The Case for Tesla Making a Gasoline Car

NEW YORK (TheStreet) -- In this article, I am making the case that Tesla (TSLA) is building such a powerful customer relationship model that it could have success in also selling "traditional" gasoline engine-powered cars. Much of this is because U.S. consumers have come to hate car dealerships, which Tesla doesn't use.

Remember those days 10-20 years ago, when you bought a PC from one of those independent "dealers" located on every fifth street corner? It was a bit like buying an allegedly antique hand-knotted oriental rug: You absolutely didn't trust the person who was selling you the rug, and you hoped you would never have to return to that store for any reason.

Next to visiting a hospital or dentist for a surgical procedure, buying a car -- new or old -- is a painful event. You KNOW that you are being taken advantage of; you just hope you minimize the damage.

Either you pay too much up front, or at the next service visit they will "find" $2,700 worth of "unfortunate" repairs not covered under warranty. This is in part a function of the lack of a unified incentive structure between the auto makers and the independent dealerships.

The car maker wants you to be happy, so that you recommend the brand and return to it next time you buy. The car dealership's incentive to do so is less. Yes, they too want you to like the brand and come back. However, there is only so much the dealership can do to impact this equation. To take advantage of you in the short term can be much more tempting, for some.

As a result, the dealership experience may be viewed by consumers as one of the worst shopping experiences, let alone servicing and repair experiences. Yes I know -- the auto companies are trying to combat this with endless quality surveys, holding back cash for year-end based on quality survey results, and so forth.

Still, impressions tend to be long-lasting, and the consumer generally has been looking for a better way.

In the PC industry, Apple (AAPL) found the better way. It opened its stores and aligned the brand's long-term incentives with the people who touched the consumer. Is there anyone who doubts anymore Apple's superior retail and life-cycle service experience?

In the auto industry, existing auto makers saw the Apple store phenomenon and would have loved to emulate it. However, they can't. Not unless the laws change.

Basically, most U.S. states have laws preventing car makers from selling cars directly to the consumer. These are ancient laws, probably in deep conflict with the intent of the U.S. Constitution to ensure that states don't limit competition.

However, in most of these states, the automobile sales franchising laws cover only auto makers with existing franchisees. In other words, if you hadn't already accepted an independent franchise to sell your cars, you are exempt.

People had almost forgotten about this exemption seeing as there had not been any new significant auto companies in many decades. Chrysler was founded in 1925, and Ford and GM are older than that. Smaller auto companies died or were acquired along the way. The issue was asleep, "settled" for generations. Forgotten.

Until Tesla.

In the wake of the Apple stores, that Microsoft (MSFT) also has copied, Tesla made the genius move to circumvent the relic of the independent auto dealership.

And customers love it!

A Tesla customer can shop in confidence knowing that the dealer isn't going to try to play a cat-and-mouse game with them for various kinds of hidden fees. When the car comes back for service, or needs repair, the consumer doesn't feel like he is being robbed nearly to the same extent as would likely be the case with an independent dealer for an older auto maker.

This leads me to the main point of this article. Tesla does not have only two major advantages in the market right now:

1. An all-electric high-performance car with good interior space that can go 265 miles on a single charge. Nobody comes close.

2. A rapidly growing 440 volt DC charging network for long-distance travel. Nobody comes close.

Rather, there is also a third one: The absence of the traditional independent car dealer. Mind you, this has nothing to do with Tesla cars being electric, and the electric car charging network.

This leads us to an interesting thought experiment: What if Tesla started making gasoline and/or diesel cars? If people prefer the Apple model of direct sales and service, it suggests this would be a major advantage for Tesla even inside the gasoline/diesel world.

Clearly Tesla has no intention of making a gasoline or diesel car today. Amazingly, Tesla has been almost equally clear that it hasn't been considering any form of plug-in hybrid either (think BMW i3 with range-extender or Chevrolet Volt).

With this as a background, let's consider two scenario inputs, not necessarily co-dependent:

1. Gasoline prices decline, and electric car subsidies go away:

In this scenario, all other things equal, Tesla would face sales headwinds. It should be obvious that this isn't as good for Tesla as if gasoline prices stay flat or go up, or if subsidies continue or were increased.

In this scenario, Tesla might have to consider making at least some form of plug-in hybrid. There are many different architectures for this, but the most likely would be the one pursued by BMW in the i3, which hits U.S. shores in a couple of months.

Even if it were a pure gasoline or diesel car, with no plug-in anything-battery, Tesla would have a natural advantage in its direct sales model. Electric car buyers are not the only ones wanting to escape independent car dealers.

2. The prospects of Tesla being acquired:

First of all, I don't think there is anything pointing to Tesla being acquired right now, for several obvious reasons, including most prominently the valuation and the controlling shareholder. That said, what could happen if scenario No. 1 above played out, causing a fall in Tesla shares to the point where a sale would be financially viable and otherwise possible?

If so, there are two possibilities to consider:

A. Someone might want to buy Tesla for its superior direct sales network!

In other words, if I were an existing auto maker, one way to get around the ancient and anti-competitive, anti-freedom, legislation in most U.S. states, acquiring Tesla, which isn't subject to these crazy laws, would be a nice way to do it! This prospect makes Tesla worth a lot more than any factory, electric car design, or charging network.

In other words, there's more to what Tesla is worth than just the superior electric car and the superior charging network.

B. You can't acquire this 'direct sales network' right.

As best as I know, this has not been litigated in recent decades -- and would therefore be a likely candidate for writ a certioari from the U.S. Supreme Court. That said, to the extent that an older auto maker with a dealer network couldn't transfer Tesla's direct sales model into the new company as result of an acquisition, it would severely limit the attractiveness of acquiring Tesla.

So, if you acquire Tesla, you lose one of Tesla's three major competitive advantages. I don't know the legal status of such a prospect, and I don't think it has been tried in the courts in generations, if ever. Certainly not by the U.S. Supreme Court.

What if Tesla made a gasoline car? At the moment, it's as unlikely as it gets, but imagine the value created if Tesla did it!

At the time of publication the author was long AAPL.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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