Tesla Is Betting It Can Sell Cars Online, Without a Test Drive

Technology Uncategorized

Elon Musk has long defied automotive-industry convention. Now, the Tesla Inc. TSLA -7.84% chief executive’s latest strategic shift will be one of his biggest challenges: persuading mainstream consumers to purchase cars online the way they buy books or clothes.

Mr. Musk made clear the move to start selling Tesla cars only over the internet was borne of necessity. Tesla needs the savings it will get from closing stores to cut the price of its Model 3 sedan—the Silicon Valley auto maker’s bid to go from niche to mass market—down to $35,000 while still achieving profit.

Mr. Musk framed the move as consistent with the times, and touted a seven-day return policy and a shopping process that he said will take just a minute to complete.

“It’s 2019—people just want to buy things online,” he told reporters in announcing the change Thursday.

Only a fraction of car sales in the U.S. happen online. As Tesla tries to reach a new category of mainstream buyers and increase sales of its Model 3, it will be testing whether these consumers are willing to make one of life’s largest purchases without a test drive and local store to guide them through it.

The Tesla brand has the advantage of already appealing to some technologically savvy customers. Mr. Musk could tap into a distaste among some car shoppers for the traditional new-car buying process, including its sales tactics and price haggling.

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Tesla’s existing distribution model—using its own network of stores as well as the internet—is already unorthodox. In the U.S., almost all new cars are sold through third-party, franchised dealerships, as required by state laws. Tesla has found ways around that in many states because it never had any franchises to begin with.

Auto makers have long wanted a more direct and simple sales process. General Motors Co. , the largest U.S. auto maker by sales, introduced an online-buying site in 2013 called Shop Click Drive to let buyers handle much of the purchase process online, such as applying for financing and getting an estimate on a trade-in vehicle. The tool routes users to a local dealership’s website, and only a fraction of buyers use it, GM has said.

The program helps generate leads on potential customers, but customers usually end up calling or visiting the dealership during the transaction, said Brad Sowers, president of Jim Butler Auto Group, which includes GM’s Chevrolet, in the St. Louis, Mo.-area. “Buying a car still needs some hand-holding,” he said.

The U.S.’s largest dealership group, AutoNation Inc., has been testing a digital store called AutoNation Express for a few years, but said it is difficult to complete the car-buying process entirely online because states handle the signing of the final paperwork differently.

Still, preliminary estimates suggest online used-car sales totaled less than 1% of the 39.5 million used vehicles sold in 2018, said Cox Automotive, which owns car data websites. There is little industry data on how many new cars are sold online or how many dealers offer online car buying.

Scott Painter, a veteran automotive entrepreneur, said test drives are becoming less important. His latest startup, Fair Financial Corp., buys cars from dealerships and then essentially rents them to customers through an app for a monthly fee. He has found that customers are often comfortable using the service without testing for pricier cars.

“You would intuitively think the more money you’re spending, the more you need the test drive,” he said. “Actually we’re at a place in modern life where we’re comfortable with the idea that a 30-, 40-, 50-thousand dollar, brand new car is going to be a reliable, resolved thing.”

Tesla buyers have traditionally been less likely to test drive their cars before buying them, according to customer surveys conducted by Strategic Vision. Data from the past two years show that 66% of Tesla buyers took test drives before their purchase, compared with 82% for the industry.

Mr. Musk in a memo to employees Thursday said 78% of Model 3 orders last year were placed online.

Mr. Musk on Thursday said Tesla could make as many as 600,000 vehicles this year.
Mr. Musk on Thursday said Tesla could make as many as 600,000 vehicles this year. PHOTO: STEPHEN LAM/REUTERS
The Model 3, though, has been in short supply as Tesla struggled to increase production, and many early buyers were devotees who had waited for the new model. Purely online purchases of Tesla’s Model S large sedan and Model X sport-utility vehicle have been fewer, according to people familiar with the results.

And Tesla aims to increase sales quickly, taking it far beyond early adopters. Mr. Musk on Thursday said Tesla could make as many as 600,000 vehicles this year, after delivering about 245,000 last year and almost 103,000 in 2017. The company declined to comment for this article.

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As recently as several weeks ago, Tesla was touting the opening of new stores, suggesting the pivot to online-only was relatively sudden. Tesla’s website lists in the U.S. about 130 stores and galleries, where people can see the cars but can’t buy them because of local laws. The company said a small number will remain open in high-traffic locations so customers can learn about the vehicles, but they will be directed online to buy.

In his Thursday’s memo, Mr. Musk said Tesla will in coming weeks evaluate all areas of the sales and marketing organizations for efficiencies and how to support online sales.

Tesla has long said that owning its own stores helped it better control the customer experience. But the lack of a large franchise network has made it more challenging to service all its new vehicles, leading to long waits for some customers. Mr. Musk is promising to add to Tesla’s service staff even as it closes stores.

The price cut announced Thursday, bringing the Model 3 to its long-promised $35,000 starting level from about $43,000, was the third since January. Measures to reduce the price will result in restructuring costs in the first quarter that will swing Tesla from a previous guidance of a profit to an expected loss. Tesla shares fell about 8% on Friday amid concerns the cuts signal that demand for its cars is softening, despite Mr. Musk’s contrary assurances.