Digital Approach Gives Tesla Competitive Sales Advantage

October 20, 2020 by Jerry Hirsch, @Jerryhirsch

As mainstream automakers such as General Motors, Ford and Volkswagen launch more electric vehicles they still need to find a better way to compete with Tesla in the U.S.

Morgan Stanley Research analyst Adam Jonas highlighted this issue in a recent report to Tesla investors.

Franchise contracts and state rules governing auto sales saddle traditional automakers with all sorts of restrictions that create what e-commerce-savvy consumers increasingly now see as an obsolete buying process. Although there are some exceptions, depending on the state, new car companies are largely free of these rules.

“If you go to Tesla.com and after as few as just 2 clicks, you can be presented with an Apple pay button to place your $100 deposit. You will pay the price you agreed to pay on the screen….  Human interaction is extremely limited in this process depending on payment/financing method,” Jonas wrote.

“While Tesla has set precedent in moving the prices of its vehicles and features around (higher or lower), they have the ability to push updates to their website/omni-channel instantly instilling confidence that nobody is buying a new similarly equipped Tesla for a better price than you did at that moment,” he said.

Jonas then compares this to attempting to purchase a Chevrolet Tahoe online.

“Starting with Chevrolet.com, click on ‘shopping tools’ at the top, then click on ‘build & price’, click on your vehicle year, then click Tahoe and after adding a range of configurations (2WD/4WD, trim, color, packages, exterior, accessories, etc.) you get a summary of your vehicle’s price and a list of dealers in your area.”

“You then have to engage with them to discuss offers and discounts, finance/lease packages, and with the help of some on-line chat support, then can begin moving through the credit application process and other items such as trade-in, test driving and other options and adjustments,” Jonas said.

It gets even more complex.

“At this stage, you enter the world of price discovery of available inventory on a variety of dealer lots run by different dealer owners and offered different prices…  I feel the need to get more than a handful of dealers competing in an impromptu auction for transaction price/monthly payment for nearly identical vehicles to win my business. While price isn’t the only determinant, when you’re buying a car this way it’s hard for it not to be the deciding factor,” Jonas wrote.

Tesla had another advantage which quietly ended earlier this month. Previously, it had a generous 7-day return policy, which gave buyers the confidence to purchase without a test drive. But it killed that policy without explanation. Analysts generally believe online buyers like some sort of return policy. Carvana and other digital used car merchants have 7-day return policies.

Rivian, Bollinger and other electric vehicle startups, will have the same selling advantage of Tesla when they enter the market over the next several years. As new brands, they are free of the legacy restrictions.

The rules made sense at one time. Automakers needed nationwide distribution. Independent businesses were willing to take on the risk of selling vehicles by opening their own franchises and buying inventory. They wouldn’t make an investment in selling Chevrolets or Fords if the automakers could open a company-owned store within the same community. That’s why even a new vehicle ordered through the website of a legacy automaker still has to go through a dealer for physical delivery.

Tesla took the Apple approach, opening up its own stores and avoiding franchise agreements. That move gave it the leverage to launch digital sales.

“We are not necessarily advocating for legacy (automakers) to divert capital to open their own stores… maybe one day this may make sense. But there must be a better way to create a transparent, friction-free, one-price experience for these new products. It would be a real shame if they couldn’t get this right,” Jonas said.

Electric cars – which is the market where the regulation-free startups are playing – will become an increasing share of auto sales. Jonas estimates they will make up 25 percent of new vehicle sales by 2030. That’s why he says automakers have to figure this out quickly.

Other analysts believe that electric vehicles will gradually supplant gasoline and diesel cars and trucks.

HS Markit projects that electric vehicles, including battery, plug-in hybrid and fuel cell electric, will account for up to 80 percent of new auto sales in 2050. They make up just over 2 percent now.  The increased market share will be driven by greater scale in manufacturing, as well as the continued improvement of batteries. IHS Markit now projects that the average cost of lithium-ion cell cost will fall below $100 per kilowatt hour by 2023. That means that electric vehicles will rapidly become cost-competitive with internal combustion autos.

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