Tesla – A Green Car Disrupting the Entire Automobile Industry

In December of last year (2013) I saw an article in our local newspaper about a new car company that was manufacturing an all electric car with a range of almost 265 miles on a single charge, comparable to the range of many conventional gas powered automobiles. The car company is named Tesla and it is the brainchild of Elon Musk the genus who founded PayPal which was eventually acquired by Ebay. He is also founder of Space X, a successful civilian spacecraft company, and SolarCity, which installs solar panels for homes and businesses.  The article was very complementary of Tesla’s automobile – the Model S. It also stated that while the company was still producing a relatively few of its sleek sedans, it was selling every one it could make for anywhere between $79,000K and $110,000. Demand far exceeded Tesla’s then current ability to produce the car because they were having trouble buying enough battery packs needed to produce their automobiles. I fell in love with the concept of a car that could reduce the pollution and carbon dioxide we are pumping into our atmosphere and the next day I bought my first 100 shares of Tesla stock at $32.85 a share.

Since then the company has provided absolutely no reason for me to regret that purchase. Recently the Tesla Model S won 2013 Motor Trend’s Car of the Year and Automobile Magazine’s 2013 Car of the year. It was also Consumer Reports top scoring car ever. USNews.rankingsandreviews.com, which classified the Model S as the best super luxury car in the U.S. automotive market.Independent testing by the National Highway Traffic Safety Administration (NHTSA) indicated that the Tesla Model S is the safest car it has ever rated. Charging a Model S up overnight costs the equivalent of 75 cents a gallon of gas. In addition, it is beautiful automobile, but don’t get the idea it has the power of a large golf cart. The Model S electric motor is rated at 416 horsepower and can propel the car from 0 to 60 mph in 4 seconds. That’s dragster quick. I have seen clips of the standard Model S beating high powered Corvettes and Porches in quarter mile drag races.

Tesla started slow at first but production is up; Tesla produced its 25,000th car in December of 2013 and Tesla executives say that they expect to sell 35,000 cars in 2014. They also plan to add a full size all electric SUV – the Model X – to their line up by the end of the year. The company just announced and acquired funding for a “gigabattery” plant at the cost of $5 billion which should eliminate the battery shortage problem by doubling the current world wide production of lithium ion batteries and drastically lower battery costs, This will allow Tesla to introduce a more affordable car – the Model E – which will be priced in the $30,000 to $35,000 range as early as 2015. With this car appealing to a much larger range of potential buyers is not unreasonable to believe that Tesla will eventually be producing 500,000 cars a year. I won’t hesitate to say that I added additional Tesla stock to my portfolio as the price began to skyrocket. The current price at this writing is $210 per share

To extend the range of their cars Tesla is installing Supercharging Stations on major roads in North America, Europe and Asia which can provide a half charge for a Tesla in as little as 20 minutes. That’s a short break from driving for most folks. There are currently 82 Super Charging stations scattered along major interstates in the US making it possible to drive a Model S coast to coast – New York to LA, or Boston to Miami, or San Deigo to Canada. More are planned and will be added quickly. By the end of 2015, Tesla Supercharging Stations will be within driving distance of 98% of the United States population. And here is the best part: The cost of charging a Tesla at one of these stations: Zero, zip, nada. A charge is free for Tesla owners. Eventually all of the stations will be converted to solar power, making the car’s carbon footprint for a cross country trip zero.

It is easy to see that Tesla is at the forefront of the electric car revolution and it is in the process of totally disrupting the entire traditional internal combustion engine automobile industry. But that isn’t the only way it is disrupting the car industry. The Tesla sales channel is totally different as well. Traditional car companies sell through middle men, franchised dealers which add an additional profit margin and overhead to the price of a all of the new cars they sell. Tesla sells direct to their ultimate customers like Apple and other high tech companies, cutting out the middle men. Tesla has “stores” where personnel will explain the features of the car and take you for a test ride, but the customer buys the car over the internet, either there in the stores at the store or later at home. As you can guess, this isn’t making the owners of traditional car dealerships happy.

After lobbying by the New Jersey automobile dealers association, the New Jersey Motor Vehicle Commission recently passed a rule that will end Tesla’s direct sales of cars to the public in New Jersery. Tesla claimes that Chris Christy’s administration backed out of an agreement to allow the New Jersey legislature to make that decision. Tesla may soon have to close its two existing New Jersey stores. New Jersey was following the lead of two other states, Texas and Arizona, which had already enacted similar regulations.

Dealer protection laws are not new. When the car industry was young, there were a lot of manufactures and none of them were strong enough to distribute their products directly to their customers. A system evolved to fill that link in the distribution chain with dealer middle men. However, over time some of the weaker original car companies went bankrupt and some of the stronger companies started buying some of their competitors.   The car manufacturing business became concentrated and the survivors became more powerful compared to their dealers. Dealers could find their relationship with a car company terminated without notice or discover another dealership had sprung up right down the road selling the same line of cars they sold. States took steps to pass laws including franchise regulations to protect their local dealers from the car manufactures. In part because of this protection, in due course the dealerships became rich and powerful in their own right. Now state dealership associations have deep pockets which they use to contribute to political campaigns and hire lobbyist to persuade state governors and legislators to do their bidding.

The dealers may not fear completion from Tesla, at least not yet, but they do fear the Tesla distribution model. If Tesla’s direct sales model is successful, and all signs indicate that will be, dealers are frighten that their manufacturing partners will follow suit leaving them out in the cold. This might never happen, but the dealers feel that they can’t take the chance. The franchise regulations were never intended to keep the car companies from selling direct to the public, but state dealership associations are using their deep pockets and political muscle to try to expand on franchise laws and regulations to outlaw or at least limit the direct sales model in their states. It is no accident that several of the states where they have been successful have Republican governors and Republican controlled legislatures. However, underestimate the vulnerability of Democrats to be also be influenced by the political contributions made by the dealer associations.

Over the longer term the dealerships also fear that their internal combustion engine (ICE) cars may someday be made extinct by electric drive vehicles. A significant portion of a car dealer’s profits are generated by servicing the complex, difficult to maintain gasoline engines of the current ICE vehicles. Electric motors on the other hand have very few moving parts, are very easy to maintain, and rarely need repairs. So even if the dealers were ultimately to switch to selling electrically driven cars, their bottom line would take a significant hit.

One of the selling points the dealer associations use when trying protect the dealer sales model is the claim that one of their main functions is to protect the consumers from the big bad car companies. If you have had any dealings with the typical car dealership you have to question whether you would want those guys protecting you from anything. The reputation of most car dealerships is among the lowest of any business in most communities. If you have had the misfortune of buying a car from a dealership probably you know why.

The real question is whether we, as consumers, should have the freedom to buy our automobiles direct from the manufactures if we choose to do so. In today’s electronic environment we can buy many products direct from the manufactures eliminating one, two or even three levels of middle men along with the percentages they add the cost of products. We decide if we need the protection of buying form a local store and much of the time we decide it isn’t worth the additional costs. Why then are the politicians we have elected trying to deprive us of the right to buy automobiles direct to the manufactures? It is simple – they are choosing to protect dealer associations with deep pockets and a lot of political clout instead of protecting the citizens of their states. The only question now is whether we are going to let them get away with it.

Cajun  5/2/14

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