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Tesla Cuts A Deal In Ohio It Can Live With Today, But Not Down The Road

Mar 28 2014, 7:56am CDT | by , in News | Cars & Vehicles

Tesla Cuts A Deal In Ohio It Can Live With Today, But Not Down The Road
 
 

Tesla said it didn’t want to fight for the right to have company-owned stores one state at a time, but at the moment, it’s doing just that. Yesterday, it won a small strategic victory in Ohio, gaining permission to keep its two existing stores, in Columbus and near Cincinnati, as well as the OK to open a third in the Cleveland area. “This is a very good compromise,” said Diarmuid O’Connell, Tesla’s vice president for business development, in the Columbus Dispatch

And for the time being, O’Connell is right. The alternative was that Ohio’s state legislature seemed certain to pass a bill outlawing the two existing stores, forcing Tesla to turn them into information-only locations, as it did in Texas. But because the deal will limit Tesla to those three locations, it’s no long-term solution for the company, which hopes to increase sales  tenfold in the U.S. perhaps as soon as 2017, when it launches a $35,000 sedan to join a lineup that will include the already available Model S sedan and forthcoming Model X SUV.

The tech-savvy ready might already be wondering what the problem is. Because you can order your Tesla online, it’s already possible to get one anywhere in the country whether or not there’s a store nearby. But it’s important to understand that the vast majority of car buyers (1) won’t be buying that way anytime soon (2) want the comfort of a nearby dealer. Here, in the heart of Tesla country where I can’t leave my house without spotting one on the road, there are five dealerships just within a 45 minute drive. That’s two more than all of Ohio will have for the foreseeable future.

Ohio has 4 million more people than the whole of the San Francisco Bay Area and Tesla has figured it will take at least seven locations to cover that relatively small geography. (Six are already open, one is coming soon.) Should anyone question whether Ohio is somehow a good market for Tesla, I’ll refer you to the map I put together of all the Mercedes and BMW dealers in the state. While it’s an imperfect proxy for Tesla, it should you give me some idea of what luxury-car makers have done to make it convenient enough for buyers to get their product. There are 15 Mercedes dealers and 12 BMW dealers in the state. (Lexus makes do with 8 while Audi has 10.)

You can see that greater Cincinnati and Cleveland are each home to several locations for each brand; Tesla will need to get by with one. On the one hand, this problem is relatively small today. Tesla sells a single vehicle worldwide and whatever small lost sales it suffers in Ohio will likely be masked by growth overall. The same is true in Texas, where the situation is made more byzantine by the fact the stores aren’t allowed to sell directly and service isn’t easy to come by. But the harm accumulates over time.

In short, the long distances to Tesla stores will represent a deterrent to buyers and a lost opportunity to reach prospective customers. Early adopters will doubtless find the car, but Tesla’s designs on mainstream acceptance will be hampered by the finite capacity of a given location to sell. That’s why the company has been so aggressive to open locations here in the San Francisco area even with a one-car lineup. And the situation gets much more complex come 2017, with the $35,000-and-up sedan reaching the market.

Tesla is targeting the BMW 3-series with that vehicle, and BMW moves 100,000+ of those cars per year. Overall, BMW sells north of 300,000 vehicles in the U.S. as does Mercedes. Tesla’s three-vehicle lineup at that point would be unlikely to challenge those volumes, but Audi-like numbers (158,000 last year, as always stats provided by the outstanding GoodCarBadCar.net) seem within reach. The problem will come in states like Ohio where Tesla is showing up with the equivalent of a knife at a gunfight if it’s still limited to three dealership locations.

There was one hopeful note for the future for Tesla. The sponsor of the bill allowing the third store, as well as preservation of the two already open, State Senator Tom Patton, a Republican from Strongsville, said on cleveland.com, ”If it turns out this is a good business model for the consumers, we can revisit it.” He noted that the compromise protected the auto dealers but also allowed Tesla to grow in Ohio. The company will almost certainly need more stores down the road if it’s going to fulfill its potential, but in the meantime, Tesla can cross Ohio off the list of states it doesn’t want to fight in one at a time.

 

In the next installment in this series, I’ll look at the company’s legal options for pursuing a national solution via the judicial and legislative process. 

Follow me on Twitter and on Facebook. Find the rest of my Forbes posts here.

Source: Forbes

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