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Business Driver:BMW, Tesla rethink how cars are sold

Published July 31, 2013

BMW finally unveiled its long-awaited, four-door, all-electric hatchback, the i3, this week.

As industry watchers zoomed in on the central story of the i3′s place and future amidst an underwhelming electric-vehicle market, there was another show running on the sidelines: one that could potentially change how cars are sold.

According to various reports, Roland Krueger, BMW’s head of German sales, has suggested the i3 will be sold directly online. The company is even looking at creating a mobile sales force that will make house calls to potential customers.

Although this is revolutionary enough, Krueger also told German weekly Wirtschaftswoche BMW is not ruling out expanding direct Internet sales to all models.

Needless to say, German dealers didn’t take this future vision well.

Denunciations have followed, despite Krueger’s insistence that dealers will remain the “backbone” of BMW’s sales strategy.

How BMW intends to sell i3s in North America is unclear. But, if resistance is so strong in Germany — where automakers have greater control and, in some cases, direct ownership of vehicle sales outlets — one shudders to imagine what could happen if BMW followed a similar strategy over here. Canada and the U.S. have some of the toughest dealer franchise laws in the world. These rules vary by state, but the essential undercurrent remains the same: automakers cannot compete with their dealer networks by selling cars on their own. The restrictions apply to online retailing as well, as Ford learned the hard way in the late 1990s when its direct-website approach landed it in legal hot water, forcing the Detroit automaker to abandon that strategy.

Luxury EV-maker Tesla’s ongoing battle with dealership associations in various U.S. states has once again stirred the franchise law debate.

The Silicon Valley-based company runs about 30 retail stores across North America — Canada has one at Toronto’s Yorkdale Mall, with service support centres in Montreal and Vancouver. Despite North American vehicle sales estimated at less than 10,000 in 2012, American dealer groups claim that these stores are illegal.

Tesla contends that it has no existing franchises and, therefore, the company is perfectly within legal limits to sell cars through its own stores or via its website. Tesla CEO Elon Musk also argues that its product is unique, so the company is best suited to sell the vehicles through its Apple-styled store experience.

Court decisions have been varied. New York and Massachusetts have been favourable to Tesla, while states such as Texas and Virginia have largely rejected the company’s bid. Musk has pledged to take the legislative showdown as far as it will go. Tesla as an automaker is a market anomaly but, when it comes to the overall question of direct sales, dealers have a valid argument.

Cutbacks in Chrysler and GM dealer outlets during the recession hit these networks hard. Company-owned stores or direct selling could further dismantle the industry. Thousands of jobs are at stake here.

But I don’t think automakers really want to do away with dealerships. After all, the dealers are deeply connected to local customers and are generally best placed to serve them. Dealerships ensure competitiveness in the market, which ultimately benefits buyers. Also, dealer operations cost big money and manufacturers don’t necessarily want to make that kind of investment. Instead, what automakers such as BMW are aiming for is a recalibration of the selling process. Vehicles have changed, as has the nature of digital presence, so why should carretailing remain a 20th-century dinosaur? Take electric vehicles where volumes are currently low and will likely remain that way for years to come.

Made-to-order direct sales can save EV automakers a ton of production headaches and investment. Even dealers can benefit, by committing less inventory costs for products that are hard to move out of their lots. EVs are technically different, which likely requires specialized sales strategies and more automaker oversight.

As I stated in a previous column, I firmly believe one of the reasons behind the low uptake of EVs is that they are not being sold right.

BMW seems to be on the right path positioning the i3 as a brand in itself. More direct involvement in the selling process of an entirely new kind of vehicle may drive sales and benefit dealers when volumes pick up. The growth of online retailing in even big-ticket electronic products has also shown customers may be inching closer to buying a car online. Emerging technologies, such as augmented reality and 3D-sensing, may even make virtual test drives possible in the near future.

The approach between automakers and dealers should be collaborative, and ultimately serve the best interests of buyers.

Kumar Saha is a Toronto-based automotive analyst with global research firm Frost & Sullivan.

Email: wheels@thestar.ca

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