After testifying last week before Texas legislators, Tesla Motors CEO Elon Musk talked in depth with Automotive News about his reluctance to use franchised dealers. The following is an excerpt of the interview with Automotive News reporter Amy Wilson:
Texas legislators want to facilitate a meeting between Tesla and the dealers association. Is that happening?
I'm not sure what happened with that. Thus far, we've not really seen any willingness to compromise from the Texas Auto Dealers Association.
We're in a tough spot because I'm not fundamentally opposed to franchising, but I think it's really difficult for a new company with a new technology to be franchised. It's not possible to effectively sell a new technology like electric vehicles, for a dealer to do that, without undermining the story behind gasoline cars.
That's why we've got to go direct. If there was a hard commitment to sell a significant number of cars through the franchise approach, we'd be open to that. But what we can't do is give someone an exclusive with no commitment, which is what people have been asking for. That's completely unreasonable.
You told Texas legislators you would be open to a trigger threshold where you'd use franchise dealers after hitting certain volumes. What kind of threshold would you entertain?
If electric vehicle sales from Tesla exceeded 5 percent of new car sales in the state per year, then I'd say yes to that. We're a million miles away from that.
You talked extensively to legislators about other electric car companies failing after choosing to use franchised dealers. But aren't there other reasons behind such failures? What about Fisker's battery supply issues?
Yeah, I agree. But even with the battery supply issues, they had unsold inventory at Fisker. Sales was a significant contributing factor, in fact, the determining factor. A123 went bankrupt because Fisker wasn't buying enough battery packs from them.
And you connect the lack of Fisker sales to the retail model they used?
That's a substantial contributing factor, yeah.
Where does Tesla's legislative effort in Texas stand?
We've got a decent chance of getting the bills out of committee. That's our goal right now.
You've had a conversation with Texas Gov. Rick Perry about the bills?
Yes. About a month ago. He said he would support something like this. It's unTexan to have this kind of regulation.
How much more would Tesla invest in the state if you had this exemption?
Over time, it would be tens of millions of dollars and several hundred people for sales and service. The other thing is, when we do establish a manufacturing plant outside of California, Texas would be a leading candidate for that.
On the space side, our next biggest base of operations outside of California is Texas. We're looking at developing the world's first commercial orbital space port on the south coast of Texas near Brownsville. So I'm very much a pro-Texas guy, and I've demonstrated I'm not some Johnny-come-lately striding in town and making promises.
Will talking about those investment possibilities for Tesla and SpaceX in Texas help win favor for this legislation?
I've not explicitly tied the two together, and they are two different companies. But I'm using the one as evidence I've demonstrated a history of being pro-Texas with my space company, and I would be inclined to do something similar with Tesla.
What do you think about the resistance you're getting from dealers and where you are today in Texas and other states?
We certainly have a lot of battles in a lot of places. So far we've been successful in those fights. It's because right is on our side.
In Texas, we've got a really difficult battle. It's so ironic it should be in Texas which prides itself on being the most free market state in the country. Everyone in the industry is saying there's no way we are going to get legislation passed given the power of the dealer association. And they might be right, but we're going to fight it anyway even if the odds are against us.
In Texas, it's the toughest of all because [the dealer association president] about 20 years ago was a really tough dude, and he worded it six ways to Sunday. Like Green Eggs and Ham, you know. If you're a manufacturer, you cannot sell it any which way, no matter what. You can't sell it in a house, can't sell it in a mouse, can't sell it in a grouse. It's like, OK, wow. You can't sell it.
Isn't your route more costly than it would be to use the franchise system in the first place?
Yeah. It would be cheaper for us to use the franchise system, except I don't have confidence that the franchise system would actually sell cars. It would not sell enough volume for us to be successful.
What are your thoughts about dealers? Your internal e-mail last week had some pretty strong words about dealers.
I didn't mean for that e-mail to be published. It certainly wasn't me who leaked it. One uses stronger language internally than one would use externally. But I feel like we are being attacked all over the place by dealers, and they're causing us to spend a ton of money on legal battles, and they've slowed down our licensing approvals at DMVs in various states, and they're just generally being pretty negative and behaving in an anticompetitive way.
If they think there's an issue, they should just focus on selling cars. They shouldn't focus on stopping us from being able to sell our cars. Obviously, it's not going to make me love dealers. It's pretty hard to love someone who's attacking you viciously in multiple locations.
Have you had negative experiences with dealers buying a car yourself?
Yeah, I've had some bad experiences and some OK experiences. I've never had a good experience.
Is that part of your dedication to the direct model and your focus on providing a different customer experience?
Yeah. I've always wanted to make sure that people look forward to buying the next car. I would like to really foster a relationship for a long time. In our stores, we encourage people to get in and sit in the cars, even if it's a 10-year-old kid.
I remember when I was a kid and went to an expensive high-end car dealer, and they wouldn't let me touch the car. They wouldn't let me get inside the car.
We want to try, even if somebody can't afford the car, well, let's let them at least experience the car. It seems like a nice thing to do. We just want people to like that they visited the store and enjoyed the experience and want to come back. Maybe one day they could afford the Model S or the third-generation car, which will be about half the price.
What else do you want dealers and legislators and regulators to consider about your model?
There's better things to do than attack Tesla. We're a little company selling a small number of electric cars. And we're just trying to make a go of it and not be yet another body in the graveyard of car company startups. We're not trying to poke a finger in their eye or do something unreasonable. If I thought there was another way to be successful, I would take that path. But the evidence suggests if we don't at least initially pursue a direct sales model, we will fail.
In the future I could certainly see us embracing a mixed model, where there's a mixture of company-owned and franchised stores. There are good examples of those, like McDonalds. But we need to be a bigger company.
What size do you need to be to make that work? What kind of annual volume in the United States?
Roughly 1 percent. That's not a large number. But I think we've got to be at least 1 percent of new car sales in America, which would be around 130,000 or 140,000 cars.
How soon can you get there?
It depends on when our third-generation more affordable car comes out, which is going to be in about three or four years.
You need that more affordable car to hit that sort of volume?
I think so. I'm not sure there are enough people who can afford the Model S or the Model X to reach those volumes domestically.
Would you launch the affordable car with a combination of company stores and your first franchise stores?
That's a definite possibility. It's worth noting in Europe, for example, there's a mix of company-owned dealerships and franchised dealers and that model is able to co-exist. So it's not just in other industries. I just think the dealers associations are getting bent out of shape for no good reason here.
Dealers express concerns that new manufacturers from China or India will try this approach. Or that if Tesla is successful, existing manufacturers will carve off EV lines under a new name and try company stores. Is that a valid concern?
I don't think so. People ought to look at Europe where there is a mix of company-owned and franchised dealer locations. If franchised dealers really believe what they say when they say they're the ones best able to sell and they can do a better job, then they should not fear competition.
Are you going to personally be more vocal and appear at more proceedings like legislative hearings whether in Texas or other states?
I'll do whatever necessary for Tesla to succeed. I'm an engineer. I like working on engineering, not legislation. So it's not that I want to do it. But you have to do your chores. I have to do what I think is necessary for the health of the company, and that's what I'm doing.
Is this distracting you from core engineering and design tasks in a way that hurts the company?
Yeah, I don't think it's productive. I wish I was working on design and engineering of new products. Instead I'm distracted by these issues. Hopefully they go away in the not-so-distant future because it is taking time away from new product development.