Tesla Might Need to Rethink Its Lack of Automotive Dealers
Tesla famously does not use franchised dealers to sell its vehicles to retail consumers. This direct sales model offers advantages such as a streamlined customer experience, tighter control of brand management, and an enhancement of its ability to innovate. However, during times of automotive market volatility, this model also exposes the company to economic and market risk when there is a mismatch between manufacturing capacity and vehicle demand.
This is exactly the environment Tesla is living through today: a scenario where their EV (electric vehicle) demand is falling while production capacity remains high. Tesla’s response to this ‘demand-capacity mismatch’ has been to adjust the prices of its vehicles on multiple occasions. While cutting prices might actually increase demand for Tesla vehicles, these constant price reductions also hurt the company’s premium brand image, heighten customer expectations for continued price cuts, and negatively impact the resale value of Tesla vehicles.
Tesla is much more exposed to EV market volatility because it has no dealership network.
Legacy automakers have a better business model to manage automotive market volatility that would be beneficial to Tesla. This model is the usage of a franchised dealership operations strategy.
Managing Inventory Costs
Legacy auto companies use dealers to hold inventory. Tesla, by comparison, bears the full cost of unsold inventory. These costs include the ongoing expenses related to storage, insurance, and depreciation of vehicles that remain unsold. For legacy automakers, these costs are distributed across their networks of independent dealers.
Navigating Cash Flow Challenges
In the traditional automotive dealership model, dealers purchase vehicles from automakers before selling them to retail customers. This helps legacy automakers maintain more consistent cash flow. Tesla, however, only receives payment upon selling directly to consumers, making cash flow more dependent on maintaining steady sales.
Easing Pricing Pressure
Legacy automakers work with their dealers to independently offer discounts or incentives to move vehicle inventory during periods of slowing demand without directly impacting the automakers’ pricing structure. Tesla is facing continuous pressure to reduce prices to encourage vehicle purchases, directly impacting its revenue and profit margins.
Being Scalable and Flexible
Tesla must adjust its production directly in response to consumer demand, which can lead to either excess inventory or an inability to meet demand quickly. Legacy auto companies can manage fluctuations in demand more efficiently. Dealers can order more vehicles when demand is high and reduce orders when demand is low, acting as a buffer for automakers.
Maximizing Market Penetration and Minimizing Expansion Costs
Tesla continues to invest significantly in building and maintaining showrooms and service centers. In traditional automotive models, dealers bear the cost of these physical investments, even during times of slow vehicle demand.
Tesla is experiencing substantial negative exposure to an EV market downturn. Its direct sales model offers several advantages, particularly during periods of rapid growth. However, the company is much more exposed to EV market volatility because it has no dealership network.
Tesla’s continuous price cutting announcements, and even the recent layoffs, are influenced by its decision to tackle the automotive market with a direct-to-consumer business model. Maybe the company needs to reconsider how a dealer network could be beneficial during periods like these versus only considering the disadvantages of having a dealer network.
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