The Tesla Competition
Board: SAS: Tesla Motors
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(Wow, this turned out a lot longer than I thought. Hope it's useful to somebody, though...)
My guestimation is that everyone else is a half a decade behind.
There is only 1 other EV generally available in the US right now: Nissan's now well-priced Leaf, an upright hatchback that seats 5, takes 10 seconds to go 0-60, and has an EPA range of about 75 miles. Nissan's CEO, Carlos Ghosen, as made a lot of hay about Nissan being really serious about EVs (and gaining a significant role in the movie, Revenge of the Electric Car in the process), but after seeing the Model S and its glowing reviews Nissan decided to "delay" their luxury Infiniti LE car for a few more years (http://online.wsj.com/article/SB1000142412788732339450457860...).
Audi has cancelled their "eTron" program. (http://www.edmunds.com/car-news/audi-r8-e-tron-wont-make-it-...).
BMW has announced their first generally available EV (the MiniEV and ActiveE were leased test vehicles) won't ship in the US for another 9-10 months. It's a 90 EPA mile (that's a prediction based on what information they've released) small SUV/crossover that seats 4 and takes more than 7 seconds to go 0-60.
The other EVs are so-called "Compliance Cars," which means they're only available in CA, and perhaps a few of the other 10 states that have similar laws requiring automakers to make and sell a certain number of electric cars. Here are some of the "compliance cars" available today: Chevy Spark EV, Honda Fit EV, Ford Focus Electric, Fiat 500e, and Toyota's Rav4EV. The Toyota has a Tesla designed and manufactured powertrain (battery, motor, cooling, etc.).
The companies that don't sell enough vehicles ot meet the law's requirements have to pay penalties, but Tesla is able to sell the "ZEV credits" they get from making EVs - so the other car companies get to pay less than the penalty. The good news for us TSLA investors is that Tesla gets this money instead of the state AND the law kicks in to a higher gear in 2015. But, while EVERY other EV on the planet was designed with the thinking that people are willing to give up convenience and money in order to be "green," Tesla provides better performance, luxury, and convenience at the same price levels and "just happens to be green."
The other car companies just don't get this. In 2009, Audi's US President, Johan de Nysschen, said "[Pure EVs are] for the intellectual elite who want to show what enlightened souls they are." He also called Chevy Volt buyers "idiots." (http://www.dailytech.com/Audi+US+President+Calls+Volt+Buyers...)
Because of the EVs they had seen, many people did not expect Tesla could be competitive with ICE (Internal Combustion Engine) manufacturers. After all, BMW, Mercedes, Lexus, Audi, Porsche, etc. have been perfecting the ICE car for several decades, right? There was no way a brash start-up in Silicon Valley of all places could compete using brand new technology (so far delivered only on a 2500 limited production run in a small sports car), right? Making a great car is hard. There's no way a bunch of nerds can do it, and certainly not in volume their first time out the gate, right?
Here's an example of auto industry insider thinking at the time (From Automotive News, a trade journal), titled "Kilowatt? In carspeak, it's kill-a-thrill" (http://www.autonews.com/article/20100719/RETAIL03/307199978#... )
An electric car is mainly an appliance. First, of course, it runs on electricity, the same power that operates dishwashers, hair dryers and bedside clocks. And electricity is not sexy. ... Startup Tesla Motors Inc. is selling electric sports cars. ... But the appeal of most electrics and hybrids is not fun but efficiency.
Even when the car came out and started getting rave reviews, insiders didn't recognize the threat. Bob Lutz, former Vice Chairman of GM, wrote a piece in Forbes just over a year ago, titled "Tesla Beating Detroit? That's Just Nonsense" (http://www.forbes.com/sites/boblutz/2012/07/13/tesla-beating...) that ended with "Don’t confuse it [Tesla] with what Detroit does for a living."
That Tesla's Model S is a great car (not just a great EV) surprised the stalwarts of the automotive industry. They were figuring out how to sell just enough EVs to not get penalized (monetarily and publicity wise), not how to make a better car. This mind-set is typical for established companies when faced with disruptive technology. Go read about this history repeating pattern in Clayton Christensen's book The Innovator' Dilemma (http://www.amazon.com/The-Innovators-Dilemma-Revolutionary-B...)
While everyone else was focused entirely on the ecological benefits of electric drive, Tesla focused on the ability electric drive gave them to make a better car. Gut-wrenching acceleration (Tesla's are faster 0-60 than Disney's California Screamin' roller coaster). No gear shifts. Quieter. More room in the cabin. Lower COG. Less required maintenance. Lower per mile costs. Convenience of starting every day with a full tank. Tesla wrapped all that up in standard looking luxury bodywork and priced it about the same as their ICE competition.
