Mauro Tibone, EBX Columnist

Tesla Motors – Roaring Apple-Style Hype or a Ground-Breaking Car Maker?

Mauro Tibone, EBX Columnist

For Tesla Motors’s CEO & founder Elon Musk, 2013 will be a year to remember. This is the first year since the company was founded in 2003 that Tesla Motors has reported a quarterly profit. Mainly for this reason, Tesla shares have taken off this year, breaking through the barrier of $10bn market cap as a listed company in the Nasdaq.

Tesla Motors has tripled its share price since last March and reached an all-time high of $114 in May. What is behind this remarkable stock market success and what does the Tesla Motors business model represent for the automobile industry?

Tesla Motors was named after Nikola Tesla, a renowned Serbian-American inventor and pioneer in the electricity field, with several remarkable contributions, such as the design of modern AC induction engine, which the company has basically adopted for its vehicles.

Tesla’s, young, charismatic and South African-born founder Elon Musk is an eclectic inventor and business pioneer himself. A self-taught software developer when he was merely a teenager, after completing his studies at university in business and physics, he co-founded Paypal, which he later sold to Internet giant EBay.

During his studies Musk drew inspiration from Nikola Tesla’s works, nurturing his dream of bringing back the electric car to the masses. After founding Tesla in 2003, he also became involved in the space exploration business with SpaceX and in the solar business with a company called SolarCity.

Unlike most innovators of his generation, Musk had not forgotten that after many decades of dominance from combustion engines, electricity vehicles were among the earliest passengers’ vehicles. In the 1900s, before powerful internal combustion engines became the mainstay, electric automobiles held several records for speed and distance on land. At the turn of the century, there were more electric than gasoline-powered vehicles and at one point they even out-sold gasoline-powered vehicles, having about 28% of the automobile market share.

A decade ago, Musk decided to enter the electric car industry, because he was convinced that no major car manufacturer would have any serious intentions to build one. He recognised a growth opportunity in a new market and went for it, well aware that the consensus considered it a rather crazy proposition.

In fact, many companies had already failed for decades to accomplish the goal of bringing back EVs to their former splendour. As a stark reminder of such a difficult challenge, Fisker Automotive and Miles Electric Vehicles, two US manufacturers of hybrid and all-electric cars, have recently filed for Chapter 11.

Elon Musk’s intuition was to try a rather different approach. Building a car purely for the purpose of transportation, efficient but with no-frills, would never make the cut. You really had to make it a desirable object, something that would capture customers’ imagination. Such features were notably missing for example, with the GM Impact, to name one of the most promising attempts by a major automobile maker to create an all-EV in the mid-1990s.

Tesla therefore ‘aimed at markets in which rich people could afford to buy a Tesla as a status symbol… third or fourth car’, as former Internet analyst and now popular financial commentator Henry Blodget recently declared.

Elon Musk’s strategy therefore started with targeting a niche market, with a high price/high performance Roadster model, produced in low volumes. Once the brand became established, he then ramped up production volumes and targeted a broader high-end market with unit prices from about $70k, the successful sedan Tesla S. This is remarkably lower than the $109k price set for the Roadster. The next step will be in a few years time, to further lower the price point towards an average of $30k-$40k, while significantly ramping up Tesla’s production volumes.

Meanwhile, Musk positioned the company in such a way as to cooperate with Daimler and Toyota Motors (respectively partners with 4,7% and 10%) helping to jointly develop all-EV models or to supply powertrain components.

This partnership strategy left the company in decent financial shape, after a very troubled 2008 when Musk dug deep in his own pockets to manage a serious liquidity problem. Moreover, it elevates Tesla’s technology in this industry, while leaving the door open to a takeover down the line, if the company starts to fire on all cylinders.

Another interesting feature of Tesla Motor’s strategy is its challenge to US car dealers by adopting a direct sales model, similar to the Apple stores. For this purpose, three years ago Tesla hired George Blankenship, a former Apple Executive, to help develop Tesla’s retail strategy worldwide.

