The Will of the People Be Damned

David Fessler
by David Fessler, Energy & Infrastructure Strategist, The Oxford Club
Electric car  charge

Most people are afraid of change. Right now, automobile dealers across the U.S. are afraid of Elon Musk.

Musk is the brilliant CEO of Tesla Motors Inc. (Nasdaq: TSLA). His outside-the-box thinking with regard to car sales has left dealers "all dressed up with no place to go."

With his direct-to-the-customer sales model, he doesn't need dealers. His Model S sedan received 99 out of a possible 100 points from Consumer Reports.

In my mind, and that of many others, Musk is the Steve Jobs of the auto industry. Jobs reinvented the music business, despite widespread disagreement from the music industry.

Now Musk is facing a challenge from auto dealerships. Many are using their strong lobbying power to try to slow him down.

Musk is determined, however. After New Jersey's Motor Vehicle Commission voted to prohibit direct-to-customer car sales, here's what he wrote in a blog post on March 14, 2014: "Democracy is supposed to reflect the will of the people."

Fighting Against Change

Unfortunately, New Jersey is only the most recent state to effectively ignore the will of the people, at least when it comes to Tesla auto sales. Arizona, Texas, Maryland and Virginia residents are also unable to buy an automobile directly from Tesla.

Several states have come up with ridiculous restrictions instead of outright bans. In Georgia, Tesla's limited to selling 150 cars. That's only because of an exemption from Georgia auto dealer rules.

You can test-drive a Tesla in Maryland. If you decide to buy one, you have to go to another state.

The map below is courtesy of Forbes contributor Mark Rogowsky. It shows the states that have bans and restrictions currently facing Tesla.

Make no mistake: The nation's auto dealers are scared of Tesla. Both individual state dealer associations and the National Automobile Dealers Association (NADA) strongly oppose Tesla's sales model.

They claim that protecting dealerships is better for consumers. But the dealers also acknowledge that they fear they just can't compete with a direct-sales model.

"How can we as auto dealers compete with manufacturers in the same market when we are completely dependent upon them for our inventories?" Tammy Darvish, vice president of Darcars, a Maryland-based chain of dealerships, told the Chicago Tribune.

Elon Musk isn't aiming to be the next Steve Jobs. He's aiming to be the next Henry Ford. He can easily imagine Tesla being a major car manufacturer in the United States.

That's a huge disruptive force to other U.S. automakers. It's especially disruptive to the U.S. car dealer network.

A Simpler Way to Buy a Car

Tesla's out-of-the-box sales model is simple. Customers visit small storefront locations, usually found in high-end malls.

There, they can sit in an actual Model S sedan. Tesla customer representatives are available to answer questions about the car. This is very similar to Apple stores.

If customers like what they see, they can order their car right there. Customers can also buy their cars online if they prefer.

Customers take delivery at the nearest Tesla service center. One of Tesla's "Delivery Specialists" explains the car's features. It's fully charged and ready to go.

Who wouldn't want to buy a car like that? It turns out, the majority of Americans would.

The auto dealers aren't just fighting Elon Musk. They're fighting the will of the people.

The Triangle Business Journal in North Carolina conducted a poll. It found 97% of respondents said Tesla should be able to sell its cars directly to customers.

The Austin Business Journal in Texas conducted a similar poll. It found 86% favored direct sales. Finally, a Los Angeles Times poll indicated 99% favored the Tesla sales model.

What About the Will of the People?

Given all the hoopla and legal hurdles Musk faces, is Tesla a good investment? Goldman Sachs thinks so.

In a recent report on Tesla, Goldman ascribes as much as a 104% upside to Tesla's stock price between now and 2025. Shares have climbed 482% in the last 12 months.

Betting against Elon Musk and Tesla is a dumb idea. Betting against the will of Americans is even dumber.

Good investing,


P.S. Discovering high-growth companies that thrive through innovation is one of Dave Fessler's unique strengths. And subscribers of his Oxford Resource Explorer have profited handsomely from it. They've gained 44% this year on just one of Dave's picks. We're just days from delivering the next issue. Find out how to receive it by clicking here.

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A Big Automaker Can Innovate, Too

When it comes to innovation, it's hard for any of the big auto manufacturers to compete with Tesla and its sleek, all-electric cars. But Toyota Motor Corp. (NYSE: TM) may be the one that comes closest. After all, it was Toyota that introduced the world's first mass-produced gas-electric hybrid vehicle in 1997.

Every major manufacturer now offers a hybrid to compete with Toyota's Prius. Investors have rewarded Toyota for its success: Since Alexander Green added the company to our Oxford Trading Portfolio in 2012, shares are up 60%.

Here's what Alex told us about Toyota recently:

"When we added the Japanese car manufacturer to our portfolio [in 2012], it was struggling with a number of problems, including product recalls and the devastating impact of the 2011 earthquake and tsunami.

"But now Toyota is firing on all cylinders. It is back in full production. The weaker yen is boosting sales. And the ever-popular Camry is poised to complete its 11th year as America's top-selling car.

"Despite the government shutdown last [year] - which crimped sales at many retailers - Toyota had a banner October. Total sales increased 9% over a year ago. And there were a number of highlights with individual models. The company's all-new Avalon posted tripled-digit gains for the eighth month in a row. Sales of the new Lexus IS are up more than 68%. Sales of the new RAV4 increased 61%. And the company's hybrids make up over half the U.S. market.

"Although the hybrid market is still small, don't downplay it. It's about to get a lot bigger. In fact, Toyota Chairman Takeshi Uchiyamada predicts that gasoline-electric vehicles and hydrogen-fuel cell vehicles will eventually displace gasoline-powered vehicles altogether.

"However, he is skeptical of all-electric vehicles. He insists they will require two battery-technology breakthroughs before they are commercially viable: size and efficiency. Hybrid vehicles are a bridge to future automotive technology but, he insists, 'it could be a long bridge and a very sturdy one.'

"The outlook for Toyota remains outstanding. The average age of vehicles on U.S. roads just hit a record 11.4 years, according to data released by R.L. Polk. Pent-up demand for new cars should drive further sales increases, especially now that prices are moderating at the pump.

"Recent new-vehicle launches should stoke demand and bolster this year's earnings. Not that they are disappointing now. In the most recent period, profits increased 94% on a 14% increase in revenue. Sales over the last 12 months were a breathtaking $290 billion.

"And the political situation in Japan is positive too. Prime Minister Abe is committed to stimulating the economy and reducing the regulatory burden on manufacturers.

"In short, new models, a weaker yen and an improving global economy point to a continued rising share price for Toyota. The stock remains attractive at current levels."

- Bob Keaveney with Alexander Green

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