Elon Musk should not let go of win-win deal with Hertz

In the spirit of full disclosure, I’m a holder of Tesla stock—but I also advise executives to engage suppliers at a strategic level that goes far beyond beating them on cost. Instead, I urge companies to boldly pursue much bigger business benefits from procurement, often in collaboration, rather than confrontation, with their suppliers.

This Hertz-Tesla deal brings the benefits of this approach vividly to life.

For Hertz, a rebranding of extraordinary value.

The deal itself models affordability—something both sides can use. Though the reported sticker price of the 100,000 new Teslas that Hertz ordered is $4.2 billion, Hertz will reap about $1.26 billion in tax credits—a 30% discount on its acquisition cost. These are terms that would normally be nearly impossible to extract, no matter how formidable your negotiating prowess.

Further cost savings are gained by Hertz in the areas of operating and maintenance. According to an analysis done by Car and Driver, EVs cost about 30% less to maintain, and around 50% less to run than gas-powered vehicles, based on a head-to-head comparison between two cars, the Mini Cooper and the Hyundai Kona, that have both electric and gas variants.

The deal represents, at minimum, a symbolic milestone in the global race to reduce greenhouse emissions. Its long-term implications for sustainability potentially hold great hope for a cleaner future.

In terms of marketing and branding, this deal hands Hertz the sugarplum of differentiated customer experience. According to Consumer Reports, Tesla has earned the highest levels of customer satisfaction, seven percentage points ahead of the next competitor in any vehicle category. Through this purchase, Hertz will soon be able to offer its customers that same unique experience.

There is a caveat here. For long-distance renters used to going 300 miles without stopping to refuel, the concept of finding a charging station and then waiting 20 to 30 minutes for an EV charge that might only take them another 200 miles could create adverse customer experiences. However, with faster chargers being developed and charging station networks expanded, this should get resolved.

Perhaps most important to its image, Hertz stands to gain some much-needed brand prestige. After emerging from bankruptcy—and the too-frequent embarrassment of not having cars on its lots—Hertz has instantly elevated its place in the hypercompetitive rental car space. Like any rental car company, Hertz only spent money on purchasing vehicles. But this vehicle purchase has captured the positive attention of the press, consumers, and investors worldwide.

For Tesla, a rocket ride to the moon.

This brings us to Tesla. For the auto manufacturer, no matter how you look at it, this is a blockbuster sale. Selling 100,000 cars in a single deal represents around 5% of all Tesla sales to date and about 12% of its 2021 forecast sales.

First, stated here for admittedly partially selfish reasons, it ushered in a soaring stock price. Following the deal, Tesla’s share price topped $1,000. Tesla becomes only the sixth company to top $1 trillion in market cap, which truly creates massive value for shareholders.

The EV manufacturer also gains huge upscale in awareness and trial. In my opinion, this may be the biggest long-term benefit for Tesla, as thousands of Hertz customers who might never have had the nerve to visit Tesla for a test-drive will now pay Hertz for the opportunity to do just that. Tesla has less than 450 stores around the world, with six U.S. states barred from opening Tesla franchises. To achieve an upscale in awareness and trial comparable to what will be gained in the Hertz deal, Tesla would need to schedule upwards of 400 test-drives per store, per day—a tall order. Applying the typical marketing funnel approach, this free additional exposure could yield another 100,000 vehicle sales per year, even factoring in a modest 1% conversion rate.

All these new drivers will provide a lot of new data. The sheer amount of data and number of driver styles, road conditions, and so on is simply invaluable in the race toward self-driving. As if it were not enough already for Tesla to be a leader, this new input will put rocket boosters behind its trajectory.  We often forget that Tesla is not just an EV company, but also holds several keys to the bigger promise of autonomous driving. 

For all these reasons and more, the Hertz-Tesla deal was a procurement masterstroke—for both sides.

Bharat Kapoor is global lead, PERLab, and Americas lead in the high-tech practice of strategy and management consulting firm Kearney. He can be reached at Bharat.Kapoor@Kearney.com. The author would like to acknowledge the contributions of Tracey Pavlishin, Tom Varian, and Kushal Fernandes.