Published on March 1st, 2019 | by Steve Hanley
March 1st, 2019 by Steve Hanley
The $35,000 Tesla Model 3 is here. During a conference call with journalists on February 28, Elon Musk was clearly pleased that his promise to build an affordable electric car is now a reality. Long-term reservation holders will still get first priority but anyone in North America can now order a Model 3 for $35,000 and expect to take delivery before the end of June. That’s important because July 1 is when the federal tax credit for Tesla buyers ratchets down to $1,875, from the current max credit of $3,750.
Overseas buyers can expect to receive their entry level Model 3s a few months later. In response to a question from CleanTechnica Director Zach Shahan, Tesla CEO Elon Musk indicated that he expected the base Model 3 to be available for ordering in EU and China in probably 3–6 months. Then there’s the matter of shipping the cars.
Some will carp that $35,000 is not exactly “affordable,” since a person can still buy a Hyundai Accent for $14,393, but c’mon people, get real. The average price of a new car in America today is over $36,000 — although, admittedly that number is juiced considerably by the number of people who choose to spend big bucks to make a $70,000 light-duty pickup truck their daily driver. So, yes, the $35,000 Model 3 really is an affordable car, one that becomes more so over time since the true cost of ownership (Paul Fosse will explain this in detail shortly) will be significantly less for a Model 3 than any gasmobile out there.
The Big News Is Not What You Think
As exciting as the $35,000 Model 3 announcement is, the big news yesterday was how Tesla plans to market its cars going forward. It is closing many of its stores in the US and transitioning to a 100% online sales model. Online sales will soon be the norm worldwide. There are two reason for doing this.
First, closing stores will save the company money, which translates into lower prices for Tesla automobiles. It’s part of what makes the $35,000 Model 3 possible, but it is also a primary factor in price reductions on the Model S sedan and Model X SUV, both of which now cost about 6% less than they did a few days ago.
Second, this is Tesla’s way of bypassing the whole franchise dealer law debate. Rather than knuckle under to powerful dealer groups in those states where direct sales to customers are banned, it is serving notice to one and all that it is done playing their silly games. From now on, anyone in any US state can order a Tesla and have it delivered to them directly.
No dealer network is needed to buy clothes or groceries from Amazon. Why should buying a car be any different? “It’s 2019. People just want to buy things online,” Elon said on the conference call with journalists, and there was steel in his voice when he said it. Clearly, he is done dealing with local politicians who take money from dealer groups and the auto industry to write laws designed to keep Tesla from selling cars directly to customers in their states.
There are two ways to win a war. The full frontal assault is one. The other is to jump over the front lines, land in the enemy’s backyard, and destroy its comfort zone. Tesla tried the first and found it took too long and cost too much money. Now it is pursuing the second option with a move that will lay waste to the entire franchise dealer model. This is a direct challenge to the way every other automobile manufacturer does business in America. It is a deliberate, calculated poke in the eye and it will have far reaching consequences.
Direct online sales may turn out to be the defining moment in the Tesla story. Elon was forthright in his comments. Online sales are permitted by the US Constitution, specifically the interstate commerce clause, he indicated. Those of us listening in on the call could hear the icy resolve in his voice. He was clearly throwing down the gauntlet and serving notice that Tesla will no longer play nice.
The Puppy Dog Close
On the surface, the online sales model is simple. No need for a test drive. Simply order your car and pay for it. Tesla will bring it to you. After a week with the car or 1000 miles, whichever comes first, you can return it for a full refund if you don’t want it, no questions asked. You may as well treat it like a free rental, Musk laughed. Musk says ordering the car can be done in under a minute using a smartphone. Returning one would be just as simple and hassle free. Sweet.
In sales, this is known as the puppy dog close. Let the customer take the product home and live with it for a while. Not 1 in 1000 will give it back. Why? “The feel of the wheel seals the deal,” goes one old saying in the car business. How many people will get behind the wheel of a brand new car and say, “I like my 3 year old beater with 70,000 miles on the clock better.” If you said, “Not many,” go to the head of the class. In the case of a Tesla, that gets taken to another level.
