- Tesla's most bullish fans are overestimating its potential in the future electric-car market.
- Rivals like GM can ramp up production much faster and use existing EV platforms in several new models much faster than Tesla.
- Tesla is more likely to wind up being the sixth- or seventh-largest electric-vehicle maker in the long run.
Tesla almost went bankrupt in late 2008, but since then Elon Musk's all-electric-car maker has more than survived — it's prospered, against all the odds. With a market cap that surpassed General Motors, Ford, and Fiat Chrysler Automobiles — the Detroit Big Three — at one point this year, Tesla became the Big One as far as new American automakers go.
What Musk and Tesla have achieved is monumentally impressive. Before Tesla, the consensus was that the car business chewed up and spit out new players, the classic example being the ill-fated mid-20th-century entrepreneur Preston Tucker.
Musk is a bigger deal that Tucker ever was. Tucker did rate a Francis Ford Coppola-directed biopic, "Tucker: The Man and His Dream in 1988," but Musk is also trying to colonize Mars with SpaceX and was a model for the Tony Stark character in "Iron Man."
Having just started production of its Model 3 mass-market car, Tesla is riding high and, for the most part, is surfing a strong wave of investor confidence — or overconfidence, depending on your point of view. The bear argument that the carmaker that will struggle to build 100,000 vehicles this year while GM and Ford assemble and sell more than a million apiece isn't worth roughly the same value, or even close to it.
The bulls, by contrast, promise not just the moon but also Mars and a few other planets. Former Apple analyst turned venture capitalist Gene Munster recently offered the preposterous notion that Tesla's addressable US market alone could be 11 million vehicles sold annually.
That would constitute a 65% market share in today's market of roughly 17 million cars sold annually. The baseline US market is more like 15 million, so if Munster, evidently a big fan of monopoly power, thinks Tesla could control well over half the market in a boom, one assumes the carmaker would manage something similar in a weaker sales environment.
The level of overstatement is antihistorical. At its peak in the mid-1950, with essentially only two competitors in Ford and Chrysler, GM controlled just over half of the US market. Since then, a dozen competing brands have arrived, knocking GM's still No. 1 share down to less than 20% and providing consumers with a number of choices.
It wouldn't just be completely unprecedented for Tesla to get that large. It would probably invite antitrust action after Musk has decimated the existing auto industry in the US from dealer showroom to factory floor.
But such is the state of Tesla punditry, especially in the tech-finance side, where monopolists are welcome. Obviously, Tesla has more than miles to go before Munster's calculus pans out. Even with the Model 3 launch, Musk's goal of a million vehicles in annual production by 2020 would demand a radical rethink of the EV market, which now adds up to only about 1% of global sales.
We're ... No. 6
But let's grant Munster that Tesla will continue to prosper and grow. Following this line of thinking, another prospect emerges: Tesla won't be the biggest US carmaker in an electric-car world — instead, it could occupy the middle of the pack. That's right. Even among electric-car makers, Tesla wouldn't be No. 1. It would be, like, No. 6 or 7.
Let's look at the current US No. 1 for an explanation why.
GM went from concept to production on its own mass-market EV, the Chevy Bolt, in about a year and a half. The vehicle rolled out in limited release last fall and is now selling about 1,500 units a month, probably a bit more than GM expected. Combined with the gas-electric Chevy Volt hybrid, GM is now the top US seller of electrified vehicles that are not Teslas.
GM, as it has in the past with gas-powered machines, could also use the Bolt as a segmentation opportunity, offering larger all-electric vehicles, small pickups, maybe even sports cars using the same vehicle architecture and technology. The company is exceptionally good at rapidly scaling up global production based on demand. A level of 1,500 Bolts today could go to 5,000 literally next month, while Musk as Tesla try to ramp the Model 3 from 30 this past July to a predicted 5,000 by the end of the year.
GM certainly isn't alone in the capability; the rest of the traditional global auto industry could also quickly switch from gas to electric propulsion if demand surges.
Electric cars are nothing new. The technology has been around for 100 years, losing out to the internal-combustion engine in the early 20th century and held back over more recent decades by battery chemistry. With 200-mile ranges finally possible at an affordable price, the EV could at long last be ready for its close-up.
So let's say Tesla gets to a million in sales by 2020, and let's limit those sales to the US. Conservatively, that would be about a 7% market share, and, for the sake of argument, let's project that share out into the future as EVs displace internal-combustion-engine cars. I won't even delve into profitability — a big question for Tesla as it moves from $100,000 luxury EVs to $35,000 cars for the people — so we can keep it simple.
Middle of the pack
Tesla won't be able to add assembly lines fast enough to move past that level over the next few years, so the upshot is that its share would be about what Hyundai and Kia together control now. What you have to accept here is that Tesla doesn't now and won't soon have the capacity to dominate given its currently modest manufacturing footprint (a single, somewhat outdated factory in California with a theoretical annual production max of 500,000 units).
So if EV demand really takes off, Tesla won't be able to fully service it. Nor does Musk even want to, despite what the Munsters of the world might think! He's all about more EVs on the road. They don't have to be Teslas. Enter the legacy automakers and their ability to build a lot of cars in a hurry. The market-share framework in the US could remain the same, just with propulsion systems switched from gas to electric.
Tesla thus occupies a middle-of-the-pack position, with a potentially profitable luxury business topping out at about 75,000 to 100,000 in annual sales by 2020 and a mass-market business yielding between 500,000and 900,000, all depending on how robust the overall market is. Unfortunately for Tesla, competition across all segments would be impossible, so the carmaker would lose out on EV pickup and large SUV sales, as well as sales within segments, such as compact crossovers.
Tesla would then be the No. 6 or No. 7 player in the US. Perhaps the story would be different in China, but compared with its US sales, Tesla's China sales still have a way to go before GM or Volkswagen have anything to worry about.
A hard lesson for Silicon Valley
What does this mean for Tesla financially? Well, it actually suggests that the carmaker's market cap isn't totally out whack, as long as it doesn't grow much beyond $50 billion-ish levels in the future. Tesla would basically become what VW wants to be in the US: a company that offers both mass-market and luxury options.
What does this mean for Silicon Valley? It's a disaster. The US auto market is textbook anti-monopolistic. Nobody can achieve more than 20% share, and competition is ferocious at every level, from innovation and design to price. Consumers benefit enormously from this. Investors, not so much, as the laggard stock prices of Ford and GM for the past five years amply demonstrate.
Tesla's holds a middle-of-the-pack position, with a weak product lineup. It has only three vehicles now, with perhaps five or six in the picture by 2020, optimistically. And dependence on the Model 3, whose profits margins at an average sales price of something like $40,000, are bound to be wimpy. It all means that the company's aggregate margin will be less than 10%.
It's fun to be Tesla now. But it won't necessarily be if this scenario comes to pass. Paradoxically, the business would be more stable. But the story won't be one of dominating, high-tech future excitement. It would be one of continuous dog fighting for every sale — exactly what every carmaker doing business in the US wakes up to every day.
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