A year into production and Tesla can't make them fast enough to satisfy demand. And, this is with zero advertising, zero price negotiations, etc. Heck, while other companies are cutting the prices of their EVs in order to sell more, Tesla has actually raised their prices a few times. Motor Trend, Consumer Reports, etc. have all raved about the car. Anyone looking to buy a big BMW, Mercedes, or Audi sedan is checking out the Model S, and many are choosing the Model S.
Tesla is continuously improving the car. From expected features like park distance sensors to new interior options, to a new upgraded suspension option, Tesla doesn't wait for "model year" changes to roll out improvements. Each one of these things breaks down a barrier someone had for buying the car.
But, Tesla also thinks outside the box. For instance, while other car companies point to a lack of EV infrastructure as an excuse to explain why their EVs aren't successful, Tesla decided to fix the problem by building their own DC fast charging network across the world.
This is the real kicker for me. While everyone focuses on Tesla's great technology - and it is great - Tesla innovates with more than just technology.
With its Apple-esque boutique stores placed in high traffic shopping malls, encouragement to touch and sit in the cars, product specialists that aren't paid on commission, and giant touch screens for more information (or to actually order), Tesla has changed how people buy cars - and they love it. A no-pressure, upfront and no haggle pricing model.
Saturn tried something like this, but Tesla has taken it to a whole new level. If you're in a Tesla store, note how diverse the Product Specialists are in terms of gender, age, etc. (OK, they're mostly young, but compare the diversity in a Tesla store to any dealership) Watch how people in the store choose to whom they walk up to with questions. I think there's a carefully crafted appeal factor built into their hiring. Also, it's all super low pressure. Is that BMW M5 unlocked for me to sit in? Not in the dealership I visited not too long ago. OTOH, can my kids climb over the back seat of that Model S or crawl into the frunk? Certainly, even with chocolate ice cream on their hands. Heck, the Tesla sales people will take a photo of you in the car with your cell phone if you ask (and many do).
The service model for Tesla is also innovative. Again, instead of figuring out how to shoe-horn the servicing of electric cars into some traditional service model, Tesla found advantages to servicing electric vehicles. With greatly reduced fluids and no engine or transmission, Tesla saw that they could service cars anywhere they could drive a van to. The electric motor is about the size of a watermelon, so easy to have a spare on the van. Try that with a big block Chevy V8! The PEM is about the same size, and everything else on the car runs on electricity (power steering, air conditioning, etc.), so most things are just remove and replace on site. Then refurbish the cores in the factory to original specs for use in other cars.
I mentioned the SuperChargers before. While a great technological achievement to get a half charge in about 20 minutes, the real achievement in my view is the cost model. Using the same inverters built into the cars themselves (your Model S has 1 or 2 of them for 10kW or 20kW AC charging), Tesla takes 12 of those exact same inverters and gangs them up to produce a 120kW Super Charger that pipes DC directly into the battery. Since these inverters are mass-produced (tens of thousands a year), they're less costly than other DC fast chargers like Chademo. Then, pack some solar panels on the roofs to get some free electricity (which they can sell back to the utilities like a homeowner with solar panels does if usage is less). All very cool.
But, then Tesla does the extraordinary step of making use of these SuperChargers free for all Model S owners. I pointed out earlier how the entrenched mindset of the established automotive companies meant they would never even think of trying to solve the EV infrastructure problem. Tesla not only solves it with technological innovation, they solve it with business innovation. Imagine your car getting free long distance fuel forever. Again, Tesla looked at how the benefits of electric drive - in this case ecologically friendly and economically cheaper - could be used to improve the value of its products to their customers.
I love that Tesla's have free fueling options, but you gotta admire how Tesla handled their recent capital raise. In my view, they clearly planned to blow out expectations back in Q1, get a short squeeze (remember Musks "Tsunami of hurt" tweet?), and then issue $600 million in convertible notes (base of under $125 per share which is a great price today) plus stock to raise over $900 million, then pay off the DOE loans in full (first US automaker to do so). Note that more than just the great press (and Fox news silencing) from paying the loans off, the move extinguished millions of stock warrant contracts that the government carried at much lower exercise prices. This is financing innovation at its finest - a shareholder friendly move. (http://www.forbes.com/sites/thestreet/2013/07/09/tesla-jumps...)
Conclusion on Competition
Bottom line for me, Musk was right to laugh. It might seem like hubris to some, but considering all of the above, Tesla has earned the right to chuckle a bit. While some insist that BMW or Mercedes or maybe even Ford will wake up and use their vast resources to put Tesla out of business, I don't see that happening. Even if the people at those companies get it, the corporate structure they have - and which has made them successful - won't let them do what is necessary.
