New EV makers swerve to avoid the dealership

By David Ferris | 07/17/2020 07:18 AM EDT

In a sign that the electric vehicle could be an agent of change for car dealers, well-known global brands, along with electric startups, are borrowing heavily from the retail playbook of electric pioneer Tesla Inc.

The logo of German carmaker Volkswagen AG at a VW dealership in Hamburg, Germany. VW is testing a new system for selling its electric vehicles that upends the traditional relationship between car dealer and customer.

The logo of German carmaker Volkswagen AG at a VW dealership in Hamburg, Germany. VW is testing a new system for selling its electric vehicles that upends the traditional relationship between car dealer and customer. Julian Stratenschulte/dpa/picture-alliance/Newscom

Buying a car in America means an anxious trip to the dealership. Often it’s a big lot in the suburbs that is stuffed with cars at inflated sticker prices, stalked by salespeople hungry for a commission, ending with a tense haggle over the final price.

But a wave of electric cars are soon arriving that will do it differently.

In a sign that the electric vehicle could be an agent of change for car dealers, well-known global brands like Volvo and Volkswagen AG, along with electric startups like Lucid Motors and Rivian Automotive, are borrowing heavily from the retail playbook of electric pioneer Tesla Inc.


Volkswagen, the world’s second-largest automaker, has declared that its new electric hatchback will usher in a new kind of relationship between VW and its dealers in Germany.

Polestar, a new all-electric luxury brand created by Volvo and its Chinese parent, Geely, will forgo the auto mall for tiny pocket showrooms. Lucid, based in Newark, Calif., is dispensing with dealerships altogether. Plymouth, Mich.-based Rivian is also selling to customers directly, arguing that the customer relationship is key to harvesting the car’s data.

These strategies are "the thin edge of the spear," said Karl Brauer, executive publisher of Cox Automotive, the owner of Autotrader and Kelley Blue Book.

"They are trying to establish this new system, and they are using EVs to do it," he continued. "It’s an indicator of where non-EV retailing will eventually get to."

The new EV models are showing up at a tumultuous time for the auto industry. Manufacturers are in the midst of the most wrenching transition in history, moving from a one-car, one-owner model to a fuzzy connected future where vehicles could be robotic, electric, operated as shared fleets or a combination of those.

One slice of that disruption arrived at the dealership’s doorstep with the coronavirus epidemic and recession.

Overnight, lockdowns and social distancing forced brick-and-mortar dealerships to become digital dealerships. Auto sales plunged by 24% in the first half of this year, but the damage would have been far worse if dealers hadn’t figured out how to provide customers with touchless test drives and the ability to sign paperwork from their laptops.

"What’s been going on the last few months have only accelerated this process," Brauer said.

State laws in the United States protect franchised auto dealers from the kind of changes Volkswagen is trying in Europe. Other major automakers, from Ford Motor Co. to Nissan Motor Co. to General Motors Co., are resolute in selling their EVs alongside their gas-burners. And it is unclear whether the new methods, now targeted at those who can afford luxury cars, will work when applied to economy cars.

Drivers seem open to a different dealership experience. A recent survey of 2,000 people by Cox found that just one-third are "very satisfied" with how dealerships work these days and that solid majorities want more online shopping, fewer salespeople and a different kind of showroom.

Automakers are tying electric car sales to new retail platforms that are online-friendly, offer flat prices and make low-key pitches.

From the dealer’s perspective, other changes are even more earthshaking. They challenge age-old ways of selling cars.

Volkswagen and Polestar are using their electric platforms to shrink the dealer’s role in financing, sales, service and brand identity — changes that could scramble balance sheets and job descriptions.

Tied up in these shiny new cars is a long-simmering debate. Can the auto dealer, which has sold its internal-combustion-engine cars in the same way since the 1950s, adapt itself to selling electric vehicles? Or is it better to start from scratch?

In Tesla’s tire tracks

If these new techniques sound a lot like the way Tesla already sells cars, that’s not a coincidence.

Tesla created fury among auto dealers by shunning them and opting to sell directly to its customers, sparking legal skirmishes that continue to this day.

"Existing franchise dealers have a fundamental conflict of interest between selling gasoline cars, which constitute the vast majority of their business, and selling the new technology of electric cars," CEO Elon Musk wrote in a 2012 blog post. "It is impossible for them to explain the advantages of going electric without simultaneously undermining their traditional business."

Direct sales have become essential to the business plan of every other EV startup. They see little reason to re-create a franchise model that buffers them from the customer.

