Part 2 of a multi-part series. Part 1 is here.
I had originally thought that I could cover this topic in a long single blog post. I think that does a disservice to the complexity of the subject matter. Accordingly, I hope to paint the broad brush strokes here and then get to the specifics of each business line in the Tesla portfolio.
I tweeted earlier that I want this information to be accessible to non-financial readers but, also, have enough in it to be informative for financial pros. I fear that the objectives of the former will make it too superficial for the latter. But, I’ll (pun intended) charge on.
The conventional wisdom tends to look at Tesla as having two business lines: auto manufacturing and, with its acquisition of Solar City, solar power. I think that doesn’t allow the market to see either the co-dependence or the separate opportunities and risks in the sectors in which they operate.
I see their major business lines as thus:
- Auto Manufacturing
- Truck Manufacturing
- Auto retailing
- Power storage
- Power distribution
- Autonomous driving technology
I imagine that many will look at this list of being somewhat pedantic in it’s definitions but, zooming out, each one of these business lines can stand on their own and allows us to put their activities in a comparative framework within specific industries. Additionally, each one of these lines could (and some perhaps will) be converted out of their proprietary use and, if push comes to shove, be sold or marketed to the non-Tesla public.
With that in mind let’s look at the big picture of each of those lines starting with Autos.
Auto Manufacturing – State of the Industry
To put Tesla’s auto manufacturing business in context here’s what the world looks like today.
- Global fleet of passenger vehicles and transpiration trucks in service = 1.2 biillion
- Number of cars produced globally this year = 75 million.
- Total number of BEVs and HEVs sold in the world to date = 3 million which is slightly less than 2% of the worldwide vehicle fleet..
- 2017 market share of EVs to all transportation vehicles = 1%
- If Tesla meets it’s goals of selling 600K cars by 2020 it will produce roughly 1,600 cars per day. Today, GM and Toyota produce about 28K cars per day each.
Here are the latest numbers on total US EV sales of both pure EV and hybrid for 2017. With the final numbers to be reported soon it looks like the total plug-in EV market will be around 200K autos in the U.S. wihich is about 1.2% of the total U.S. market.
A Crush of EV Competition Is Happening Now
Auto manufacturers have announced plans to bring to market no less than 100 new EV models in the next five years. It remains to be seen if the actual end demand justifies such an industry wide investment. So far, car buyers seem quite happy with internal combustion engines – both for price and convenience.
EVs v Internal Combustion
Currently, an EV drive train runs about $10K more for a 200+ mile range than a gas powered car getting 400 miles on a fill up. Old school auto industry reporters don’t see the US EV market really gaining traction at the rate EV enthusiast see simply for the inconvenience factor of charging and the monthly payment difference. I suspect that the internal combustion engine will be with us for quite some time – at least until the cost differential sinks and the problem of charge times gets solved.
Also, given the low energy density of batteries it looks like a while until consumer preferences for full-sized and SUVs and light trucks -currently above 50% of the total U.S. market- can become cost competitive and practical (here is where fuel cell technology, if improved, would pay big benefits.)
BTW, the average sales price for all passenger auto in 2017 was $33K. This is skewed significantly by sales of luxury cars, light trucks and full sized SUVs. The average price for a sedan is in the mid-$20K range.
Pure EVs v Plug-in Hybrids
Meanwhile, many plug-in hybrids (HEVs) offer nearly the same green footprint for the average driver by offering the benefit of all electric travel for 95% of their driving and avoids the inconvenience of charging wait times when hauling the family to Mount Rushmore for the summer vacation.
For example, the Toyota Prius Prime boasts a 640 mile range with an estimated 133 MPGe and a reasonable 54 combined MPG for long road trips. Although it only has a range of 25 miles of pure electric driving that’s good enough for most to commute to work and run daily errands. With tax credits, the price nets out at about $25K with the mid-level trim package compared to roughly $35K for the Chevy Bolt and (the yet to be built) 220 mile range Tesla Model 3. Most manufacturers have HEVs in this swatch of the market in their 2018 line-up.
On the pure EV front, the space is somewhat less competitive for 2018 but 2019 promises vast choices beyond GM and Tesla. However, a big contender in 2018 will be the new Nissan Leaf with a 150 mile range for about $30K and the promise of a 200 mile range battery pack before the end of the year.
Tesla needs to be worried about competition for their Models S and X. Porsche and Jaguar will both deliver high-preformance EVs near the price point of the Model S in 2018. At a minimum, this will take some of the starch out Tesla’s proprietary “sexy factor.” There’s a lot more coming into the space by 2020 from the likes of BMW, Mercedes-Benze, etc.
Of course we can’t neglect China which is working hard to be the market leader in EVs. If you don’t know them now you’ll soon be familiar with names like BAID, Zaidou, and BYD. All three are positioning to sell cars into the North American market and have the hopes and dreams of the Chinese Government providing support all along the supply chain.
Everyone In The Pool
Going into the next decade there is huge commitment to EV production across all manufacturers. GM promises 20 pure EV models by 2023 and VW has committed $32 Billion to EVs over the next decade. Again, we’ll see where market acceptance leads to sales but, if EVs fail to really become mainstream in the next 5 years, at least everyone is going down together. This points to the obvious benefit of being a legacy manufacturer that can sell internal combustion engines while they size real demand for EVs.
The Short of It
It’s true that Tesla has some competitive advantages currently with a combination of marketing hype, mobile charging stations, and sex appeal. I’ll get to those in later installments as well as the technology risks that Tesla suffers by a rapid expansion in production goals.
Leave it to say, however, that this might prove to be ephemeral over the next ten years. The competition is heating up by companies who really know how to make cars, understand end demand, and are extremely well capitalized – none of which Tesla has demonstrated well (what happens when the Model 3 deposit holders get all the deliveries they want and the number of competing products increases dramatically?)
A lot of people have offered up the analog that Tesla cars are the new iPhone. I reject that summarily – which I plan to write about. But if I was to use that type of analogy, I’d use Blackberry. As in most industries, it’s the second mouse that gets the cheese.
That’s the view from 10,000 ft. I’ll get much more specific as we go.
Next Up: The Tesla Semi – wherein I’ll debunk the breathless fawning of fanboys who think it’s a game-changer and show how Tesla is, if fact, behind the curve.
ps: There’s a ton to cover in doing a thorough analysis. I’ll get to financials, production overhead, scale economies and a host of other matters. Still, I think if I give you a 20,000 word piece you’ll stop reading. Ergo, I’m breaking it into bite-sized bits.
Full disclosure: We are short $TSLA stock.