Tesla could solve its money problems with franchise dealerships

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Last week, Elon Musk, CEO of Tesla, notified employees the company needed to improve its profitability to become a "viable business". This meant a reduction of 7% of the hourly and salaried staff, the elimination of his sales referral program and increase in the price of overfeeding. Despite the changes, Tesla has made many expensive and capital-intensive decisions, in part because the company is proud to do things differently. For example, Tesla has chosen to create standard components, such as seats, internally, rather than relying on global suppliers of seats that can produce more efficiently. Tesla also badumed that automation would reduce labor costs and speed up production, but as the traditional automotive industry already knew, robots can not yet replace human hands for each function. And, although this last element may surprise more than one, the direct sales model is a major area in which Tesla has received very little return on investment.

It's no secret that Tesla does not want franchise dealers. The company's position is based on the idea that franchised dealers can not properly sell electric vehicles (EVs). Tesla has therefore spent billions of dollars on its own sales outlets, service centers, call centers and the personnel needed to populate them. As a result, despite its high gross margin, Tesla bears the highest selling, general and administrative (SG & A) expenses of any of its established competitors (on a per unit basis), expenses that did not substantially reverse even when Tesla sales volume increases.

Tesla operates an American network of more than 125 points of sale, more than 75 service centers and several call centers. To build this network, Tesla provided the land or space for these properties, then designed, built and equipped these sites. She then hired, trained and staffed local salespeople to sell and deliver vehicles, as well as qualified technicians and service personnel. But with a franchise model, all of these tasks (as well as debt and badociated financial debt) would be left to Tesla resellers, who should build and manage Tesla's stores, call centers, and service centers in accordance with industry standards. the brand. This reality applies to all automakers today who require their dealers to have facilities and personnel that meet their unique standards, including prohibiting the sale of other brands.

New vehicle inventory management is another area in which incumbents in the automotive sector have a lead over Tesla. Traditional manufacturers are instantly paid by dealers as soon as a vehicle leaves the factory. Thus, automakers are not responsible for the money (or balance sheet debt) of vehicle inventory, including vehicles used for driver testing at the dealership. Tesla could eliminate the expense and balance sheet debt badociated with new cars, even with its order-to-order (designed to reduce inventory) model. As Tesla continues to increase sales, particularly with its goal of 500,000 units or more, the storage costs of new car inventories will prove even more burdensome.

Redesigning inventory management of used vehicles is also a significant benefit for Tesla. The builder is currently responsible for the residual risk of the vehicles at the end of the lease, as well as their resale after the end of the lease. These tasks include inspecting and preparing these units for retail, while paying the interest charges to inventory them. For example, if a rental contract for a Tesla Model S is based on a vehicle worth $ 60,000 at the end of the contract and a value of only $ 50,000 at the time of retail sale, Tesla is responsible for the difference of USD 10,000 and all costs incurred for the sale. the vehicle. These are & nbsp; responsibilities generally reserved for franchised dealers, so it is not surprising that Tesla has trouble remarketing used vehicles to the point that it can no longer meet its essential needs, like repairing cosmetic repairs or even provide pictures of his inventory.

According to Tesla's US inventory specialist, EV-CPO.com, Tesla currently sells more than 1,500 used vehicles in the United States, some of which are over two years old and have experienced price reductions over $ 50,000. If Tesla had dealerships, it would be creating a certified opportunity program consistent with those offered by several automakers that would bear the financial burden and price risk badociated with selling vehicles. opportunity. For example, most new vehicles rented to BMW Financial Services (the captive lender of BMW) will be immediately sold to a BMW dealer at the end of the lease. BMW dealers must purchase a high percentage of leased units at the residual price of the lease or at the current wholesale market price, even if they do not wish to resell them at retail. By increasing the number of independent sellers on the market who are forced to buy leased stocks, BMW better controls the residual values, which reduces its depreciation costs and liabilities. To manage the flow of incoming vehicles, BMW dealers have been forced to develop effective remarketing processes that typically sell these units within 30 to 45 days of the end of the contract, while reducing overall sales costs per accelerating inventory turnover. Incidentally, via customer satisfaction scores, BMW penalizes dealers who do not perform cosmetic repairs or provide accurate pictures of their vehicles.

Many skeptics opposed an indirect franchise model, saying Tesla should raise its prices to support it. But the average gross profit per new vehicle sold retail by franchised dealers in the US is only $ 2,231, a very limited margin for Tesla, given that most of its variants sell for more than $ 70,000. In addition, Tesla's low-maintenance, highly technical vehicles are an ideal profit center for a dealer. Tesla repair shops, operated by franchised dealers, could benefit from high throughput for vehicles requiring maintenance, and for technical repairs, they are less likely to lose repairs in independent workshops because Tesla vehicles are highly specialized. And since dealers are realizing profits on the service, they would be incentivized to strengthen their ability to meet the needs of their local customers. This is particularly relevant to the builder's growth strategy, many Tesla owners have complained online forums current customer maintenance and repair costs are the responsibility of the customer long waiting times.

While Tesla currently has a high gross margin, it is giving way to SG & A, the highest of the major automakers. While the automaker is attacking its latest cash-flow issues, it could be seen that several Chinese automakers (many of which are producing electric vehicles at prices lower than Tesla's) have concluded that the franchise franchise model was the method the most effective way to sell their vehicles in the United States. market. While Tesla continues to evolve its model and is forced to act and compete more as a traditional builder, it will need to consider options allowing it to invest in building better vehicles at lower prices, rather than investing in low-margin and capital-intensive ancillary activities. services. This reality is increasingly pressing for the builder, who now faces intense competition from Chinese automakers and historic builders while losing the benefit of tax credits.

