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This is a bizarre argument to me, and I remember thinking that the last time you "pointed it out". You're essentially saying that tens of thousands of dealers

This is a bizarre argument to me, and I remember thinking that the last time you "pointed it out". You're essentially saying that tens of thousands of dealers and hundreds of billions of dollars worth of car companies are going to go out of business because they can't find a mutually beneficial incentive structure. It's not going to be all roses, but Tesla shunning dealers hasn't exactly been either, from a service quality and cost structure perspective. Porsche doesn't seem to have any trouble shifting Taycans, doubling their production from an initial 20k to 40k units a year (simultaneous to Tesla cutting their X/S production from 100k to maybe 80k). Here's my prediction: legacy auto manufacturers will continue to be years behind Tesla, but if and when the space matures that'll stop mattering. At that point, Tesla better stop acting like a startup and have their shit figured out, lest they become the Myspace of EVs.

btilly 8y ago
You're essentially saying that tens of thousands of dealers and hundreds of billions of dollars worth of car companies are going to go out of business because they can't find a mutually beneficial incentive structure. It would be far from the first time. One of the biggest problems is for a company whose internal incentives and business model are based around one set of market assumptions to rethink it all and do something else instead. Both The Innovator's Dilemma and The Innovator's Solution touch on this. The latter one in particular walks through how internal structures and incentives have caused company after company to fail to figure out how to sell products that they know consumers are buying. The two most common problems being that it is very hard to cut your own margins to match a low margin competitor, and it is even harder to convince a third party sales distributor to cut their margins. Anyways this is something that I've been aware of for close to 20 years. In another 10 years you'll be able to decide whether I was wrong.
- reitzensteinm 8y ago
  Yeah, I've read them too. But you're not saying that it's a challenge the industry will face, you're saying the death is a fait accompli, and the entire traditional auto industry is not real competition to Tesla (your words from your linked post). I don't need to wait ten years to decide that you're wrong; even if your prediction turns out to be correct (which it might), assigning a 100% probability to this outcome is absurd, and if you could reliably do this you'd be a trillionaire. Since we're reading the tea leaves via business school curriculum, what about a little Prisoner's Dilemma? Let's assume that consumer demand exists for EVs (which Tesla has basically created single handedly), and EVs aren't profitable when slotted in to the cost structure of a traditional dealership due to the lack of maintenance. Dealers try every trick in the book to steer customers away from EVs. Why wouldn't a percentage of dealerships defect, rebrand and focus exclusively on EVs? They'll enjoy abnormally high sales, and be profitable on the margins from new car sales alone. Dealerships that insist on only selling ICE vehicles will stick around for a while, but nobody will start one, and the number will be reduced by attrition. The total number of dealerships fall and the EV transition is completed over a few decades. So to be clear: you assign a zero percent probability to this happening?
  - btilly 8y ago
    The probability is not 100%, but I believe it to be very high. As for your hypothetical, the reason is that the dealers that try to do that won't make a sufficient profit to their business model unless they sell EVs at a very significant premium to published list price. And it will be very hard to sell consumers on letting them do that. Even if you could get consumers to accept those prices, the industry would then face the problem that the margins on EVs from traditional car manufacturers have much higher margins than the EVs from startups like Tesla. Which will make them uncompetitive in the marketplace. This gets us back to the classic problem that it is hard to get organizations to significantly cut their margins. And even harder to convince your business partners to do so for your benefit.
    - reitzensteinm 8y ago
      You are assuming that Tesla and future competition can operate their own dealerships more efficiently. They don't get their physical presence for free, and the cost is baked in to the sales price just the same way. Maybe Tesla can pull that off but there's no reason to expect other EV manufacturers will until they hit massive scale.
      - kjksf 8y ago
        Let's say there are 2 grocery shops. All their costs and expenses are the same but one grocery shop sells twice as many products per square foot / unit of time. As someone interested in more profit, which store would you rather own? The argument you're responding to wasn't "Tesla's stores are dramatically more efficient". The argument is that Tesla stores sell Tesla's EV cars effectively (because that's the only thing they sell) and traditional dealership anti-sell EV cars because they make more money on selling ICE cars. This is not a conjecture. In addition to plenty of anecdotal evidence, there were qualitative studies both in US and Europe where researches sent "mystery shoppers" pretending to be interested in buying EV cars. The results were dismal. Many dealerships didn't know much about EVs themselves and in the worst case, they would literally lie about how bad EVs are. That will be a problem for GM, Ford, and others when they finally have good EV cars to sell. And there's no obvious solution to that. Car makers and dealerships are frenemies so it's not like GM can dictate terms to their dealers or that they can force dealers to do a good job selling EVs. The obvious solution (heavily subsidize dealers with bigger discounts) is bad for profit margins. Investors like profit margins and it'll look doubly bad because when they finally have EV cars to sell, they'll go through the same "loss due to low volume / production ramp" that Tesla went through in first half of 2018 and will be competing with Tesla's 2021 heavily cost optimized production.

