Tesla’s Grand Plan

The Tesla Model 3. Is this the breakout model that will create a mass market for electric vehicles and transform the electric grid?

The Tesla Model 3

Tesla Motors, which wants to expand its retail presence in Virginia, is more than a manufacturer of high-end electric vehicles. It’s part of Elon Musk’s quest to transform the electric grid.

by James A. Bacon

Richmond businessman Stuart Siegel loves his Tesla Model X. The SUV is loaded with luxury options and its electric motor is as quiet as a mouse. After he recharges his car battery at night, the car holds enough juice to run 280 miles more than enough for daily needs rarely exceeding 50 miles. If he ever wanted to drive to Maine or Florida, he says, the car monitor shows the location of hundreds of Tesla recharging stations around the country. Twenty minutes with a supercharger — not much longer than it takes to grab a coffee or take-out at a nearby restaurant– gives him enough power to drive another 175 miles.

Selling luxury electric vehicles is not the only thing that endears Tesla to Siegel. The company is redefining how an automobile manufacturer sells and services cars. Unlike traditional manufacturers, who work through auto dealer franchises, Tesla controls the customer experience from start to finish.

When ordering his Model X, Siegel went online to pick all the options — color, interior, wheels, seating configuration, size of battery. A few m0nths later, Tesla delivered a vehicle to Tesla’s retail outlet in Tysons, manufactured to his exact specifications. He couldn’t get that degree of customization with any other car, he says.

If the car needs maintenance, Siegel doesn’t go to Tesla, Tesla comes to him. When he had a problem with a door latch, the company dispatched a “ranger” from the Washington area to his house in Richmond. “This guy showed up in a white van,” he recalls. “Everything he needed to fix a car was in that van. He put on a new latch, and an hour later he was gone.”

Tesla also provides tech support. When he picked up his Tesla X at the Tysons sales center, a delivery specialist spent two hours showing him how to drive the car, Siegel says. “He took me through everything. He gave me his card.” One day, when the car monitor went dark, Siegel called a tech support number. The technician told him exactly what to do, and the monitor came right back on. “I love the car. It’s unlike any other I’ve ever owned.”

As Tesla expands its product offering from the sporty Tesla S sedan ($85,700 sticker price) and Tesla X utility vehicle ($106,200 sticker price) to electric vehicles in the $35,000 range, it needs to ramp up its retail footprint. Due to the unique nature of how it interacts with customers, however, the company is unwilling to outsource the relationship to independent auto dealerships.

Tesla’s corporate philosophy has caused a rift with the Virginia Automobile Dealers Association (VADA), which maintains the company should abide by the same automobile-franchise and consumer-protection laws as every other auto manufacturer. After negotiating a deal that allowed the company to set up a retail outlet in Tysons two years ago, Tesla now wants to add one in the Richmond area.

Following lengthy hearings, a Department of Motor Vehicles hearing examiner recommended yesterday rejection of Tesla’s request.  Tesla had argued that there are no independent automobile dealers in the Richmond area capable of profitably selling its cars. But at least 11 dealers had expressed an interest to sell and service Tesla’s cars, noted examiner Daniel P. Small. The case goes to DMV Commissioner Richard Holcomb for a final decision.

Holcomb’s decision, driven by a consideration of Virginia’s auto dealership laws, could have profound implications for the future of Virginia’s electric grid. Tesla is but one component of a larger vision by California entrepreneur Elon Musk to move the world toward a more environmentally sustainable economy.

In Musk’s view, selling more electric vehicles helps the world by cutting gasoline combustion and the carbon dioxide emissions implicated in global warming. But EVs need electricity, most of which comes from burning fossil fuels. So Musk has announced his intention to merge Tesla Motors, his EV company, with SolarCity, another company he has founded, creating what he calls “the world’s only vertically integrated sustainable energy company.” His ultimate goal is to make solar the primary energy source for the electric grid, using Tesla’s battery technology to store excess electricity produced during peak sunlight hours for use during periods of peak demand later in the day.

While the three main components of Musk’s empire — generation, storage, EVs — can work independently of one another, Diarmuid O’Connell, Tesla’s vice president of corporate development told Bacon’s Rebellion, “It’s best if they all work together.”

