Elon Musk’s Sales Vision Is a Channel Challenge

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Tesla wants to bypass auto dealers and sell its ‘green’ cars direct, but Dell and others offer ample proof that the channel is needed, no matter the industry.

By Larry Walsh

Electric-car manufacturer Tesla is gearing up to mass-produce vehicles that are more efficient and economical, bringing green-energy cars to the masses. And founder Elon Musk wants to disrupt the conventional car-sales model by going around the thousands of dealers dotting the U.S. landscape and selling his cars direct.

His idea: Why should consumers have to buy through an intermediary when they can deal directly with the manufacturer and get a better price?

If only it worked that way. Musk and Tesla have been rebuffed in several states – most notably, Arizona, Maryland, Michigan, New Jersey, and Texas — where the powerful car dealers’ lobby has successfully beaten back attempts to amend decades-old legislation mandating that cars be sold through channels.

“The Automotive Dealers Association is definitely creating some problems for us, making it harder to get things done,” Musk said during Tesla’s 2013 annual meeting.

The car dealers are right that Tesla going direct would disrupt the century-old auto industry go-to-market channel. And Tesla is right that the system is ripe for disruption. But both are wrong in their intractable positions.

Musk is an entrepreneur and innovator who relishes disrupting the status quo. He did it in the card payment industry by founding PayPal. He’s attempting to do it in the space industry through his fledgling lift service, Space X. And he wants to do it in the transportation arena as well, via a system of revolutionary high-speed mag-lift trains.

Tesla, which is expanding production capacity to build less expensive rechargeable electric cars, wants to sell direct to keep costs down. Here’s the problem with that: Tesla sales and service support cannot scale to meet the demands of the target market.

Currently, Tesla operates showrooms across the country. Many of these showrooms are for display only, as Tesla cannot sell cars direct in many states. The system works well today because Tesla has a limited market capacity. It can sell only a limited number of cars, and it doesn’t have many in its current customer base to support. If the company starts selling on the scale of General Motors or Honda, it will have a serious capacity problem.

Now here’s the paradox. Without a dealer channel, Tesla cannot achieve its market penetration. It’s nice to say the direct-sales model will remove costs that will be passed to the consumer, but history has proven that theory wrong many times. Establishing and maintaining a large sales and support system is cost-prohibitive, yet without such a sales network, a company like Tesla cannot cover the total addressable market fast enough to create a barrier to entry to competitors.

In the technology industry, we saw this with Dell. The PC vendor pioneered the direct-to-buyer model, and it worked for many years – until it didn’t. In 2007, Dell’s sales started falling, costs crept up, and competition with channels started taking market share. Dell’s response was to embrace the channel and build a complementary indirect model.

The mistake car dealers are making is fighting Tesla as if there’s only one route to market. The value of a car dealer, just as with an IT solution provider, lies in the value-add services and customer relationship. And while the auto industry seems to think it has a lock on this model, it’s wrong. Every industry has a mix of direct and indirect channels. McDonald’s and Wendy’s own stores that compete against franchises. IT vendors – including Cisco, Dell, and IBM – have healthy direct-sales organizations. And hotel chains such as Hilton and Marriott operate corporate and licensed facilities.

Tesla isn’t alone in its quest to bring direct sales to the auto industry. Every major car manufacturer has attempted to circumvent dealers at one point or another. Eventually, state legislatures will relent, as New York’s did, in relaxing car-sales restrictions and allowing direct-from-manufacturer purchases. And companies such as Tesla will discover, as Dell did, that they need at least some level of indirect sales.

The IT industry should take note of this ongoing battle with Tesla. Solution providers need to look at this fight and see that the real issue is how partners bring value to the customer relationship. And vendors need to see how partners truly are an augmentation of their sales capacity and market reach that, in the process, also helps control costs.

 


Larry Walsh, The 2112 GroupLarry Walsh is the founder, CEO and chief analyst of The 2112 Group. You can reach him by email: lmwalsh@the2112group.com; or follow him on social media channels: Twitter, Facebook, LinkedIn.