Blankenship Departure Underlines Tesla Retail Issues

Going down with the Blankenship?

For all the praise it receives for “innovating beyond internal combustion,” there’s nothing especially unique or disruptive about Tesla’s core technology.  On the other hand its approach to automotive retail, forgoing dealerships for direct sales, is both unique and potentially very disruptive. Especially at a time when some of the biggest OEMs in the US market are opening  online sales channels that could someday allow online-only retailers to bypass the dealer franchise system. With the man behind Apple Store and The Gap retail successes leading Tesla’s direct-sales strategy, car dealers have had good reason to worry that the future might be passing them by.

Now with Tesla under NHTSA investigation for what is clearly an anomalous incidence of fires and effectively banned from retailing in one of its largest potential markets, Tesla’s retail guru has suddenly and quietly retired. As much as the fires themselves, this is another clear sign of Tesla’s growing pains… and possibly the most concerning.

In the roaring post-IPO period, as Tesla’s stock value shot beyond any rational expectation, Blankenship’s presence at Tesla doubtless helped foster the firm’s image as an “automotive Apple.” And with his well-honed eye for retail spaces, there’s no doubt that Blankship helped establish the brand’s fourth-most important avatar (after Elon Musk, the Roadster and the Model S): its slick, high-end retail spaces. But although his official title is listed at the Tesla website as “Vice President, Sales & Ownership Experience,” it seems that his job has been almost entirely focused of late on designing and opening new stores as Tesla expands sales globally. Apparently the Tesla’s notoriously aggressive sales operation itself has been handled by Director of Model S Programs Jerome Guillen since early this year.

This makes sense: with the post-IPO glow fading from Tesla’s stock price, Blankenship’s image-building retail spaces are less important than simply moving metal. And since many Tesla “experience centers” aren’t allowed to actually sell cars, their longer term value in many cases are questionable. Tesla’s retail challenge has shifted from seducing consumers, a goal it has handily accomplished, to battling dealer franchise lobbyists state by state simply in order to sell cars there. Rather than a tech/design creative like Blankenship, Tesla needs a tough-nosed political insider if it wants to continue to build out the national retail and service channel needed to support future higher-volume models. Just ask Musk, who seemed more than a little stunned by the cold reception he received from Texas dealers.

The Texas setback, along with hints from Tesla execs that it might consider dealerships once volume levels rise beyond an unspecified level, indicate that Blankenship’s departure may be part of a broader re-thinking of retail strategy at Tesla. And not without good reasons: as Michael Smitka and David Ruggles point out over at Autos And Economics,  Tesla has plenty of good reasons to reconsider its anti-dealership approach.

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.

Point one hasn’t been a huge deal as long as Tesla’s stock remained frothy, but with enthusiasm coming back down to earth dealers could well become an important source of capital. Certainly the major increase in volume Tesla needs to survive long-term will require capital investments inventory holdings that would be extremely expensive for Tesla to undertake itself. Point two is also a real issue: between the lack of consistent service infrastructure and mounting technical/quality challenges, Tesla has much progress to make before it can support higher volume models. Point three is no less germane: despite several efforts no auto OEM has been able to out-perform franchised dealers.

But the main issue likely to force Tesla to abandon its push for post-dealership auto retail? The sheer costs involved in tackling the franchise system itself. For one thing, dealers are some of the most politically connected business people around. For another, franchise laws vary state by state, meaning Tesla has to fight state-by state, rather than “scaling up” a single win.

Whether Blankenship was forced out for failing to address these issues, or if he retired because he didn’t want to tackle them, it’s clear that sexy retail space isn’t going to win the war for Tesla. This change was inevitable… the question is what comes next.