A Tesla outlet for selling EVs eventually will become “a single retail touch-point for the customer,” O’Connell says. “We’re trying to pull the pieces together with one offering in the market. The best possible case in Virginia is to modify our existing retail footprint so we can offer the full package” — electric vehicles, solar panels and energy storage.

The franchise fight

So far, Tesla has been content to make its case to Virginia regulators mainly by appeals to competition and consumer rights in the context of automobile sales.

“We think of ourselves as the flagship for the next generation of electric vehicles,” says O’Connell. “We want to invest in Virginia to serve our customers better. Why should we have to go through a middle man to access our customers?”

The automobile franchise model for selling and servicing cars does not work for Tesla, he says. The company has a more intimate relationship with its customers than other auto manufacturers. Rather than outsource sales and service, Tesla wants to maintain direct contact with its customers, a number that has reached 1,700 in Virginia and is growing. Forcing the company to adopt the franchise model undermines its business strategy.

Don Hall, president of the VADA, doesn’t have much good to say about Elon Musk or Tesla. Musk, a co-founder of Paypal, has built Tesla and Solar City on federal subsidies and hype, says Hall.  The charismatic, celebrity entrepreneur seems to think the normal rules don’t apply to him.

Henry Ford created the franchise system as a way to get independent businessmen to take on the risks of holding inventory and selling cars to the public, Hall says. The modern dealership system evolved in Virginia as a way to regulate the auto-sales process and protect the public. “It’s easy to say I don’t need a dealer involved. But there is a thing called the lemon law. Cars do break; they do have problems. … Auto brands come and go. But car dealers are part of the community; many of them have been around for generations. They are more responsive than the manufacturers would be.”

Tesla does not conform to Virginia’s consumer protection laws, Hall claims. For example, the company’s bill of sale, which documents the sales transaction in writing, “looks nothing like” the document required by Virginia law. Auto dealers are required to disclose information about selling price, trade-in, financing, and buyer’s rights, 13 items in all; Tesla is not bound by those requirements.

State law also regulates advertising. Auto dealers are required, for example, to disclose the full vehicle price before any discounts or rebates are applied;  Tesla lists the price of its car after federal credits are deducted, making it appear less expensive.

Dealers also have a legal right to charge a processing fee, which normally runs a couple hundred dollars. Tesla charges a processing fee of $1,500 on average, Hall asserts. “There’s not disclosure of that, not in their ads, not in their buyers’ orders. Consumers just pay it. … That might be fine for millionaires buying a hundred thousand dollar car. But not for someone buying a $35,000 car.”

“You don’t get to play by your own rules because you think you’re different or special,” Hall says. “If you don’t like the rules, you change them through an orderly process called the legislative process.”

Tesla responds that it displays the same information on the “Monroney sticker” (pasted in the window of the car for sale) that auto dealers do. As for advertising, Tesla doesn’t advertise. But its website order page does allow users to toggle between the list price and the post-rebate price of the cars

Tesla is operating lawfully in its Tysons location, and it wants to do the same in Richmond, says O’Connell. “We’re seeking to operate under the same rules that Don is holding up as the reason we shouldn’t operating. He’s the one preventing us from offering the consumer protections and licensing!”

“The auto dealers lobby is powerful in every state,” says O’Connell. Virginia is unique. Don Hall and the VADA more or less own the legislature. We’ve come to a resolution in New Jersey, Pennsylvania and other states. What’s the big deal here?”

The master plan

Surprisingly, Tesla has made no effort to align itself with the green lobby in Virginia, even though Musk’s vision touches all the right environmentalist bases. Musk has laid it out in two documents: his original “master plan,” written in 2006, and the “Master Plan, Part Deux,” published earlier this year.

The master plan explained how he planned to go about building an electric vehicle company.

  • Build a low-volume sports car that can sell at a high price. “While some people would be prepared to pay a high price for a sports car, no one was going to pay $100k for an electric Honda Civic, no matter how cool it looked.”
  • Use that money to build a medium-volume car at a lower price.
  • Use that money to build an affordable, high-volume car.
  • While doing the above, also provide zero emission electric power generation choices through SolarCity.