In fact, Elon Musk has no qualms about taking on powerful lobbies, such as car dealers, which benefit from special protection under the law in many US states by not allowing cars to be sold directly by manufacturers.

Similar to Apple in the early stage of development, Tesla’s marketing is unique, in the sense that it relies heavily on word-of-mouth, rather than heavy advertising budgets.

Musk’s genius was in his capacity to harness social media, communicating as often as possible and creating a constant buzz around his enterprise. Social media plays a major role behind the success of the Tesla brand, so much so that Musk’s omnipresence and easy accessibility to the media have drawn 225k Twitter followers. Quite a lot, given how relatively few cars Tesla is currently selling (roughly 21,000 this year, compared to about 16 million vehicles overall in the USA).

Could Tesla’s business model work in Europe, where incidentally, the EU has just announced its 2020 CO2 target of 95 gram/Km for vehicle gas emission?

Firstly, let’s keep the Tesla hype in perspective. The all-EV market, similar to the USA, still represents, a very tiny fraction of the entire European automobile market, accounting for roughly 0,23% of all cars currently being sold.

A bounce in all EV sales during the first two months of 2013 got some industry commentators a bit excited, considering also the launch of new models such as Nissan Leaf or Renault Zoe, which should mark a bigger presence of all-EVs in terms of car sales going forward.

Industry leaders such as Carlos Ghosn, CEO of Nissan, have great hopes for all EVs, claiming that by 2020, demand for these types of vehicles will represent about 10% of total demand. In the UK, the Committee on Climate Change, an independent advisor to the government, hopes to see 1,7 million EVs on the road by the same deadline, if the UK is to comply with its greenhouse gas targets.

In theory, all this should augur very well for an electric car manufacturer, but here’s the rub: Tesla Motor is not competing with EVs such as Smart, Nissan Leaf or Renault Zoe for the simple reason that it’s still a luxury carmaker.

Elon Musk himself could not refrain from laughing when asked during an interview with Bloomberg last October, whether he was worried about competition from the likes of BYD (a Chinese automaker, with an array of products including hybrids and all-EVs, which counts Warren Buffett as a major investor). Such is the gap between the Tesla market segment and other EV carmakers.

It is widely noted that this EU agreement (still to be approved by each state member) on stricter emission targets by 2020, is a carefully orchestrated compromise deal by Germany. It is aimed at ensuring that its high-end automobile makers, such as BMW and Daimler, can continue to produce more polluting cars.

The EU deal will not allow the carry-over of supercredits earned before the 2020 deadline, but will maintain retention of the multiplier (a factor which increases the number of supercredits a manufacturer earns for each low emission vehicle it builds).

Essentially, Germany gets to preserve its high-end combustion engine automobile market for longer, while also benefitting from introducing more low emission vehicles.

Given that at this stage Tesla Motors, with its high price point is addressing precisely the segment dominated by German carmakers, it is unlikely that this EU stricter regulation will do much good for them.

More importantly anyway, Tesla’s financial resources only allow to prioritize the US market, given its commitment to develop new models and install their 480 superchargers stations network on the US territory.

Tesla Motors indeed opened a handful of stores in Europe, establishing its stores in London, Munich, Milan, Zurich and Paris, together with a few sales reps in other major European cities. In spite of that, it is my opinion that Tesla’s presence in Europe for several years to come will be more symbolic than strategic.

Tesla Motors is making car enthusiasts reel with its eye-catching design and outstanding driving performance. However, well-known issues persist within this car segment, such as affordability, longevity of batteries and anxiety over the distance the car can actually go, these will be hard to dispel.

It is still too early to tell whether all-EVs can really take off and if Tesla can reach its stated goals. But for those thrill seekers who cannot afford to ride the actual Tesla cars, there is a cheaper option: buy Tesla Motors shares at $109 each…

A rollercoaster ride is guaranteed, given its current lofty valuation and high level of speculative short interest in the stock. Whether you are driving a Tesla or owning shares in the company… take my advice: fasten your seatbelt!

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