Luxury electric car maker Tesla faces hurdles on way to mass-market goals

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Within the walls of the Tesla store at Easton, customers will tell you that the maker of all-electric vehicles can do just about anything.

“It’s the best thing I’ve ever driven,” said Don Johnson, 59, who owns a Tesla Model S sedan and was looking at the Model X crossover.

This kind of confidence is about to get a major test. California-based Tesla is introducing the Model 3, its first car aimed at the middle of the market, with pricing that the company says will start at about $35,000.

The new model, like other Tesla vehicles, will be sold through a network of Tesla-owned stores, an approach that has been fought by traditional auto dealers across the country. As a result, Tesla stores are banned in six states and severely restricted in others, including Ohio.


Despite such limits, the company is hoping that the Model 3 will be the kind of car that nudges all-electric transportation into the mainstream.

Tesla produced the first few units of the model this month in Fremont, California, the beginning of a ramp-up toward a goal of making 20,000 Model 3 vehicles per month. The company has said that more than 370,000 customers are on a waiting list for the model, which means that other prospective buyers probably are in for a long wait.

“The whole thing is something we have never seen before,” said Jessica Caldwell, senior analyst for Edmunds.com, of Tesla’s move from a boutique maker of luxury electric vehicles to one that mass-produces them. Considering the complexity of such a transition, she would not be surprised if there are delays in Model 3 production.

It is difficult to understate the challenge Tesla faces, said Peter Ward, a management professor and associate dean at the Fisher College of Business at Ohio State University.

“Since the [Ford] Model T, cars have always been produced in volume at about one per minute, so Tesla will have to ramp from a leisurely pace to something like two shifts with two lines running simultaneously if they produce in a single plant,” he said.

“Because of the complexity and number of parts that go into auto assembly, getting all of that right is about the hardest thing there is to do in manufacturing,” Ward said.

Analogy not with cars
The closest analogy for Tesla’s situation might not be in the automotive world. Ward points to advancements in personal computers that resulted in some companies being unable to make the transition to a low-cost, mass-market model.

The shift toward the mass market has always been part of Tesla’s plan. Founded in 2008, the company has aspired to make all-electric vehicles widely available. The Model S made its debut in 2012 to rave reviews, followed by the Model X in 2015. Their base prices are $68,000 and $82,500, respectively.

But Tesla’s sales remain tiny compared with those of other automakers. Last year, the company delivered 76,230 new vehicles to customers, a US market share of 0.23 percent, according to WardsAuto.

That was fewer than luxury brands such as Porsche, which had a market share of 0.3 percent, and far behind the big leagues of companies; the leader, General Motors, was at 17.03 percent.

Despite such a small share for Tesla, investors are betting that the company will be huge. Its market capitalization is $53.8 billion, just below GM’s $54.3 billion.

Clearing challenges
Tesla was founded by Elon Musk, an entrepreneur who previously started the company that became PayPal.

The automaker opened its first Ohio store in 2013 at Easton. The store, plus ones now open in the Cleveland and Cincinnati areas, led to a backlash from the Ohio Automobile Dealers Association.

Other automakers sell through a network of independent franchises. Dealer groups saw Tesla’s rise as a challenge to that system, raising concerns that other manufacturers would open their own stores to compete with franchises.

The Ohio debate led to a compromise in the General Assembly. The auto dealers and Tesla gave their blessing to a plan that would allow Tesla to open the three stores it now has, but no more.

It was a better deal than Tesla got in some other places. Arizona, Connecticut, Michigan, Texas, Utah and West Virginia have laws that forbid company-owned dealerships, according to the National Conference of State Legislatures.

In some cases, the company has complied with restrictions by calling its outlet a “gallery” and directing customers to make the purchase online. Tesla has more than 90 stores or galleries in the United States.

Three years after the Ohio legislature imposed the three-store limit, Tesla and the dealers are in a period of relative peace. “All parties, including Tesla, have agreed to the parameters established, and I think that’s why you haven’t seen or heard anything,” said Zach Doran, president of the Ohio Auto Dealers Association.

Tesla’s corporate office did not respond to a request for an interview. Employees at the Easton store referred questions to the corporate office.

Brady Berlin of Westerville, 36, leader of the Ohio Tesla owners’ club, said the limits imposed by some states, including in Ohio, might end up helping Tesla.

“The best way to get an American to buy something is to tell him he can’t buy it,” Berlin said.

But the limits on where Tesla can sell its products are an impediment for a brand that wants to dramatically increase sales.

Berlin, an information-technology consultant, thinks Tesla’s approach is going to succeed in the long run because of the strength of the brand. For him, an essential part of the brand is the idea that the adoption of all-electric vehicles is a step toward helping the environment.

Such a motivation is complicated by the fact that most electricity comes from power plants that run on fossil fuels. However, a small but growing share of power is coming from renewable sources such as solar and wind, which changes the equation entirely.

“I want things better for my kids,” Berlin said. “I want things better for my grandkids.”

Customer support
Back at the Easton store, Johnson, the Model S owner, likes what he sees in the Model X, a crossover with three rows of seating.

Johnson lives in the Rochester, New York, area and was in Columbus with his wife to take their son on a campus visit to Ohio State.

The store’s staff has become used to people who stop by while traveling through town, as if the store is a tourist attraction for people who already drive Tesla vehicles.

Sometimes, the current drivers are almost like the sales staff, striking up conversations with potential converts. This indicates a strength in the brand that Tesla will need as it releases the Model 3.

“Go do it,” Johnson said, summing up his advice for anyone considering a Tesla. “It’s a wonderful thing to do.”

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