Elon Musk, CEO of Tesla, took another step in defying conventional wisdom by agreeing to provide Hertz with 100,000 Teslas to be delivered by next year. The news was extremely well received by Wall Street and took Tesla’s market cap past $1 trillion and in the process made Elon Musk richer by $42 billion. Just days after it made the announcement with Tesla, Hertz said it will make 50,000 of those Teslas available to Uber drivers in an expanded rental program.

While the stock market is rewarding both Tesla and Hertz, it will be an uphill battle for Tesla to shed the stigma associated with cars that appear in rental car lots. Historically, bulk rental fleet sales were considered a dumping ground for less popular models that didn’t sell well with individual buyers at dealerships. In many cases, auto makers used rental fleet business to pad sales and keep factories running even as demand faltered at dealerships.

For Tesla, there is more at stake than keeping its factories running. Rental car sales diminishes the value of the brand and makes it less exclusive. Will Tesla’s foray into the rental car market make it a replica of a C Class Mercedes? 

Future Wealth’s View

The primary reason people buy a Tesla is its exclusivity and the high price tag. Having a Tesla in one’s driveway sends a message to all the neighbors – “I am wealthy and can afford a Tesla”. The fact that it is an EV is an afterthought, if at all. If one solely wanted to reduce emissions and buy an EV to help the environment, there are several cars that are a fraction of the cost of a Tesla. Given the exclusivity of the Tesla, can you imagine the shock of a Tesla owner to see a plethora of Tesla’s with a Uber and Hertz stickers on them schlepping people to and from the airport and God forbid, one of them pulls in front of his house to drop off packages of food from Uber Eats to his neighbor or even worse, to himself?

In a seminal book titled “Marketing Mistakes” by Robert Hartley, there is the story of how Mercedes lost its exclusivity when it introduced its C class for under $20,000. Until then, every working man or woman who was driving a Ford or Honda would be eyeing the Mercedes that went by and be saying to themselves – “I will work hard and buy a Mercedes one day”. When the C class hit the market, new recruits straight from college could secure a loan to buy a Mercedes sedan and thus started the decline of the Mercedes brand. In a strange twist of irony, Tesla replaced Mercedes as the  “Most Exclusive and Coveted” automobile.

For Tesla investors, many of whom don’t really care to look at fundamentals of the company and only read Elon Musk’s Twitter feed, the runway for the stock to go higher has just gotten longer with this announcement with Hertz. But for Tesla owners, diminishing brand value is going to hurt over time. As the saying goes – “Own the stock, not the product”.