Tesla Motors (TSLA) is a cult sensation right now. TSLA stock is up 430% year-to-date in 2013, Tesla CEO Elon Musk keeps justifying his image as an iconic entrepreneur and imaginative techie, and the Model S sedan is a hit with consumers.
So investors who think TSLA poses a risk to entrenched automakers like General Motors (GM) and Ford (F) are right. But it’s not just the lost sales, where a Chinese customer snaps up a Tesla Model S instead of a Chevrolet Volt.
It’s the very nature of Tesla, with its innovative sales model that has caused so many waves in the U.S. because it breaks down the old order of dealer-focused transactions.
In America, there’s a large lobby that will fight tooth and nail to keep that structure in place by pushing dealer-friendly laws and regulations … but in the emerging auto market of China where regulatory structure is much more hazy and there is no decades-long legacy of dealerships, the whole system could fall apart.
And considering that China is now the #1 vehicle market in the world, that’s a huge blow to Detroit and a huge boon for TSLA if the nation starts to think of auto sales outside of conventional dealerships.
Now, this is hardly an easy row for Tesla to hoe. The company just allowed for its Model S to start selling China — and given the struggles at TSLA to meet its existing backlog of U.S. orders, it’s highly unlikely that the company will be able to do anything at scale overseas anytime soon. TSLA sold a mere 5,150 vehicles in Q2 and is pacing about 21,000 on the year — hardly GM-like, which sells over 1 million total vehicles per quarter around the world.
It’s also difficult to believe that anything in China will affect the U.S. regulatory fight over the Tesla sales model. TSLA actually lost a very contentious legal battle in Texas recently, and continues to face serious headwinds on that front.
Still, China is not exactly known for scrupulous regulators and doesn’t have a lot of rich family dealers looking to protect their business model that has been built over the decades.
So while the threat of lost vehicle sales in China is admittedly a small one, the threat of a structural change in the very sales model is a serious one.
After all, “channel stuffing” is a famous tactic of auto dealers looking to manipulate numbers. In short, the practice involves recording a sale from GM because it has been delivered to a dealer — NOT an end customer — and when done unscrupulously and at scale can temporarily mask problems with sales trends. TSLA obviously benefits on margins by selling direct, but Ford and General Motors have long benefited from having these channels to serve as buyers at scale rather than worrying about a retail operation.
And on a basic level, selling luxury cars retail is much more practical than selling compact cars — where the volume is much higher and the margins much lower. Part of the reason Tesla stock can rely on a direct sales model now is because the Model S is a niche product and there is a low ceiling on volume, making the logistics of such an operation easier.
Who knows if Telsa will ultimately move away from direct sales in the U.S. and towards a more conventional dealer-driven model.
But the longer-term story here is how China’s auto market as a whole will evolve separate from TSLA, and what the impact will be on Ford, GM and other automakers that are heavily dependent on this region to provide growth.
Related Reading on TSLA
Will TSLA rentals give the stock a boost? (The Slant)
The Tesla Model S goes to China. (CNNMoney)
The Texas dealer’s group that broke TSLA. (Automotive News)
More on the dealer-less threat posed by Tesla stock. (Bloomberg)
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.
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