Ed Wallace

Selling Autos Direct

Ed Wallace
Ed Wallace

Not a week goes by without someone writing to ask, “Why aren’t consumers allowed to buy cars direct from the manufacturer?” and pointing out to me that Tesla buyers get to do that. But they never mention Elio; that’s a rarer email question or the occasional phone call to the radio show. Those people want to know whether I think they will ever get their new Elio — or even just get their deposit back.

Both questions answer themselves with a cursory amount of research.

First, while Tesla does sell direct, it’s never managed to turn a profit. That alone explains why their business model is seriously flawed. However, if their executives can ever figure out how to build the new Model 3 and hit their stratospheric forecast volumes, that could change. At least for a while.

Elio, on the other hand, has been taking customers’ money for its proposed 3-wheeler for some time and hasn’t managed to build one yet. So, in the two cases where one can buy cars direct from the factory, one company loses untold billions of dollars, while the other can’t even get its vehicle into production.

Meanwhile the old line, old-fashioned auto manufacturers are making billions of dollars in profits using main line new car dealers.

There’s another issue with buying direct, though, and it’s a big one. Last week Inside EVs, a publication devoted to the mass adoption of electric vehicles, pointed out that on the Tesla Repair Channel, an older (2013) Model S with just 61,000 miles on it is needing its control arms repaired for the third time; they’ve worn out, which allows excessive play during steering. Additionally, the control arm bushings are showing cracks, also a major issue. Not mentioned is that, if these problems aren’t repaired, a broken control arm leaves the driver with no control of the vehicle.

If any product from any legitimate automobile manufacturer developed suspension problems like this, they would trigger not just a major recall of the vehicle but a “stop drive” recall: Customers would be warned to park their vehicles immediately, and a wrecker would pick them up right where they were. While this kind of recall is not common, GM was forced to do one some years ago because it appeared a few new trucks were missing a bolt in the suspension assembly. Nothing in the Inside EV story mentioned a recall on the Tesla. The article simply noted that the control arms seemed to last only 20,000 miles on this 2013 Model S P85. For the record, on most cars control arms last at least 100,000 miles and some last twice as long.

If that story is accurate and other Teslas also are suffering premature control arm failures, there’s no better justification for having manufacturers sell cars only to dealers — and for everyone’s standing behind their products.

But don’t think the automobile manufacturers haven’t tried selling direct before. Ford bet the farm on that strategy, and it failed miserably.

If It Works …

In the Nineties, Ford invited me to a Susan G. Komen event in Dallas, a luncheon that Edsel Ford would be attending. I was sitting next to one of Ford’s top officials, and he regaled me during the luncheon with his company’s foolish plan to start buying dealerships from current owners in order to make them factory-owned stores. This concept was first called the Ford Retail Network, but independent Ford dealers pointed out that they too were part of any Ford Retail Network, so the name became Ford Auto Collection.

It would start in July of 1998 in Tulsa, where Ford bought out its established dealers. Immediately the top salespeople quit, Ford sales fell, and GM picked up the lost market share.

Now, one would think that experiencing such a disaster on the first run would encourage Ford to fix Tulsa before advancing this scheme elsewhere. But no. On to Oklahoma City, where what had happened in Tulsa was repeated. San Diego became part of the Collection, and then on to Salt Lake City. There Ford purchased 14 dealerships and cut that number down to nine locations, and immediately half of the salespeople at those stores quit.

Ford’s one-price, no-negotiation system was not a crowd favorite. The company centralized management and parts procurement; those, too, failed disastrously. There was major confusion in vehicle supply as well, according to a 2000 article about the fiasco at MotorTrader.com. One Salt Lake dealer, Brent Butterfield, would end up keeping his Ford store; and in 1999, the year after the Ford consolidation and factory takeover, his dealership sold well above the national average volume. One Automotive News story claimed that at one point his store outsold all of the other nine city dealerships Ford controlled. Oh, and in Salt Lake City total Ford car sales fell by 13 percent, while sales of trucks and SUVs fell by 29 percent. As I recall, the Tulsa numbers were similar.

According to numerous articles at the time, morale among both Ford employees and those dealerships’ customers was extremely low. That can’t be verified; as always with customer satisfaction scores, manufacturers won’t release that information.

By 2001 Ford decided it wanted to give up on selling its cars direct to the public, although it claimed all of those regions were now performing wonderfully. Of course, that’s doubtful or they would have kept those stores. This experiment in critical markets lasted just three years before Ford realized the old system worked far better.

For some unknown reason, when the business media writes about the joys and brilliance of being able to buy direct from a manufacturer, they never bring up the Ford Auto Collection debacle. (Or the fact you’d have to pay list price each and every time with other manufacturers.) Nor do they point out that Tesla doesn’t make money doing that — or that, so far, Paul Elio and his auto venture seem to have been surviving on the deposits of thousands of customers without ever once delivering the car he promised years ago.

