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 benefiting 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 seat belt!
No comments:
Post a Comment