Tesla says Model S crash test score is best NHTSA has ever recorded

by Jonathan Ramsey of AutoBlog

"We found out a couple of weeks ago that the Tesla Model S aced the crash tests administered by the National Highway Traffic Safety Administration. What we didn't know until Tesla filled in some of the details is that the Model S scored more than five stars on the way to recording the best result of any car the NHTSA has ever tested. While NHTSA's highest public rating is five stars, the Vehicle Safety Number it gives to manufacturers can go higher, and Tesla says the Model S scored a 5.4. That's a better result than has ever been achieved in NHTSA testing of a passenger car, SUV or minivan.

Tesla's press release says that after its internal tests showed that it would score five stars on government's crash tests, it addressed any other weak points it found on the vehicle to ensure it would get perfect marks "no matter how the test equipment was configured." It was already going to do well in the frontal test, as the lack of an engine allows much more leeway in creating an occupant-saving crumple zone. And the rollover test was aided by the battery pack being located in the floor. The low center of gravity meant that the Model S couldn't be rolled over "via the normal methods and special means were needed to induce the car to roll."

Nested aluminum extrusions along the hatchback's flanks took care of the side pole intrusion test, the Model S not only scoring five stars but, according to Tesla, leaving nearly nine times more "driver residual space" post-impact than the five-star rated Volvo S60. And when the roof of the Model S was tested for crush resistance, the testing machine broke just after it crossed the four-G mark - the Model S, on the other hand, didn't."

Ruggles writes: A neighbor bought one of these. It is flat out beautiful. I have seen them at auto shows and at a Tesla showroom, but this is the first one I've seen on the road. My wife made me go around the block for another look, and she is ambivalent about cars.

I predict the beef over the Tesla company owned showrooms will blow over. Even Elon Musk isn't rich enough to finance a real distribution system, even if he included all of his friends. As long as they are a boutique manufacturer, he'll be just fine with the current setup, as we noted in a May 23rd post on Tesla's Distribution Challenge. The next step, if he gets that far, will require a dealership system. He will be selling off his company owned stores for large multiples. It isn't practical to try to attract investors if they know they would be having to compete against their supplier. Then there are those pesky franchise laws.

State Franchise Regulation

This is the fourth carryover from student blogs, with guest blogger Asher Stevens-Lubin. In his defense he wrote this post at the very start of the term, before we'd covered franchising issues (and had David in as a speaker). Both Ruggles and Smitka append comments. Roberts-Lubin's citations are detailed at the bottom.

The cost of the auto distribution system in the United States has been estimated as averaging up to 30 percent of vehicle price, with 15 percent on the end of the manufacturer (in the form of advertising, loans, and rebates) and the other 15 percent solidly on the side of the retailer, or dealer. This 15 percent of the total price of a given vehicle is due to the cost to dealers of financing inventory, paying for insurance, advertising, and paying commissions. [Source: Marti et al.]

Early in the history of the US auto industry, most manufacturers sold their vehicles directly to the consumer. However with the advent of Ford’s assembly line and the mass-production of automobiles, distribution was more efficient through retailers since manufacturers mainly had just one or two factories located near resources like steel mills (making the assessment of demand and provision of customer services easier for retailers).

In these early days, this franchise system was conducted through voluntary contracts between manufacturers and dealers. However since then, virtually every state has codified the automobile franchise system, making it illegal for manufacturers to sell automobiles directly to the consumer; largely because states earn around 20 percent of their sales taxes from automobile retail, but also because car dealerships account for, on average, 7-8 percent of employment. [Source: Lafontaine & Morton]

Ruggles writes: This is the first misnomer. The reason for state franchise law is to protect Dealers from their Suppliers. A Dealer makes a SIGNIFICANT investment to represent an OEM's products. That Dealer is then in in a position of subjugation to that supplier without significant protection other than the traditional franchise agreement. The supplier could over supply or under supply on a whim. The supplier could provide premium stock to a competitor while withholding premium stock from the original Dealer. The supplier could make unreasonable demands on the original Dealer and use the control of inventory supply, compensation for warranty repairs, etc. to coerce Dealer. Without Dealer protection the supplier could open a factory owned store near the franchise Dealer, and under sell that dealer to drive them out of business. This is the primary reason for Franchise laws.

This model was beneficial to both manufacturers and retailers until the advent of the Information Age in the late nineteen-eighties. With the arrival of global instantaneous information sharing and online automobile sale, disintermediation occurred—that is, the role of the retailer became superfluous (or at least very much different). Cutting back on its number of dealerships has been a key means for GM to reattain profitability. [Source: Bodish]

Ruggles writes: The model is STILL beneficial to both OEMs and Retailers.