Maybe it’s because few understand how large, expensive durable consumer goods manufacturing works. The path to profitability demands the factory has to run at 100 percent line utilization to minimize production costs as much as possible — whether it’s your parts cost, because those prices become lower the more cars you build, or even your labor costs per car.

The new Toyota-Mazda plant in Alabama is a great example of how this works, so let’s do some fourth-grade math with it. According to the press release, this $1.6 billion factory will employ 4,000 people building 300,000 vehicles annually. First, there’s the fixed overhead; we don’t know how long the scheduled depreciation on that factory is, but the cost of that building will be expensed on every car built.

Next, assuming that each of the 4,000 workers puts in a 40-hour workweek and takes one week’s vacation each year, the factory would have 160,000 hours of labor each week, or 8.160 million hours per year. If one divides that by the 300,000 vehicles to be built, then each vehicle’s assembly requires 27.2 man-hours of labor. (This is a simplistic example as a few might not be line workers, paid less, and their labor not counted towards auto production.)

But let’s say that Toyota and Mazda find ways to make this factory even more productive and within a few years it can produce 400,000 vehicles per year with the same size workforce. Doing that math shows that the man-hours per vehicle built figure falls to just 20.4; in manufacturing, that’s a huge labor cost savings. Improvements in overall volumes may come from future automation.

Now let’s imagine that Toyota and Mazda sold those cars direct to the public. In order to keep the line running optimally, every workday of the year they would have to have around 1,150 orders in hand to build those products. Not likely to happen without a national sales force. In fact, it’s only happened once — the pre-orders for the Tesla Model 3 — and so far, Tesla hasn’t figured out how to build it in volume.

You see, new car dealers are the buffers that let factories work profitably and efficiently for the most part, except in recessions. Dealers buy cars and trucks that aren’t selling in great numbers, because the zone office is twisting their arms every week to buy more vehicles than they need so that any given factory’s utilization rate stays as close to 100 percent as possible. The public buys when individuals are motivated for a new vehicle. That’s not consistent; but dealers buy these cars every week from the manufacturer, and they are often forced to do so.

Back to the new Toyota-Mazda plant and the concept of selling cars directly. Let’s say that by doing so, the public wants to buy only 200,000 of those cars per year. Using the same fourth-grade math, with 4,000 workers the man-hours per car figure jumps to 40.8. And any factory that inefficient disappears.

Consider this. In its first year the Chrysler 200 sold over 150,000 units, but even at those numbers Chrysler claimed to be losing money on it and decided to discontinue it at the end of its run. How sad is that? The 200 is unbelievable compared to the old Neon we purchased in even larger numbers two decades ago.

Saab went out of business selling fewer than 200,000 cars a year, yet the business media seems to think Tesla’s a raging success with sales about half that, which is why the company has failed to make money. Keep in mind that Tesla, according to The Verge, has close to 10,000 workers at its Fremont, Calif., factory, or 2.5 times the planned workforce at the Toyota Mazda plant — building 1/3 the proposed output. Again, it’s hard to make money in a capital-intensive industry like automotive production with those numbers.

None of this is meant to pick on Tesla or any other manufacturer. But this industry has tried selling direct before. Ford bailed on its program after three years because of poor sales, poor morale and losing dealerships’ best employees. Tesla has yet to make money doing so, and Paul Elio is likely never going to produce his car.

And all of this information is easy to Google and verify. The problem is that people keep making a false comparison. Buying your $700 iPhone™ direct is not the same as buying a $60,000 BMW 5 Series direct. The iPhone has few options; the BMW has far more (every car comprises 20,000 to 30,000 parts) — and the iPhone’s manufacturing cost isn’t much; further, Apple sold almost half as many iPhones last year as the number of cars sold worldwide. So, that one product and its one design has extraordinary volumes. Now think of all the car companies, different vehicles made, options per vehicle, and so on. Automobiles are truly expensive from a manufacturing viewpoint.

Remember, when Saturn came out GM said there would be one price — the list price. The plan was no salespeople; you’d go to a Saturn store and a hostess would pitch you a key to a demonstrator to sell yourself. Then she’d sit you down at a computer to spec out your Saturn, and seven days later it would arrive from the factory.

Yeah, that was really the plan. Even GM executives finally realized that was never going to happen. Cars need professionals to show customers all their good points.

Customers also need great dealers when cars develop recall-worthy problems.

Further, great dealers are dependable; they find ways to survive tough times, while the car-buying public is often fickle. It’s just how we are; we can’t be counted on to buy X number of cars each and every day to make a capital-intensive factory system work.

Other than that, buying cars from the manufacturer is a great idea whose time has come.

© Ed Wallace 2018; Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, bestowed by the Anderson School of Business at UCLA, and hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. Email: edwallace570@gmail.com

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