Tesla Motors (NASDAQ:TSLA) Chief Executive Elon Musk said the traditional way cars are sold in the U.S. is dampening the electric automaker’s growth prospects, calling for direct-to-consumer sales.
Shares were trading nearly 2.5% lower at $92.53 in mid-afternoon trading Wednesday.
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Car manufacturers are prohibited by most states from selling cars directly to consumers, except through online sales. The company has avoided using a network of independent dealers by merely opening showrooms to display the electric car and taking orders for its Model S online.
The company has urged for changes in the traditional sales model, aiming to sell cars directly to consumers.
“The auto dealers association is definitely creating some problems for us, making it harder to get things done,” Musk said in an appearance at Tesla’s annual meeting Tuesday.
But for now, Tesla is reaping the benefits of several positive developments this year for the former startup. Its Model S received a near-perfect score from Consumer Reports magazine, the company reported its first quarterly profit and Tesla shares have nearly tripled on the year.
By the end of this year, the Palo Alto, Calif.-based company expects to have 50 total stores, up from 34 in the first quarter.
Musk suggested that traditional dealers aren’t the best advocates for electric cars, adding that consumers widely support direct sales.
“It didn't work for Fisker, didn't work for Coda. In the last 90 years, when did it work?” Musk said of the current sales model. Coda Holdings filed for bankruptcy last month, while Fisker is seeking a buyer. “We have to do this directly.”
Bill Wolters, President of the Texas Automobile Dealers Association, said dealerships are “total advocates of alternative fuel vehicles and hybrid vehicles,” as well as all-electric vehicles.
He added that data from the National Automobile Dealers Association shows that dealers nationwide have a gross margin of 4.15% and make an average of $1,283 per new vehicle sold in 2012.
“If we didn’t have dealership laws, manufacturers would restructure in the most profitable way for the manufacturer,” he said. “It’s not unusual to have attacks on dealership laws, particularly from manufacturers. Ford (NYSE:F) tried in 1999 to change the law in Texas. Musk tried it in a unique way, calling for an exception for his company.”
When he met with Musk in Palo Alto recently, Wolters told the Tesla chief that the automaker could “have the exact retail model he wanted” even without Tesla owning dealerships. Wolters said he told Musk that Tesla would still be able to keep some control over dealers, since manufacturers currently control dealers “in many ways.” For instance, now-defunct GM brand Saturn told dealers not to negotiate prices, he noted.
“I told him we would do anything possible to work with his company. He has a great car and has built a brand quicker than anyone I’ve ever seen. But he’s going to need more than just showrooms in Austin and Houston,” Wolters said.
Musk was involved in pushing for a Texas bill that would have changed laws there. At Tuesday’s meeting, Musk said dealership associations in Texas, North Carolina and Virginia were “bragging” about failed attempts to change franchise laws.
“Nobody’s bragging,” Wolters responded. “It’s just the opposite. We make sure dealers are obeying the law and providing the best service. Cars have to be titled and safety inspected to make sure vehicles are fit for the road and ready for customers. I don’t know how you do that through online sales.”
Wolters said about 90% of dealers are still family-owned business, and franchise laws protect those businesses.
“When Elon Musk comes in and criticizes the dealer network without realizing what we do for America, it’s a little off-putting. And he says he can’t make money through independent dealers when he’s never tried,” he said. “He’ll make more money on the stock market than he will selling cars.”