Tesla has achieved these goals. Two high-priced models have supported expansion of the Tesla plant and growth of its retail operations. Now the company plans to roll out a $35,000 electric vehicle that will appeal to a mass market. SolarCity, an installer of residential solar systems, generated $186 million in revenues in its 2nd quarter, an increase of 81% over the previous year. Musk is betting heavily on the synergy between electric vehicles and solar. Tesla’s massive Gigafactory in Nevada will crank out state-of-the-art lithium ion batteries for use in Tesla automobiles as well as Powerwall home batteries for storing excess solar-generated electricity.

Musk’s updated vision now includes:

  • New electric cars. Expand the offering to include a compact SUV, pickup truck and heavy truck. Tesla does not foresee the need for an economy EV, however, because…
  • Shared fleet. “You will also be able to add your car to the Tesla shared fleet just by tapping a button on the Tesla phone app and have it generate income for you while you’re at work or on vacation, significantly offsetting and at times potentially exceeding the monthly loan or lease cost,” Musk writes. “This dramatically lowers the true cost of ownership to the point where almost anyone could own a Tesla. Since most cars are only in use by their owner for 5% to 10% of the day, the fundamental economic utility of a true self-driving car is likely to be several times that of a car which is not.”
  • Urban transport. Tesla is in the early stages of developing high passenger-density urban transport. With the advent of self-driving capabilities, writes Musk, “It will probably make sense to shrink the size of buses and transition the role of bus driver to that of fleet manager.”
  • Solar roof. Create a smoothly integrated and beautiful solar-roof-with-battery product, empowering the individual as his own utility, and then scale that throughout the world. One ordering experience, one installation, one service contact, one phone app.

The electric grid

Dominion Virginia Power, the Old Dominion’s largest electric company, hasn’t gotten tangled in the auto franchise dispute, but company officials are watching Musk’s enterprises with interest.

“We admire the innovation from Tesla. We’re excited about supporting EVs (electric vehicles),” says Brett Crable, the utility’s director of new technology and energy conservation. “The next Tesla car  could be a game-changer. We will anticipate the car and be ready.”

Growing the market for electric vehicles could increase electricity consumption in the early morning hours when the most surplus capacity exists and electricity is less expensive to provide, Crable says. For that very reason, Dominion has promoted electric vehicles for more than 20 years. Indeed, Crable was involved with the company’s EV group in the mid-1990s. Back then the national focus was on reducing oil imports and improving air quality. Despite collaboration between utilities, auto manufacturers and the federal government, however, EVs never became more than a niche product.

Since then, the policy justification for EVs has changed. Now the focus is on reducing C02 emissions from gasoline combustion to combat global warming. Ultimately, though, success of electric vehicles will hinge upon their ability to meet the needs of consumers, says Crable. Battery science and car performance have come a long way. In the ’90s,  EVs could drive only 50 to 60 miles before they required recharging. Tesla’s cars can go four times as far. Moreover, cars can recharge more rapidly, meaning that motorists can recharge at work or even on the road.

By Dominion’s estimate there are about 4,000 electric vehicles on the road in its Virginia and North Carolina service territory. Drawing upon industry research, the company estimates that EV ownership will grow rapidly, reaching 334,000 by 2030. Peak electricity consumption will amount to 370 megawatts of electricity. That’s not a huge amount — Dominion’s Greensville power station under construction is designed to produce nearly 1,600 megawatts of power — but EVs should bolster electricity consumption even as energy-efficiency initiatives are shaving demand in other areas.

A growing number of EVs will justify an investment in public recharging infrastructure, and in a virtuous cycle the expansion of EV infrastructure will make it more convenient to own and operate an EV. Dominion supported Virginia legislation in 2011 to allow third-party charging services, says Crable. The number of public charging stations has increased from four in 2010 to 358 in 2015.

Dominion also is conducting two pilot projects to see how EV owners respond to rate incentives to recharge their cars in the early morning. (One plan reduces rates for EVs only, the other for EVs and all large appliances.) EVs can create big problems if owners start recharging when they get home in the late afternoon/early evening, a period of peak demand in the summer when electricity is expensive. The pilot project cuts EV electricity rates in half for participants who recharge between 1 a.m. and 6 a.m.