The high tech company I was previously at got bought out by a ginormous high tech company. It was fine for a while, but it was clear to me and even some execs that we weren't innovating enough. The VP of engineering had recently done a presentation where he put up company names like Kodak, RIMM (Blackberry), Nokia, etc. and talked about the danger of disruptive technologies to our company. I had just accepted an offer from a pretty small company, and he wanted to talk me out of it. He knew all about the Innovator's Dilemma, technology disruption, etc. I asked him how our company could be like Nikon instead of Polaroid. Polaroid, after all, had a bunch of digital cameras and other related products, but they failed because the new business model required didn't match their razor and blades model - it wasn't the technology disruption that killed Polaroid, it was the business model disruption that killed Polaroid. We talked and while it was clear to me that he totally "got it," it was also clear to me that he was mostly powerless to make the necessary changes in this ginormous company to successfully make the transition. I left for my new job a couple weeks later.
This is important. For all the great engineering BMW has, for instance, they first don't have the will. Successful companies have anti-bodies that keep them successful. Those anti-bodies kill off ideas that don't make their current business better. They listen to their current customers who want better MPGs or brighter color interiors or a larger sunroof. But, customers aren't demanding a change in propulsion technology. As you have certainly read, many people were vehemently opposed to such a change. A company of BMW's size, even if they could engineer and produce hundreds of thousands EVs, couldn't sell hundreds of thousands of EVs. But, a small company like Tesla can make money at tens of thousands of vehicles, and use that experience to work towards their hundred thousand a year product a few years down the road.
What's a BMW to do? When the shift comes, it'll come quicker than they can turn around their aircraft carrier of a company. Back in the day, disk drive companies actually set up completely separate entities to produce the next generation of disk drives, and one even swapped the whole staff when the new tech was ready. Even if BMW has the foresight, the infrastructure changes needed to do this are too massive, the investment needed too great, and even if they did that they'd lose the focus they need on their current cars to keep them great. Current shareholders would whine and sell off if BMW invested what they really need to invest in order to lead the EV future. Same at Ford, Toyota, etc.
But, even before they could do that, they'd have to think they needed to do that. They'd have to realize that the change is coming, and like Nokia making fun colors or round keypad phones instead of smarter phones, by the time they realize the new world is here, they'll be completely unprepared.
Since this post is already way too long, I'll make it longer. Reed Hastings of Netflix gets The Innovator's Dilemma. He used to be one of my heroes. Netflix turned the movie rental business on its head - twice. First was a business thing with the DVD mailer, second was the streaming business as subscription, not per show. Both completely disruptive ideas that put the established companies out of business. But, then he blew it. Perhaps he was too focused on the upcoming change and simply moved too quickly, but the bottom line for me is that he didn't "get" his customers. Netflix doesn't understand that customers don't want to choose streaming or DVD and then choose a movie, they want to choose what movie they want to watch and then deal with whatever format it's available. Separating the businesses, removing the "add to DVD queue" button, etc., was a customer unfriendly move. I feel that Netflix doesn't care about me, just their business. It's maybe the first case where someone moved too quickly on The Innovator's Dilemma instead of not quickly enough. Ironic, eh?
On the other hand, I feel Musk and Tesla care not only about their customers, but about their impact on the world. They could have done the SuperCharger things solely as a competitive advantage against other EVs, or to level the road trip comparisons with ICE cars, but they took it further, finding a way to make it cost effective to give the electricity away for free. They thought about value to their customers in ways Netflix doesn't.
Tesla obviously needs to keep the pedal to the metal in order to be successful. They've overcome serious hurdles and big odds and have barely made a mis-step. The stock is at all time highs, and has a nose-bleed valuation. It's really hard to recommend that anyone buy at these levels. And while Tesla has serious and hard challenges in front of it, the overall future is no longer in doubt to me. Electric cars are coming and soon they're going to be better than what you drive today. Maybe you believe that, maybe you don't. And even if you do, and even if you believe Tesla will continue to lead that charge (pun intended), maybe you think the stock has gotten ahead of itself. Way ahead of itself, even. I won't argue with that.
But, the point of this post is that for the foreseeable future, Tesla has no competition to speak of. No-one else is going to go after Model S or Model X - too late for that. For there to be real competition for Tesla a whole bunch of unlikely things have to happen:
1) The board of directors of these auto companies have to believe, really believe, that if they stay on their current track of just dabbling in EVs until the market is ready, that they will be the next Kodak or Nokia.
2) The board has to have a management team in place that also are true believers and grant them the power within the company to make the commitment of money and people necessary to beat Tesla's Gen-II in 3-4 years. They have enough time, after all.
3) The management team has to convince its employees that transition is good for the company. This means everyone from product designers to marketing to sales to service to engineering, etc. Remember, it's going to be asking their middle mangers with decades of experience with ICEs to do lead something different. They'll have to get new talent that understands the new technologies and can implement them at Tesla's level.
4) The board and management team have to have the fortitude to stand up to shareholder complaints about smaller profits and perhaps a weaker current product line.
Now, do you really think they can do that? What was the last company to successfully accomplish that? My experience tells me that history will repeat itself, and the new upstart will win.