Disintermediation has NOT occurred, at least not yet. Cutting back on the number of its Dealerships was NOT a key means for GM to regain profitability. GM's customers are its Dealers. Consumer end users are the customer of their Dealers. Getting rid of customers doesn't help an auto OEM become profitable. GM realized their mistake and reinstated many of the terminated Dealers with some urging from Congress. The story behind how Team Auto came to the conclusion that reducing Dealerships helped OEM profitability is a long one. Looking through this blog one will find numerous columns on the subject. But if one wants to read the most scathing criticism of that mistaken thinking, read the SIGTARP report on the auto bailout (such as HERE).

Yesterday, Automotive News reported that Tesla Motors CEO Elon Musk (the same billionaire entrepreneur who plans to build a colony on Mars and die there himself, “just not on impact”) will “consider federal options” in his battle to overturn automobile franchise laws.

Ruggles writes: Actually, Elon Musk is NOT seeking to overturn automobile franchise law. He is looking for the means for Tesla to own its own Dealerships. This is not a problem in most states as long as there are no Tesla franchised Dealers. Musk plans to have NO privately owned franchised Dealers in any state, or so he thinks, UNTIL he realizes that expansion is limited by his own personal finances and having franchised Dealers might benefit him and his company. Personally, I have no problem with Tesla owning its own stores, and don't think anyone else should either, as long as Tesla isn't competing against any franchised Telsa dealers. But he did run afoul of the Texas auto franchise law, and that is where the legal action is taking place. Read Maryann Keller's statement about the matter in this blog.

He tweeted a link to a petition calling for the same on the White House’s website (as of this writing it had just over 5000 signatures). Musk runs Tesla Motors on a “mall-based” retail network, which dealers in Texas and elsewhere have alleged violates many states’ laws.

David Hyatt, a spokesman for the National Automobile Dealers Association, responded to this petition’s claim that franchise laws “stifle the auto industry, keep prices of new vehicles up and reduce consumer choice,” stating that “the franchise system is good for consumers, good for communities and good for the economy. Manufacturers that sell their vehicles directly to consumers – and don't let anyone else sell that vehicle – eliminate competitive pricing.”^[4]

Ruggles writes: Yes, the state franchise laws stifle the auto industry to the point they have only sold as many as 17 million new vehicles in a year. So we can sell what, 20 million without Dealers? Who will deal with the tradeins and do the warranty work? If you want to see new vehicle prices rise, get rid of the franchise Dealers and leave it to the OEMs. Is anyone familiar with the Ford Collection experiment which failed miserably?

Yet allowing manufacturers to sell cars directly to the consumer could very well reduce inventory costs, and whether it does should be left to be seen. In other words, if retailing actually increases competition and lowers prices, then dealerships will survive the deregulation of the automobile franchising system.

Ruggles writes: It won't be seen any time soon. There is NO EVIDENCE that manufacturers selling directly to consumers will save inventory costs. NONE.

Now this is an arbitrary sum up. Why should the purpose be to lower prices? The mission is to let the competitive market determine prices. We're not going to see any deregulation of the automobile franchise system. Dealers have made BILLIONS of dollars of investment in their businesses based on the franchise system. The numbers are so high there is no way for OEMs to finance their own dealer network, and they know it.

the prof (Smitka) writes [originally April 23rd, 2013]: Whether dealers are “necessary” is something we’ll talk about; it’s good that you picked up the Tesla, which is attempting to circumvent state franchise law with Texas as a test case. Auto distribution was a key, probably the key, institution in the development of franchising; fast food is strictly post-WWII but as we’ll read, autos date to the 1920s. The case is much more complex than just physical distribution and inventory costs; on a regional basis swapping among dealers addresses the latter, because you can (potentially) sell cars held by others, but selling out of inventory is more profitable. However, a dealership also provides for the purchase of used cars (and then their sale), arranges finance, and handles service. “The Factory” has found that an impossible business to run as part of a large organization, and not just in the US but also in Japan, Germany, the UK and emerging markets such as China, Brazil and India. That ought to suggest that the issues are rather more complex.

So we might instead ask: what might make Tesla different? Or is this a transitional pattern (which, by the way, ties up a lot of capital)?

Bodish, Gerald R. (2009). "Economic Effects of State Bans on Direct Manufacturer Sales to Car Buyers." Department of Justice Economic Analysis Group Competition Advocacy Paper #09-1 CA.