The Time-of-Use rate can saves typical users about $200 per year, Dominion estimates, based on an average of 333 gallons consumed yearly at a cost of $2 per gallon and a standard residential electric rate of 11 cents. The program, which lasts through 2018, has 575 EV owners enrolled. The experience so far has been positive, says Crable. Most car owners do shift their recharging times to early morning. If adopted on a large scale, the preferential rate will give another incentive to purchase EVs.

However, Hall, with the auto dealers, expresses skepticism that EVs will live up to the hype. First, he notes, projections of rapid EV adoption assume that internal combustion technology will stand still. But it won’t. “The miles-per-gallon on new cars today is staggering” — and it’s still improving. It takes six to eight years of fuel savings to break even on the higher cost of EVs. Also, while batteries have improved, EV cruising range is overstated. “Get on Interstate 66 on a hot, humid day with the AC running full blast. Electric cars are great as long as you don’t turn anything on!”

There’s also the matter that neither Tesla nor SolarCity have yet to make a profit. Musk’s ability to combine the two companies and proceed with his grand plan hinge upon obtaining billions of dollars in financing that has may or may not be forthcoming.

EVs and Solar

While Dominion welcomes Musk’s innovation with electric vehicles, his “master plan” for solar does not align with Dominion’s vision. Musk wants to install solar panels on house roofs, in effect making homeowners their own utilities. He also would sell them batteries to store excess electricity produced during the mid-day that would re-power the EVs during the early morning hours. The idea is to emancipate the homeowner as much as possible from the power company.

But Crable is not worried about losing many customers. “We have very competitive, affordable residential rates,” he says. “We will be using more renewable energy going forward, and utility-scale solar generation is more cost-effective than small-scale solar production.” By exploiting economies of scale, Dominion can generate solar electricity at about half the cost of residential solar installed one dwelling at a time, he says.

Tesla’s O’Connell is not looking to pick a fight with Dominion. He acknowledges that power companies like Dominion have a public-service responsibility to maintain a reliable supply of electricity to everyone. “Electricity distribution is a regulated monopoly for some good reasons. … Their responsibility to customers is to always keep the lights on.”

He is optimistic that Tesla can work out a mutually advantageous arrangement with electric utilities. The opportunity to integrate solar into the grid “is so big and so worth undertaking that right-thinking people can come together and work out solutions that serve the public interest.”

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6 responses to “Tesla’s Grand Plan

  1. Love to see Mr. Seigel’s car tax bill, and I note he does not live in NoVA where car taxes are even higher. Sales of EV’s are going to be related to state incentives, which we mostly have disincentives here in Va. as outlined above. In Ca. you get free HOV with a single passenger and monetary incentives, not to mention Ca. mandates that plug-ins be sold.

    Actually Virginia shows decent ownership of Plug-ins (0.6%) despite our lack of incentives. Gov McAuliffe did sign a mostly “blue state” pledge to assist Ca, in trying to push incentives for plug-ins. I am not a huge fan of plug-ins, but basically Congress has made it national policy to try to push plug-ins. It’s like ethanol mandates as far as I am concerned -forced onto us. And if you can’t beat ’em, at some point you gotta join ’em.

  2. Virginia car dealers are behaving in a similar fashion to Virginia utilities. They want to extend the 20th century through as much of the 21st as they can. Disruptive new industries come at the margins. Existing players in an industry are not usually sufficiently innovative to transform the industry on their own. For decades, we have had mechanical, internal combustion engine-powered machines with thousands of moving parts that have gradually added computer based controls. Now we are seeing vehicles that are computers with wheels that are powered by electric motors and have 20 moving parts.

    Car dealerships were invented to allow for mass production and local warehousing of cars to push manufacturer’s expenses on to local dealerships. The lowest share of a car dealer’s profit comes from the sale of new cars. Used cars contribute the next largest share of profit, but by far the largest share comes from parts and service. That’s why Musk says that no car dealer can make money selling Tesla’s. Every car is made to order. There is almost no maintenance required and the “service department” comes to you. This is the business model of 21st century information age companies not the archaic model of 20th century machine age companies.

    Ignoring the trend and rejecting Tesla’s request will just make things worse for Virginia’s auto dealers. A Stanford professor researching the disruption occurring in the auto industry has forecast that by 2030 almost all cars will be electric. Between 2020 and 2025 electric cars will be as cheap as ICE cars with little lifetime maintenance expenses and lower fuel costs.