If nothing else, the instant torque and acceleration of a new Tesla is going to blow most people away from the instant they start driving it. People love to be pushed back in their seat when the light turns green and they tromp on the go pedal. It’s addictive and once you experience it, you don’t want to go back to the old way. That’s precisely what Tesla is counting on. The worst-case scenario is that there will be a few Teslas with under 1,000 miles on them for sale at somewhat less than full retail prices.
The states that ban direct sales and the franchise dealer groups didn’t see this coming. Expect all sorts of restrictive new laws to be filed in state legislatures around the country. With the help of the nefarious American Legislative Exchange Council (ALEC), those efforts will be carefully coordinated. The most expensive lobbyists available will be pressed into service to slay the Tesla dragon.
But what can the states do? Will they voluntarily refuse to collect the sales taxes and registration fees that become due and payable when a resident buys a new Tesla? Will they send SWAT teams to their borders to detain anyone who tries to deliver a Tesla to an in-state buyer? Will they arrest the new owners and charge them with conspiracy to purchase a product online? Will they build walls along their borders to keep Teslas out?
Making A Federal Case Out Of It
The dealer groups, supported by the manufacturers, will file a flotilla of lawsuits designed to prevent online sales. One thing Tesla has done with its new policy is make how it sells its cars a federal issue, one based on the Constitution, not state law. That means all the suits will be heard by judges in federal courts. In fact, Tesla already began that process in 2017 when it sued the state of Michigan in federal court, arguing that its ban on direct sales violates the Constitution.
That suit has yet to be decided and that may be part of why Tesla has decided to simple play leapfrog and move directly to fully online sales. Elon has many attributes, but patience is not one of them. He may simply be tired of playing the game, romancing local boffins in state legislatures and winning legal skirmishes here and there. Time to take the fight directly to those who stand in his way.
Some courts will rule in favor of Tesla and some will rule in favor of the states and dealer groups. Expect some of the most tortured judicial decisions in the history of American jurisprudence as reactionary judges everywhere try to impose their personal views on what should be a simple legal determination. But Elon has his own interpretation. Blocking internet sales would be “a fundamental restraint on interstate commerce and fundamentally violate the Constitution,” he said on Thursday.
Politics will surely play a role. Tweets from deep within Mar-A-Largo are a certainty. Direct sales may be defined as a threat to America’s national security, one that requires building a 30′ high concrete wall around every state to mitigate the danger.
Headed For The Supreme Court
This issue can’t help but end up in front to the US Supreme Court, where the majority is composed of men suckled at the breast of the Federalist Society, an organization that preaches government is always the problem, never the solution. Will Roberts, Thomas, Alito, Gorsuch, and Kavanaugh turn themselves into pretzels trying to repeal the commerce clause? They often declare their utter disdain for judicial activism, yet they have no trouble being judicial activists when it suits their ideological purposes.
The legal battles may take years to play out but the ground shifted under the feet of every person and corporation that owns an authorized dealership in America when Elon spoke yesterday. All those dealerships could become valueless if Tesla is successful at selling cars directly to the public over the internet. Imagine — no-haggle pricing, a 7 day risk-free test drive, over-the-air updates, service personnel who come to you rather than having to take a day off of work to visit a dealer’s service department. If this isn’t nirvana for new car buyers, it’s damn close to it.
The financial world is not too impressed with Tesla’s new business model. The stock is down about 8% from where it ended the day on Thursday. Has Tesla shot itself in the foot? Has Elon finally gone too far? People who have followed the company for the past several years are used to dramatic ups and downs in its share price. There will be more wild swings in the future. In the end, you either trust Elon Musk to deliver on his promises or you don’t. The fact remains that he promised a $35,000 Model 3 and he delivered on that promise. The question every investor has to ask is, where would you rather put your money — Tesla or Giganta Auto Group?
Tesla has put blood in the water by firing the first salvo in this new struggle. Now the dealers and manufacturers will respond. Things are going to get bumpy. Be sure to keep your seat belt fastened until the ride comes to a complete stop.
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