Lafontaine, Francine and Morton, Fiona Scott (2010). “State Franchise Laws, Dealer Terminations, and the Auto Crisis.” Journal of Economic Perspectives 24:3 (Summer), 233–250.

Martí, Eric, Garth Saloner, and A. Michael Spence (2000). "Disintermediation in the U.S. Auto Industry." Graduate School of Business, Stanford University, Case Number: EC-10.

Tesla's Distribution Challenge

...the issue isn't whether Tesla's distribution approach is legal, it's whether it's sensible...

Tesla is distributing its battery electric cars directly, rather than through franchised dealers. That's raised a hulabaloo from NADA and dealers about legality. Texas is one large market in which Tesla may be stymied for several years; its attempt to get legislation that would permit direct sales is dead this legislative season, and the next session isn't for two years, until 2015. Barring judicial support, that's a long wait in a large market. There may be room to do so, since the firm has no franchised dealers in any state, hence the idea that it is undermining dealers protected by franchise agreements has no merit. Be that as it may, taking the issue to the courts takes time, and Tesla would like to become a volume manufacturer sooner rather than much later. Time will tell, but time is not in their favor.

The real issue, however, isn't whether Tesla's distribution approach is legal, it's whether it's sensible. In his visit to Lexington to speak to my Economics 244 students, David Ruggles posited that it's ultimately unworkable. Let me make a few points in that direction; interested readers might find the Dicke chapter cited below of interest, and hopefully David will add his thoughts.

1. 1. For a firm seeking to expand, dealerships are the cheapest available source of finance. We can ignore the up-front fees to purchase franchise rights (at issue in the failed attempt of Mahindra & Mahindra – or maybe primarily the serial entrepreneur Malcolm Bricklin – to set up a dealerships to sell trucks imported from India). That's really small stuff, from the perspective of the financial needs of a car assembler. Much more important is that a dealership pays for new vehicle inventory, signage and replacement parts inventory and provides the necessary real estate. That is a crucial source of working capital for a manufacturer, because the factory is paid cash when a car rolls off the assembly line, whereas parts suppliers are paid a month or three (and workers a week or two) in arrears. Remember, too, that dealerships frequently hold two month's of inventory. Under its current structure Tesla will need to fund that directly.
   2. It may not be a big issue when they restrict themselves to a low volume of hand-assembled cars. It won't be trivial when they want to run a proper assembly operation.
2. 1. Moving to volume business will also require making provision for repairs. That may not be a big issue when its market is limited to a handful of states and is of high-end cars. They and their cars' owners can wait for a technician to be dispatched, or the car transported. That won't work if they want to move away from the supercar end of the market, because their vehicles will be means of transport, not playthings. Would-be purchasers won't want to wait a week or more to get a problem looked at. I think Tesla underestimates the challenge (cost!) of directly developing a dense network of repair facilities.
   2. In the old days, the local mechanic could do the actual work. But as Kevin Borg (a historian of the independent service station at James Madison University in Virginia) emphasizes in recent work, even the most skilled of independent service technicians lacks the training and equipment for working with the computers and high-voltage electrical systems of a vehicle such as a Tesla. To put it simply, they are fundamentally mechanics, experts in traditional mechanical systems, and a Tesla lacks much of the appurtances of an internal combustion engine powered vehicle.
3. 1. Historically the "factory" has been abyssmal at controlling inventory and even worse at handling tradeins. Think of Ford's disastrous attempt [1998-2001] under Jacques Nasser at Ford to buy up independent dealers and run their stores directly in several markets where state franchise law allowed direct sales (eg, Oklahoma City). Dicke's history of the early days of automotive distribution tells the same story. The bottom line is that the factory bleeds, and the longer it tries, the more money it loses.
   2. Now the rise of multistore dealership groups suggests that at least some people have figured out how to run stores under hired general managers rather than owner-operators. So maybe there is more know-how available. However, such dealership groups – the AutoNation and Penske's of the world – still account for but a small share of total US vehicle sales. I remain skeptical.

Ford in its early days had time to experiment; it wasn't until the early 1920s, after DuPont took over GM, that Ford faced a serious rival. They had time to recover from mis-steps. Tesla won't have that luxury.

...mike smitka...

Dicke, Thomas S. (1992). “From Agent to Dealer: The Ford Motor Company, 1903-1956.” In: Franchising in America: The Development of a Business method, 1840-1980. Chapel Hill: University of North Carolina Press, Chapter 2, pp. 48-84.