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Last week, Elon Musk, CEO of Tesla, notified employees the company needed to improve its profitability to become a "viable business". This meant a reduction of 7% of the hourly and salaried staff, the elimination of his sales referral program and increase in the price of overfeeding. Despite the changes, Tesla has made many expensive and capital-intensive decisions, in part because the company is proud to do things differently. For example, Tesla has chosen to build standard components, such as seats, internally, rather than relying on global suppliers of seats that can produce more efficiently. Tesla also badumed that automation would reduce labor costs and speed up production, but as the traditional automotive industry already knew, robots can not yet replace human hands for each function. And, although this last element may surprise more than one, the direct sales model is a major area in which Tesla has received very little return on investment.

It's no secret that Tesla does not want franchise dealers. The company's position is based on the idea that franchised dealers can not properly sell electric vehicles (EVs). Tesla has therefore spent billions of dollars on its own sales outlets, service centers, call centers and the personnel needed to populate them. As a result, despite its high gross margin, Tesla bears the highest selling, general and administrative expenses of any of its established competitors (on a per unit basis). Costs that did not substantially reverse even when its sales volume increased. .

Tesla operates an American network of more than 125 points of sale, more than 75 service centers and several call centers. To build this network, Tesla provided the land or space for these properties, then designed, built and equipped these sites. She then hired, trained and staffed local salespeople to sell and deliver vehicles, as well as qualified technicians and service personnel. But with a franchise model, all of these tasks (as well as debt and badociated financial debt) would be left to Tesla resellers, who should build and manage Tesla's stores, call centers, and service centers in accordance with industry standards. the brand. This reality applies to all automakers today who require their dealers to have facilities and personnel that meet their unique standards, including prohibiting the sale of other brands.

New vehicle inventory management is another area in which incumbents in the automotive sector have a lead over Tesla. Traditional manufacturers are instantly paid by dealers as soon as a vehicle leaves the factory. Thus, automakers are not responsible for the money (or balance sheet debt) of vehicle inventory, including vehicles used for driver testing at the dealership. Tesla could eliminate the expense and balance sheet debt badociated with new cars, even with its order-to-order (designed to reduce inventory) model. As Tesla continues to increase sales, particularly with its goal of 500,000 units or more, the storage costs of new car inventories will prove even more burdensome.

Redesigning inventory management of used vehicles is also a significant benefit for Tesla. The builder is currently responsible for the residual risk of the vehicles at the end of the lease, as well as their resale after the end of the lease. These tasks include inspecting and preparing these units for retail, while paying the interest charges to inventory them. For example, if a rental contract for a Tesla Model S is based on a vehicle worth $ 60,000 at the end of the contract and a value of only $ 50,000 at the time of retail sale, Tesla is responsible for the difference of USD 10,000 and all costs incurred for the sale. the vehicle. These are responsibilities generally reserved for franchisees. So it's no surprise that Tesla has trouble remarketing used vehicles to the point where it can no longer meet its essential needs. like repairing cosmetic repairs or even provide pictures of his inventory.

According to Tesla's US inventory specialist, EV-CPO.com, Tesla currently sells more than 1,500 used vehicles in the United States, some of which are over two years old and have experienced price reductions over $ 50,000. If Tesla had dealerships, it would be creating a certified opportunity program consistent with those offered by several automakers that would bear the financial burden and price risk badociated with selling vehicles. opportunity. For example, most new vehicles rented to BMW Financial Services (the captive lender of BMW) will be immediately sold to a BMW dealer at the end of the lease. BMW dealers must purchase a high percentage of leased units at the residual price of the lease or at the current wholesale market price, even if they do not wish to resell them at retail. By increasing the number of independent sellers on the market who are forced to buy leased stocks, BMW better controls the residual values, which reduces its depreciation costs and liabilities. To manage the flow of incoming vehicles, BMW dealers have been forced to develop effective remarketing processes that typically sell these units within 30 to 45 days of the end of the contract, while reducing overall sales costs per accelerating inventory turnover. Incidentally, via customer satisfaction scores, BMW penalizes dealers who do not perform cosmetic repairs or provide accurate pictures of their vehicles.

Many skeptics opposed an indirect franchise model, saying Tesla should raise its prices to support it. But the average gross profit per new vehicle sold retail by franchised dealers in the US is only $ 2,231, a very limited margin for Tesla, given that most of its variants sell for more than $ 70,000. In addition, Tesla's low-maintenance, highly technical vehicles are an ideal profit center for a dealer. Tesla repair shops, operated by franchised dealers, could benefit from high throughput for vehicles requiring maintenance, and for technical repairs, they are less likely to lose repairs in independent workshops because Tesla vehicles are highly specialized. And since dealers are realizing profits on the service, they would be incentivized to strengthen their ability to meet the needs of their local customers. This is particularly relevant to the builder's growth strategy, many Tesla owners have complained online forums current customer maintenance and repair costs are the responsibility of the customer long waiting times.

Although Tesla currently has a high gross margin, it is giving way to the highest selling, administrative and other overhead costs of major manufacturers. While the automaker is attacking its latest cash-flow issues, it could be seen that several Chinese automakers (many of which are producing electric vehicles at prices lower than Tesla's) have concluded that the franchise franchise model was the method the most effective way to sell their vehicles in the United States. market. While Tesla continues to evolve its model and is forced to act and compete more as a traditional builder, it will need to consider options allowing it to invest in building better quality vehicles at more competitive prices. down, rather than investing in ancillary activities with high margin capitalistic service benefits. This reality is increasingly pressing for the builder, who now faces intense competition from Chinese automakers and historic builders while losing the benefit of tax credits.