    Advances in self-driving capabilities will transform the transportation industry. People will change from owning cars to using transportation as a service. Instead of cars being used about 5% of the day, they will be shared and in use up to 80% of the day. This means far fewer cars will be sold. Some existing manufacturers are attempting to adapt to this change. Ford is developing its own autonomous driving capability and its own ride-sharing service. But the likely car manufacturers of the future will be the computer folks, Tesla, Apple, Google, and BYD and FoxConn (they make Apple products) in China. Norway is considering legislation prohibiting internal combustion engine vehicles after 2020 or 2025.

    Utilities who ignore this trend will also be in trouble. Solar PV and storage are both chip or electronic based technologies. Not so much that they will follow Moore’s Law of doubling power and halving cost every 18 months, but they are both in the early stages of dramatic price declines. By 2025 both of these technologies will be at least 50% cheaper than today. Today solar generation is roughly equal in cost to the energy produced from a gas combined cycle plant. By 2025, if the price of solar and storage decline by 50%, this new “dispatchable” solar will be equal or less than current prices while energy from natural gas plants will have at least doubled in price because of fuel price increases. Projections are that renewables will contribute 50% of the electricity supplied in 2030. Continued declines in the price of storage are expected to make combustion turbines (peaking units) obsolete by 2030.

    Tesla’s combination of battery-based vehicles and solar generation make a benefit out of what some see as a disadvantage of solar energy. By using the batteries of electric vehicles to store energy during peak solar production (the dreaded duck curve), car owners can earn money from providing a storage service at a lower cost because their batteries are paid for in the price of the car. Generation at night will have far less value and baseload units that cannot easily vary their output (such as nuclear) will be a very bad fit for the modern grid.

    Now these are projections and not yet actual facts (that is what the IRP is too). But to make plans for the future, especially for massively expensive projects with 40 – 100 year lives, without considering this possibility or some fraction of it, is not responsible.

    Virginia car dealers should wake up and stop behaving like buggy whip manufacturers. Policymakers and politicians that create protectionist policies for Virginia will just diminish our competitive advantage compared to more open minded areas of the country.

  3. just wanted to poll BR folks… have you had to have a car repaired lately?

    bonus question – if you did – did you feel sorry for the service technician’s pitiful fee?

    😉

    forget Telsa… what the dealers are worried about is their service dept profits…

    come on folks.. wise up…

  4. There are plenty of differences in the details, but as a business model for car sales, how different is what Tesla wants to do with their selling from what Carvana wants to do with their used car tower/vending machine in the Richmond area?

    http://richmondbizsense.com/2016/08/22/breaking-news-six-story-car-vending-machine-proposed-in-short-pump/

    Used cars versus new cars, I guess. Does that really make a difference in whether a dealership that brings in cars from outside the state can be approved? Is the relationship with a manufacturer the only reason the rules are somehow different?

    Yes, Tesla may be skirting the car sales disclosure info, but that’s hardly a reason to say no. In fact, put the NoVA dealership under notice to get in compliance, if that claim is true, or shut it down/fine it. VADA says yes, but Tesla says no. But if they’re in compliance, I don’t see anything from VADA that implies they shouldn’t be allowed. Other than they want that dealer to belong to VADA and provide a cut.

  5. The price of new cars sold by dealers is essentially subsidized by the service side of the business.

    there is not that much profit in the price of a new car as there is in the service of that car – over it’s service life.

    that’s where the money is – and that’s why the dealers want to retain the dealer business model.

    The “uber” of car service is the Tesla model where you pay up front for the new car -then the service on it – is not near as profitable… and not the focus of Telsa… they do not want, nor need the dealer “network”.

  6. Another way of looking at this issue is Tesla is attempting to obtain a vertical monopoly on electric cars it makes. While one can go to a dealer for parts and repairs, a gasoline or non-Tesla electric vehicle owner (Chevy Volt, plug-in Toyota Prius) can go to various parts stores, the dealer, another dealer, online shops and has options on repair (usually). Tesla is trying to control manufacture, sales, parts and service. Like a lot of big California tech companies, it wants to be a monopolist. That’s bad for the economy.

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