Recently, Tesla Inc has been in the news for its cutting edge technology.  Tesla has been developing completely battery powered cars at a lower price than has ever been done before.  Their new autopilot technology allows for safer and more efficient driving.  This summer, Tesla is planning to release its cheapest car yet, allowing consumers to purchase a care for around $35,000.  Analysts have been watching closely to see if the rollout of the new car is successful. 

However, there is an area of interest that is not monitored.  Tesla has a unique sales model.  Instead of the common way of selling through an independent dealership, Tesla sells directly to its customers.  Tesla has stores located in areas with a lot of foot traffic to help customers with choosing a car.  The car is then ordered and delivered to the customer.  Customers also have the option of simply going online and ordering the car. 

Tesla has several reasons for this model.  First of all, dealerships tend to markup prices to make a profit.  Tesla has been striving to keep the prices low, so they adopted an online ordering model.  Second, Tesla does not have an inventory.  Tesla makes its cars to order.  This allows for greater customization to the car.  A customer can go online to order and he will have the ability to choose from many options to tailor the car to his specifications. 

Over the past few years, Tesla has been encountering legal attacks on their sales model.  In 22 states and the District of Columbia, Tesla cannot sell its cars through its stores.  In many cases,  Tesla is prevented from opening stores.  This is preventing Tesla from getting the publicity it needs.  Also, customers do not have the ability to go to the stores when they need help.  Several states are stricter than others.  In Michigan, automakers are not allowed to sell directly to customers.  Therefore, they use independent dealers to sell their cars.  In New Jersey, restricted the number of stores that Tesla can open.  Texas is perhaps the most restricted.  Customers must travel to another state to buy their car. 

The biggest problem that Tesla has encountered is its inability to sell directly to customers in many states.  The reason that states created these laws is to prevent unfair competition with independent dealers.  Even traditional auto manufactures are not allowed to sell directly to customers.  This is preventing all auto companies from selling to customers at the cheapest price possible.

If states were to allow direct sales to customers, it would allow them customize cars more specifically to the customer.  In addition, manufacturers would not have to create as large of inventories.  Based on a report by a Goldman Sachs analyst, direct sales would allow for savings of up to $2,225, or 8.6%.  This is based on an average car cost of $26,000.  The report details the different reasons for the savings.  $832 would be saved by improvements in matching supply and consumer demand; $575 would be saved because of a lower inventory; $387 would be saved because of fewer dealerships; $381 would be saved from lower sales commissions; and $50 would be saved because of a decrease in overall shipping costs.  The report details an additional $1,000 in potential savings. 

In Brazil, auto manufacturers are allowed to sell directly to customers.  GM is able to have lower inventory levels.  They also have a no-haggle pricing structure.  GM is able to save about 6% simply because they have reduced inventory and reduced real estate. 

In addition, studies show that customers prefer the direct sales approach.  One of the biggest problems that customers have is associated with the dealer/customer bargaining process.  In one survey, almost half of the respondents said that they would buy cars directly from the manufacturers even if it didn’t save any money. 

All of these benefits are not without the costs.  Local independent dealers would lose a lot of jobs if the auto manufacturers changed to a direct sales approach.  As is common with advancing technology, there is job realignment.  It is estimated that there will still remain some sort dealership presence, but not to the extent in the past. 

Our states should adjust their laws to reflect the new way of selling cars.  While the National Automobile Dealers Association, an auto dealers union, will do everything the can to prevent direct sales, politicians should do everything they can to allow for a more competitive environment to sell cars.  If this happens, cars will see a reduction in price, better quality, and more variety.  Customer satisfaction will also be better.  While there will be job losses, this will only be temporary.   States should allow auto manufacturers to sell directly to customers. 

Directly Selling Cars