Friday, December 14, 2012

Why Tesla Will Suceed

The current model of selling cars is one that involves a profit model that allows many people to bank cash on a single automobile sale. During my very brief interlude selling cars, my eyes were opened to the huge amounts of pricing manipulation that went on in the industry.

The scenario; Customer walks onto the lot. He is greeted by a salesperson who assesses their needs, shows them some cars, test drives it, etc.  Customer decides its time to negotiate.  The salesman helps him fill out a credit app while writing up a "foursquare" which is a basically a bid sheet that will compromise of

1) selling price
2) trade in allowance
3) Down payment
4) monthly payment terms

Each entry is one that can be manipulated by the dealer to entice the customer to buy the vehicle.  After the credit app is filled out, Salesman takes it to the Sales manager who will run the credit app, find out what kind of terms are available and fill out the  Foursquare and give it back to the salesman to present to the customer. There may also be a team leader aka "the closer".  This will be an experienced negotiator that maybe employed to get customers who are teetering on the fence to "get over the hump"

After the price and loan terms are negotiated, the customer will talk to the finance person who will finalize paperwork and attempt "upsells" on extended warranties and that kind of stuff.  The customer signs, provides any down payment, insurance is verified and out the door he goes.

Now; he has just paid everyone he talked to and even paid a few others he did not talk to.

Besides the salesman, the closer, the sales manager and the finance person (all of whom is paid commission based on the profit of the sale) the General Manager, Owner of the dealership, Finance Manager, and even the loan company also gets paid and most get paid VERY well.

Now all car dealerships are franchises  They are independently owned and they obtain certification from various auto manufacturers to sell their cars.  It is up to them to get the car at the wholesale price and turn around and sell it at a profit which they determine.  the MSRP is a starting point that has a certain amount of profit built into the price.  By manipulating the other 3 entries on the Foursquare, the dealer is able to maximize their profits so the above scenario is somewhat different from dealer to dealer but one thing that is pretty much standard thru out the industry is that only the receptionist and the lot attendant (the guy who washes the cars) get paid a regular wage. Everyone else is paid commission.

By using an "Apple-like" model for presenting their vehicles to the public, Tesla does not have that same overhead which means that they can sell their cars at a much lower price percentage wise than regular auto dealers and still be profitable. This also allows them to better predict revenue and profits since there is no dickering on the price.  Now for many of you in my financial position, you might be saying "But why are they so expensive?"

EVs are still new technology and unlike other manufacturers, do not have established history or the status gained from being an integral part of the American economic landscape for decades behind them so there is still the start up costs that must be managed.

But Tesla announced late last week that they were now running at a slight profit for the first time ever.  Obviously this does not account for the loan that still must be paid back but payments are expected to be on time.  Add to that, the Tesla S winning just about every possible award that can be given to a 4 wheeled animal and the future is looking very bright for Tesla being the first auto maker to be a successful start up in several decades.

Tesla's real advantage will be maintaining the current sales model when they introduce their moderately price EV tentatively set for 2015-2016. The target is the $30,000 range and with the much smaller overhead and the benefit of 3 more years of research in cost cutting and  performance gains they have a good chance of being able to dominate the market in the range/price category.

For those of you that might doubt the level of profit auto dealers make; consider the outstanding deals on the LEAF and the Volt.  Huge price cuts are now available to clear out the 2012's to make room for the 2013's.  Is Nissan letting them go at a loss?? No way.  Just a bit less profit is all...

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