Lucid, for example, will let customers order directly and online when the Air, its $60,000 electric sedan, debuts Sept. 9.

Zak Edson, the director of retail operations for Lucid, said in an interview that direct sales keep his finger on the pulse.

"Over time, the automotive companies have lost their connection, and it means you can’t have the same rapid customer reaction response," he said. "You don’t know what the customer is looking for."

Rivian plans to roll out an electric pickup, the R1T, and an SUV, the R1S, early next year. The company has been fighting for workarounds to state franchise laws to permit direct electric sales. Rivian’s vehicles, like Tesla’s, will do over-the-air updates, which rely on real-time information from the car. Getting that data relies on a contract between Rivian and the truck owner. Those contracts aren’t possible with a third-party dealer in the way.

"With our customers’ permission, we will be able to connect to those vehicles and monitor those vehicles in real time," said James Chen, Rivian’s policy chief, testifying before Washington state lawmakers in February. "All that data is valuable to us for the optimization of those vehicles."

A bill to change the state’s rules failed.

Tesla’s influence on today’s new crop of EVs goes well beyond direct sales.

The California automaker pioneered online ordering; transparent pricing; and the notion of shrinking the sales floor to fit in a shopping mall, staffed by representatives who earn the same whether a customer buys or not.

That retail model, a sort of Apple Store for cars, has been eagerly copied. Tesla’s stroll-in shops, which it calls "galleries," will be the format for Lucid (which calls them "studios"), Rivian ("experience centers") and Polestar ("spaces").

Tesla also modeled a new way of servicing cars that is troubling to traditional dealerships. A dealership usually co-locates its sales floor with its repair shop. This works out well for the dealer, since much of a dealer’s profits come from parts and repairs.

The machinery in an electric car has fewer parts and is simpler. When repairs crop up, Tesla sends its repair technician to the owner, often at no charge, or relies on a Tesla service center separate from its gallery.

Polestar, Rivian and Lucid are all duplicating this model to some degree.

Who’s better at selling EVs?

There’s evidence that traditional dealerships still aren’t very good at selling electric cars, even as they’re preparing to sell more in the coming years.

Last year, the Sierra Club sent 579 volunteers to contact more than 900 U.S. dealerships. They found that many salespeople didn’t know or didn’t offer key information about how EVs operate or what kinds of rebates are available.

These knowledge gaps at auto dealerships dampen sales and explain why an EV maker would want to have more say, said Joel Levin, the executive director of Plug In America, an EV advocacy group.

"No one ever asks an auto dealer, ‘What does gas cost, and where are the gas stations, and how does it work to put gas in the car?’" he said. "But you get that kind of questions with EVs."

Jared Allen, a spokesman for the National Automobile Dealers Association, which represents thousands of outlets, contends that regular retailers are selling EVs just fine.

"Claims that franchised dealers dislike selling EVs, or that EVs don’t generate the profitable service work that dealers need, or that EV customers prefer to transact all their business differently than non-EV customers, or that EV customers don’t mind traveling great distances to regional service centers for maintenance and repairs are just not grounded in reality," Allen said.

He noted that 12 automakers now sell EVs in the United States through their dealers and that the total number of models for sale at traditional lots will rise to 100 models two years from now.

The agency model

Probably the most significant sign that Tesla’s influence is transforming the auto industry came from a little-noted announcement from Volkswagen in May.

Volkswagen said its new ID.3 electric hatchback would usher in a new kind of relationship between maker and dealer in Germany, VW’s home country. The arrangement would also apply to a long roster of electric vehicles in the pipeline. Volkswagen calls it the "agency model."

"The agency model lays the contractual foundation for integrating online business and showroom-based business," Volkswagen said.

Customers can order vehicles from the ID.3 family directly from Volkswagen. "At the same time," added the company, "they select their preferred dealer for personalized customer care and local services."

The way that Volkswagen sells its cars in Germany is in essence the same as U.S. dealers’ relationship with their manufacturers.

The manufacturer makes a car and suggests a price but is in charge of neither sale nor price. The car company sells the car to the dealer, and if the dealer can pass that car on to the customer at a higher price, the dealer gets more profit. That’s the chief reason that car salespeople are so aggressive.

The arrangement saddles the dealership with a major liability. It has to pay the manufacturer for those cars and park them somewhere, and it doesn’t make its money back until the car is sold.

