Equinox, and is more efficient than a Toyota Prius."

Sales took off. In the US, they broke the 25,000 barrier in 2015, setting the stage for the arrival of the Model X SUV and Tesla's steady march toward almost 200,000 by 2019, when the Model 3 compact sedan had joined the lineup.

The success of the Model S was the most notable new-car launch since the Ford Model T in 1918. And Tesla pulled it off with exactly zero dealer support and no significant expenditure on marketing.

2. When Tesla's market cap exceeded that of General Motors, Ford,  and Fiat Chrysler Automobiles combined.

In 2020, Tesla's stock price went ballistic. It rose over 400% and split five-for-one on the way to a $400-billion-plus market capitalization. If you added up the value of General Motors, Ford, and Fiat Chrysler Automobiles, you got only about $110 billion. 

The Detroit Big Three — and far that matter, every other major automaker selling vehicles in the hyper-competitive US market — supported extensive dealer networks and spent billions every year on marketing. That was how they went about selling roughly eight million vehicles in 2019, out of a total market of 17 million. 

Tesla sold far fewer vehicles — about 192,00 in the US — but Wall Street liked what it saw.

3. When Tesla established a direct-sales model for the first time, beginning in California.

When Tesla started, it was a tiny, California-based electric-car startup. That was 17 years ago. In 2008, the company rolled out its first vehicle, the original Roadster. And it sold none of them through traditional car dealers.

In fact, Tesla decided from the get-go that it would do direct-to-consumer sales only, and in its home state, that wasn't a problem. Traditional car dealers didn't much care because Tesla's sales were negligible — the company looked more like an offbeat, exotic manufacturer than any kind of serious competition for the big carmakers. 

But the genie was out of the bottle. Consumers liked not having to spend hours at a dealership and began to generate buzz around Tesla ownership. Eventually, Tesla would grow larger and expand its direct-sales case nationwide, sometimes winning the right to avoid the franchise-dealership mode, sometimes having to go to court to conduct sales in its own way.

4. When Tesla started winning state court cases to sell directly to consumers.

From 2013 to 2020, Tesla repeatedly went to court or lobbied state legislatures to carve out exceptions to the dealer-franchise laws.

Well-organized dealer groups, which had previously prevented big carmakers from undermining the franchise model, fought Tesla, but the company prevailed in a dozen states.

Still, the entire US remained an elusive prize: ten states banned director sales outright, and one of them was Texas, an important market for Tesla due to its population size.

5. When Tesla figured out to operate stores and service centers without having to join the franchise-dealer system.

Franchise dealers rightly point out that the model encourages owners to buy and service their vehicles in the same place. This arrangement allows for straightforward warranty-related repairs and recall fixes, where relatively new vehicles are concerned.

It also creates service customers for the dealership, and that business leads to profits. 

Tesla knew that it would have to offer similar value to its owners, so in addition to retail stores, the company established a network of service centers. It didn't have to join the franchise-dealership system to do this. In Texas, for example, Tesla can't sell directly to the customer, but it operates ten service centers in the state.

6. When Tesla in 2020 was authorized to conduct direct sales in Michigan, in the heart of the traditional auto industry.

Perhaps the biggest win for Tesla in its ongoing battle to sell directly throughout the US was the 2020 authorization in Michigan, home to GM, Ford, and Fiat Chrysler. 

There was a wrinkle to the case, however. Tesla could open service centers in Michigan, but it couldn't deliver vehicles with Michigan titles. That added some complexity to the process, as owners would have to change the title, but as speed bumps go, it was trivial.

7. When Tesla posted five consecutive quarters of profits and threatened its first-ever full-year profit in 2020.

Tesla has been the biggest story in the auto industry for a decade, but it was thoroughly outsold by Big Auto — and thoroughly outperformed in terms of profits.

Following the financial crisis and its 2010 IPO, GM alone was putting $10 billion in profit on the board every year. Tesla, meanwhile, had never posted an annual profit. But it could change that in 2020 if it makes money in the fourth quarter.

Stubborn refusal to participate in the dealership system was a reason to blame Tesla for its lack of profits; a partnership with a large national dealer — AutoNation, for example — would help Tesla to increase sales and potentially bring in more revenue, leading to an improved bottom line.

But Tesla stuck to its guns, and in late 2019 and 2020, the narrative turned. By the third quarter of 2020, Tesla had been in positive territory five reporting periods in a row.

8. When Tesla was also to service a growing fleet of vehicles without franchise dealerships.

For traditional automakers, offloading service to dealerships also means off-loading headaches. But for Tesla, the headache is servicing capacity. As the company has built and sold more cars, it has strained its service centers.

Again, partnering with a major national service outfit could have taken off some of the pressure, but Tesla instead expanded its mobile-service offering. In 2019, it had about 750 mobile units available, worldwide, with plans to expand.

Owners can schedule mobile service through the Tesla app on their smartphones. Mobile service became unexpectedly more important when the COVID-19 pandemic hit in 2020, but Tesla has already been thinking about how to bring a distinctly Tesla service experience to owners. So mobile made sense.

9. When Tesla was able to manage vehicle financing and insurance without traditional dealership F&I services.

One of a traditional dealership's most important functions is to arrange the financing that customer almost always requires to buy or lease a new or used vehicle. Dealers can also organize insurance, a necessity as you can't own a car without being insured for at least liability. 

Tesla began offering its own insurance (through a partnership with State National Insurance) in 2019, but it hasn't yet developed its own so-called "captive" financing operation, something offered through dealerships that sell and lease vehicles for carmakers that have their own banks.

Tesla vehicles can still be easily financed in most US states, so the only aspect of the process that Tesla can't offer, versus a traditional dealership, is the special terms that a captive might be able to extend to its automaker's dealers.

10. When Tesla developed pricing transparency (more or less).

Fans of the old-school dealership model like to point out that it's possible for customers to bargain themselves into a nice price for a vehicle they want to buy. The sticker is just a starting point. 

But plenty of buyers just want to get a stated, no-haggle price and go from there. Tesla does often change its pricing, but buyers can usually find out almost exactly what they'll need to pay: Tesla's website spits out a cash price alongside a modified price that factors in tax credits and potential savings from not buying gas. 

Dealers can argue that they can get more of an automaker's vehicles into customers' hands by encouraging bargaining, but for a lot of buyers, Tesla's simplified approach has been appealing — and quite a success story.

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