btilly 8y ago

You're essentially saying that tens of thousands of dealers and hundreds of billions of dollars worth of car companies are going to go out of business because they can't find a mutually beneficial incentive structure. It would be far from the first time. One of the biggest problems is for a company whose internal incentives and business model are based around one set of market assumptions to rethink it all and do something else instead. Both The Innovator's Dilemma and The Innovator's Solution touch on this. The latter one in particular walks through how internal structures and incentives have caused company after company to fail to figure out how to sell products that they know consumers are buying. The two most common problems being that it is very hard to cut your own margins to match a low margin competitor, and it is even harder to convince a third party sales distributor to cut their margins. Anyways this is something that I've been aware of for close to 20 years. In another 10 years you'll be able to decide whether I was wrong.

reitzensteinm 8y ago
Yeah, I've read them too. But you're not saying that it's a challenge the industry will face, you're saying the death is a fait accompli, and the entire traditional auto industry is not real competition to Tesla (your words from your linked post). I don't need to wait ten years to decide that you're wrong; even if your prediction turns out to be correct (which it might), assigning a 100% probability to this outcome is absurd, and if you could reliably do this you'd be a trillionaire. Since we're reading the tea leaves via business school curriculum, what about a little Prisoner's Dilemma? Let's assume that consumer demand exists for EVs (which Tesla has basically created single handedly), and EVs aren't profitable when slotted in to the cost structure of a traditional dealership due to the lack of maintenance. Dealers try every trick in the book to steer customers away from EVs. Why wouldn't a percentage of dealerships defect, rebrand and focus exclusively on EVs? They'll enjoy abnormally high sales, and be profitable on the margins from new car sales alone. Dealerships that insist on only selling ICE vehicles will stick around for a while, but nobody will start one, and the number will be reduced by attrition. The total number of dealerships fall and the EV transition is completed over a few decades. So to be clear: you assign a zero percent probability to this happening?
- btilly 8y ago
  The probability is not 100%, but I believe it to be very high. As for your hypothetical, the reason is that the dealers that try to do that won't make a sufficient profit to their business model unless they sell EVs at a very significant premium to published list price. And it will be very hard to sell consumers on letting them do that. Even if you could get consumers to accept those prices, the industry would then face the problem that the margins on EVs from traditional car manufacturers have much higher margins than the EVs from startups like Tesla. Which will make them uncompetitive in the marketplace. This gets us back to the classic problem that it is hard to get organizations to significantly cut their margins. And even harder to convince your business partners to do so for your benefit.
  - reitzensteinm 8y ago
    You are assuming that Tesla and future competition can operate their own dealerships more efficiently. They don't get their physical presence for free, and the cost is baked in to the sales price just the same way. Maybe Tesla can pull that off but there's no reason to expect other EV manufacturers will until they hit massive scale.
    - kjksf 8y ago
      Let's say there are 2 grocery shops. All their costs and expenses are the same but one grocery shop sells twice as many products per square foot / unit of time. As someone interested in more profit, which store would you rather own? The argument you're responding to wasn't "Tesla's stores are dramatically more efficient". The argument is that Tesla stores sell Tesla's EV cars effectively (because that's the only thing they sell) and traditional dealership anti-sell EV cars because they make more money on selling ICE cars. This is not a conjecture. In addition to plenty of anecdotal evidence, there were qualitative studies both in US and Europe where researches sent "mystery shoppers" pretending to be interested in buying EV cars. The results were dismal. Many dealerships didn't know much about EVs themselves and in the worst case, they would literally lie about how bad EVs are. That will be a problem for GM, Ford, and others when they finally have good EV cars to sell. And there's no obvious solution to that. Car makers and dealerships are frenemies so it's not like GM can dictate terms to their dealers or that they can force dealers to do a good job selling EVs. The obvious solution (heavily subsidize dealers with bigger discounts) is bad for profit margins. Investors like profit margins and it'll look doubly bad because when they finally have EV cars to sell, they'll go through the same "loss due to low volume / production ramp" that Tesla went through in first half of 2018 and will be competing with Tesla's 2021 heavily cost optimized production.