Carrying that large inventory is why a dealership is often a big parking lot, located in the suburbs where land is cheaper. When a customer visits, choices are usually limited to the models on the lot.

It’s also an intensely personal business of charm and handshakes. While most goods have transitioned to online shopping, the auto dealer remained a redoubt of in-person sales — at least until the COVID-19 pandemic put that on hold.

Bye-bye, brick and mortar

The new VW system changes the game.

The proposition that underlies VW’s new electric offering is that the customer doesn’t start at the dealer or even the dealer’s website. Instead, it starts at Volkswagen’s website, and from there flow the most important decisions.

"I think it’s really creative," said Chris Sutton, the vice president of automotive retail at J.D. Power, an intelligence firm for the auto industry.

He added, "My first take was, it’ll be very interesting to see that model and whether it’s adopted in the U.S."

In Germany, the electric car’s price is no longer the dealer’s to negotiate; it’s been set by Volkswagen. The options like leather trim and battery size aren’t chosen from among the ones on the dealer lot. Instead, they’re configured online through what VW describes as only 10 mouse clicks. In fact, the dealership doesn’t enter the picture until the customer chooses a dealer to be handed off to.

The dealer’s job is to "look after acquisition, sales consultation, organizing test drives, transaction processing and vehicle handover in coordination with Volkswagen," the company said.

The VW dealer’s compensation is fixed, eliminating a salesperson’s incentive to push hard on price. The dealer, VW said, "receives the same commission and bonus as in showroom business, even if the vehicle is purchased online direct from Volkswagen."

Finally, Volkswagen takes on a lot of the financial burden and risk normally taken on by the dealer. It, not the dealer, finances the vehicle and owns the inventory.

Finally, the car on the showroom floor isn’t meant to be driven away. It’s for test-driving and tire-kicking only, and it is leased to the dealership. The car that German buyers get is delivered to the dealer weeks later, after the car has been configured by Volkswagen.

How VW arrived at this new arrangement with its retailers and what VW’s intentions are for its U.S. dealerships are opaque.

VW declined to provide more details to E&E News, including how the new system will be adapted to the U.S. market. An association of German VW dealers, Volkswagen Audi Partner Service, did not reply to requests for comment.

Volkswagen won’t sell the ID.3 in the United States, citing a lack of demand for hatchbacks. The first of VW’s new electric offerings, an SUV called the ID.4, is expected here late this year or early 2021.

Automaker vs. dealer

There are reasons to suspect that VW — or any traditional automaker — will have difficulty shaking up its relationship with its dealers in America the way that Volkswagen did in Germany.

VW and its German dealers have a somewhat collegial relationship, and VW directly owns some dealerships. By contrast, automakers in the United States are usually barred from owning dealerships, and their ability to influence dealers is limited by state franchise laws.

U.S. automakers have also committed blunders that created an atmosphere of distrust. Ford attempted to operate its own chain of dealerships in the late 1990s. It was a financial failure and fractured relationships with dealers, which feared Ford would steer the best deals to its own outlets. The backlash created a wave of state rules that made it difficult for automakers to amend their agreements with dealers.

On selling cars, U.S. automakers "generally have shown they aren’t very good at it," J.D. Power’s Sutton said.

That history hasn’t prevented Polestar, the joint venture of Volvo and Geely, from trying a hybrid model.

The Polestar 2 is a $63,000 luxury sedan that is being made in China and will make its first shipments to the United States by August, said spokesman John Paolo Canton. Its first car, the Polestar 1, was a gas-electric hybrid. Future models will be pure electric.

Like Volkswagen, the experience will start online and cars will be built to order. Unlike Volkswagen, it is starting from scratch and has no existing dealers to appease.

Polestar will start by working with three dealership groups in Los Angeles, the San Francisco Bay Area and New York City.

But the location and feel of Polestar’s showrooms will be different. In a small space with just two or three vehicles on display — "brand education centers," Canton calls them — they’ll be found in upscale neighborhoods with high foot traffic, like Union Square in San Francisco and a block from the iconic Apple Store in midtown Manhattan.

The sales process will in other ways be conventional. "It is not an inconsistent experience than [with] a traditional dealer in the U.S.," Canton said.

Today, dealerships work much as they always have. It is unknown if new electric automakers will achieve mass-market status without the help of dealers or if the sales experiments by automaking incumbents will catch on.

But change is in the air.

"The retailing process they’re talking about is a full acknowledgment that there’s another way to sell a car than the one that’s been used for 100 years," said Brauer of Cox Automotive.