Tesla 65,000 sqft flagship store in San Francisco (Photo by Justin Sullivan/Getty Images)
California carmaker Tesla famously has plans for producing 500,000 of its electric cars by 2018, and a million of them two years later. This is a tall order for a company that made just 25,185 units in the third quarter of 2016, and which has an eye on making some 80,000 for the year. While Tesla’s many
fans rarely question the company’s ambitious plans, Elon Musk’s outsized targets raise doubt and eyebrows among industry insiders. An analysis of admittedly arcane data of pollution permits, secured by the company, hints that 200,000 units by 2018 may be a more reasonable target. Let’s charitably assume that half a million by 2018 is a realistic goal. In that case, one question hasn’t been asked, but can’t be asked often enough: How does Tesla plan to sell and support all these cars?
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In the auto business, the sizing of a sales and service network is an essential part of the company’s plan. For Tesla, the question is even more essential. To achieve the volume targets of its Model 3 and Y, “Tesla will need as broad a retail and service network as it can assemble,” writes Automotive News. Tesla may not be able to afford it. The company owns, operates, and hence finances all of its stores and service centers, a strategy that fell out of style with the steam locomotive. In most of the auto industry, automakers sell through independent franchise partners who pay their own bills. Tesla may be able to collect a few more billions to build gigafactories and plants that promise to make cars at the speed of light. Tesla most likely will not be given the many billions needed to scale up to something as un-sexy as the service and sales network necessary to reach its lofty targets.
Tesla in Miami, Florida. (Photo by Joe Raedle/Getty Images)
A “legacy” franchise network can adapt to growth plans relatively quickly and easily. Eager dealers buy land and finance buildings themselves, they submit to lavish standards that sometimes specify the grade of the marble on the floor. For their service departments, they buy tools, lifts, and paint booths as required by the manufacturer. At dealer meetings, they often complain that OEMs make money off their dealers by demanding that they buy their special tools, courses for mechanics, or dealer management systems. Then, carmakers fill dealer lots and showrooms with their cars, and they have the temerity to charge their dealers interest until the car is sold. Despite all the grief dealers get from the automaker, OEMs rarely complain about a shortage of dealers willing to succumb to the iniquity. Every so often, dealer ranks are pruned in an exercise of dealer Darwinism where only the strong survive.
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The sales and service network planner and the CFO at Tesla have a
much harder job. Tesla owns all of its stores, it has to pay for land
and building, buy tools, lifts, and paint booths, it must meet the
payroll of each of its stores, no matter how many cars are sold. From a
network planning standpoint, hypergrowth is an invitation to bankruptcy
if you have to finance the stores all by yourself. Let’s get the back of
an envelope, and run a few numbers.
According to Tesla’s website, the company has a total of 226 fully owned Tesla stores in North America and a few foreign countries. (Please do not blame me if I haven’t counted stores that are not on the website. Tesla has been asked to verify the number, but did not respond. See below.) Using Tesla’s 2016 target of around 80,000 cars, the average Tesla store turns 354 cars a year. That already is a very bad key ratio. The average U.S. franchised new car dealer moves close to 1,000 units per year. Most large automakers would try to fire a 300 unit dealer, or if that fails, drive him into bankruptcy, just because they don’t want to bother with such small fry.
Now let’s assume that Tesla is serious to sell 500,000 cars a year by 2018. How many stores would that need? If Tesla continues on the level of current inefficiency, it would need to own and operate more than 1,400 Tesla stores worldwide by 2018, and double that two years later.
According to Tesla’s website, the company has a total of 226 fully owned Tesla stores in North America and a few foreign countries. (Please do not blame me if I haven’t counted stores that are not on the website. Tesla has been asked to verify the number, but did not respond. See below.) Using Tesla’s 2016 target of around 80,000 cars, the average Tesla store turns 354 cars a year. That already is a very bad key ratio. The average U.S. franchised new car dealer moves close to 1,000 units per year. Most large automakers would try to fire a 300 unit dealer, or if that fails, drive him into bankruptcy, just because they don’t want to bother with such small fry.
Now let’s assume that Tesla is serious to sell 500,000 cars a year by 2018. How many stores would that need? If Tesla continues on the level of current inefficiency, it would need to own and operate more than 1,400 Tesla stores worldwide by 2018, and double that two years later.
source - http://www.forbes.com
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