Tesla’s Revolutionary Non-Vehicle Innovations Are Proving Otherwise

Before the launch of the Model S in June 2012, Tesla and its founder, Elon Musk, captured headlines for promising the first battery powered vehicle that did not require owners to compromise on style, content, and range. All of that came with a high price, but the car garnered rave reviews for safety, style, performance, and engineering as well as features like driver assistance, over-the-air updates, and design efficiency. But Tesla’s challenge to standard industry practices wasn’t just limited to the car; Musk and Tesla also wanted to revolutionize the production system as well as the vehicle purchase and ownership experience.

Tesla’s business model assumed that customers would wait for their vehicles to be assembled to their specifications. Tesla would reduce factory and store vehicle inventory via build-to-order production, as the industry calls it. Build-to-order had been a dream of automakers for decades, but it doesn’t work given the cyclicality of the business, changing popularity among brand and models, employee expectations for a predictable work schedule and compensation, and the complexity of global supply chains where contacts are based upon forecast production levels. Build-to-order only works when there is a huge backlog of orders that support consistent production, and, thus, is not sustainable over the long term.

Tesla also believed that it could automate the assembly process to reduce labor costs and achieve high quality. Automakers have used robots for decades in repetitive tasks, such as painting, welding, and facilitating vehicle component placement.  The disastrous production launch of the Model 3 confirms that every other automaker had it right – robots can’t replace humans in many assembly tasks. Tesla learned the same lesson as GM did in the 1980s – robots, even today’s more nimble ones, cannot replace humans.

Tesla further concluded that selling at fixed prices, and without stored inventory, would eliminate the need for traditional dealerships. Tesla would showcase their cars in galleries and stores where consumers would learn about the vehicles from non-commissioned “owner advisors.” And since electric vehicles needed less service, and Tesla vowed to never profit on services or parts, owners could rely on “Tesla Rangers” to provide repair service at their homes (for no additional cost).

Fast forward to 2018, and it’s evident that not all of Tesla’s promises have sustained the passage of time. For starters, Tesla’s non-commissioned owner advisors now receive a bonus that is tied to each sale. Once free services, like the Tesla Rangers or Tesla’s network of Superchargers, are not complimentary for all owners. Further, while Tesla claimed it does not profit on parts and service, on non-warranty repairs, Tesla charges hourly labor rates comparable to those of luxury dealerships, and, according to some Tesla owners, the company even marks up the price of common parts.

Tesla avoided establishing independent dealerships, but as a result, it is disadvantaged by the cost and investment in real estate, buildings, and personnel in its ever-growing network of galleries and service centers. It also appears that Tesla’s service capacity has not kept up with the number of vehicles on the road. Tesla owner blogs report long waits for service appointments and frequent shortages of critical parts.

And contrary to its aversion to carrying inventory or discounting its vehicles, Tesla has consistently been discounting new and used cars. The Tesla inventory aggregator website, www.ev-cpo.com, listed a total of 730 new Tesla S and X models for sale in the U.S. on September 8, 2018. While the majority of these vehicles are loaner and test drive vehicles with 1,000 to 3,003 miles, more than 130 of the 479 new Model S vehicles have a default mileage of 50 miles, which suggests that they were placed in galleries and are essentially brand-new cars. Likewise, approximately 100 Model Xs were listed as having 50 miles on them.  These vehicles, as well as test drive and loaner models, are discounted dramatically below list price just like they would often be in any dealership.

The market, not Tesla, will determine the clearing price of its vehicles now that the initial rush to own a Tesla has been satisfied. Tesla was able to achieve the ideal state of selling vehicles at list prices as long as demand exceeded supply, but the company is facing a new reality.  The Model S is now six years old, and without major design changes, it’s becoming a stale product.  Generous tax credits that boosted Tesla sales in the Netherlands, where the company has its European headquarters, went away, and tax credits will soon be cut in half in the U.S. Jaguar, BMW, Mercedes-Benz, Audi, and Porsche are launching new electric models over the next year, which will shift the spotlight from Tesla onto other highly competitive luxury models, which will be sold and serviced by a nationwide network of well-capitalized and established independent dealers. Thus, it is likely that Tesla’s non-vehicle innovations are about to be proven anything but revolutionary.

Maryann Keller is principal of Maryann Keller & Associates, a Stamford-based automotive strategy consultancy.