https://www.forbes.com/sites/jeremyalic ... 40f8d64800Tesla's Online-Only Model Leaves Many Baffled
I see the stock's down another 3%.. . . The legal argument…
On the day of the announcement, Musk held a private invitation-only conference call with journalists, who asked if the move would face opposition from state regulators that enforce franchise laws. Musk explained that online-only sales would allow Tesla to circumvent them, saying, “I’m sure the franchise dealers will try to oppose us in some way, but to do so would be a fundamental restraint on interstate commerce and violate the Constitution. So, good luck with that.”
The concept of using online sales to bypass franchise laws isn’t new to Tesla. In Texas, for example, where direct to consumer new vehicle sales are prohibited, customers must buy a vehicle online, then Tesla ships their car from states where it’s licensed to sell, like California. But if Tesla closes its retail locations in states where it legally operates, it’s not clear if it will lose its licensing. Leonard Bellavia, a lawyer and franchise law expert disagrees with Musk’s legal opinion, “The statement by Musk that state dealer franchise laws prohibiting factory direct sales are unconstitutional is an overly simplistic and rather bald-faced generalization.” And while Tesla plans to close its retail locations, it intends to expand its service network, which is also fraught with legal issues, according to Bellavia, “An online sale only model would require both a sales and service facility to satisfy state licensing authorities, which defeats the purpose of online sales.” Musk didn’t address the service-related legal issues in his announcement.
But Tesla’s legal issues aren’t limited to just franchise laws; there are also other state and local regulations that create a regulatory moat around online vehicle sales. In certain states and municipalities, a “wet signature” or in-person signature is required for some or all vehicle delivery paperwork. Finally, it’s also unclear how online-only sales will affect each state’s new car lemon laws, which were written based on sales occurring within the respective state.
Most car buyers aren’t ready to buy online…
Counter to the hype surrounding the predicted exodus of car buyers from dealership showrooms, the mainstream new car buyer is not ready for online-only vehicle sales. Last year, my consulting firm researched e-commerce consumer trends in the automotive industry, and after many interviews, we learned that while many new car buyers would prefer to buy online, a majority of transactions are still not well-suited for online sales. While the reasons will vary by customer segment, the explanations generally revolve around the ability to view and test drive a vehicle; review features and options in-person; the complexity of financing options and credit approval; the need for an in-stock vehicle; and finally, valuing a trade-in vehicle. In fact, more than 40% of new vehicles financed in the U.S. involved a trade; and while major advancements have been made in valuing trades remotely, in almost all scenarios, an in-person inspection is required to pay the highest amount to a consumer. . . .
Musk explains "You can now return a car within 7 days or 1,000 miles for a full refund. Quite literally, you could buy a Tesla, drive several hundred miles for a weekend road trip with friends and then return it for free.” But as someone who oversaw an extended test drive program with the BMW 7 series only a few years back, I can attest that these programs often cost more than they achieve, while also attracting chronic abuse from non-buyers. While Tesla will likely initiate safeguards to prevent abuse like I witnessed, such as requiring full payment upfront, it remains unclear how Model 3 customers can “test drive” vehicles without undergoing major inconveniences if they wish to return them. Being responsible for sales tax (which is likely not refundable by state law) as well as the vehicle depreciation (as the vehicle is considered used once registered) are just two issues. It’s also uncertain how these customers will be able to purchase a different vehicle as their credit will be weakened before/during the refund process and likely weeks after. Some experts claim that Tesla is biased by its experience with Model S and X customers, which have an average income nearly 50% higher than the typical luxury car owner. These high-earners have more flexibility than the Model 3 buyers, including (in most cases) having another vehicle at home, and are, therefore, better able to adapt to the uncertainties and inconveniences of online-only sales. But the Model 3 mass market customer needs a vehicle to go to work and perform other everyday functions and is, therefore, more restricted by vehicle downtime while also being more financially constrained. . . .
Many industry experts feel that the online-only model is not yet viable for a mass-produced vehicle, and they also question if it will improve Tesla’s profitability. But it is certain that this new approach will create obstacles that could dampen Tesla’s efforts to sell the Model 3 at a time when the fledgling automaker needs to achieve scale to function as a viable automaker. While it’s left to speculation, many predict that Tesla’s online move will be clarified over the coming weeks as Tesla consumers and investors become increasingly concerned.