Electric vehicles and tesla: greater impact than understood
Part 1: Electric vehicle impact on industry profits
In Season 3 of the great TV series “Everybody Hates Chris,” a precocious teenaged Chris Rock exclaims, “Look at me, I’m killing it, I’m two feet from a girl!” This was enough to attract the venomous envy of his schoolmates. In the same way, Tesla’s status as a loss-making auto manufacturer usually years late with its promises is enough to earn it a spot as a sore subject for the automotive ecosystem, and for good reasons. EV adoption will threaten automotive profit distribution sooner than expected and much sooner than unit volumes would imply and Tesla is the most visible entity bringing about this particular change. In future installments, we’ll discuss EV and Tesla impact on the supply chain, dealership structure, and self-driving. Also galling to the automotive ecosystem, again for good reason, is the wide latitude given Tesla by the press, investors and its customers. This latitude is potentially the Company’s biggest weakness, allowing for Groundhog Day execution problems and unnecessary “self-driving” claims.
Driving range is the only thing that matters. Tesla’s big and very transparent bet was that range is the most important EV feature, and it deserves endless credit for this now-obvious realization. In comparison, GM, Nissan, Toyota and other OEMs repeatedly introduced EVs with sub-100 mile range. For example, almost 20 years ago GM introduced the EV1, a tear-drop shaped vehicle with 70-100 miles of range. GM intentionally limited distribution and leased a grant total of about 1,100 vehicles, but it wasn’t clear there was more demand that this in any case, except amongst the digirati and Hollywood crowd. GM later recalled and destroyed the vehicles. See the movie “Who Killed the Electric Car” for a conspiratorial view of what happened, starring greats like Tom Hanks and Martin Sheen. Subsequent EVs did no better: even when almost given away annual EV unit volumes in the developed world (we’ll discuss China in another article) never exceeded about 35,000 for any manufacturer. People just don’t want (weird-looking) cars that don’t go very far, electric or not. Why weird-looking? OEMs didn’t want the inadequate nature of these vehicles (range, passenger capacity, etc.) to pollute their brands (pun intended) and quite frankly many management “petrol-heads” at the time resented anything that didn’t run on gasoline.
Tesla worked backward from the size and cost requirements of a vehicle with a 200-mile, which implied a certain size and cost of a battery pack. In 2012 introduced the large, expensive and sleek Model S with 208 miles of range. The Company now sells 100,000 vehicles a year. This has been a startling lesson for the formerly skeptical industry, who must now join the bandwagon in earnest. GM’s 2017 EV, the Bolt, with 200 mile+ range, already has thousands of monthly U.S. sales, with no dedicated charging network. In North American and similar markets, range isn’t the most important thing — it’s the only thing.
EVs are inherently premium vehicles. Tesla’s success so far is at the expense of high-end luxury cars. It’s startling that a newcomer like Tesla is selling 100,000 cars a year, and at a close to a $100,000 average price point. EVs justify their higher prices by being smooth, quiet, well-handling, and powerful by the nature of their electric drive. By working backwards from a 200 mile range, and assuming that they wanted to make an EV with a fundamental appeal to some segment of the auto market, the high-end was the obvious choice, in retrospect. Based on our first-hand experience, Tesla’s new, mid-sized Model 3 is just as likely to take share in the mid-range luxury segment. Given that luxury vehicles are many, many times more profitable than average, a re-organization of industry profit structure is possible. For example, Porsche’s 250,000 annual units generate close to the same operating profits for VW as the 9 million Volkswagen-branded vehicles. A little ding in Porsche volumes from competitive EVs means a lot. Furthermore, the innate EV characteristics of quietness, smoothness and good acceleration de-value the skills luxury OEMs have in coaxing the same outcomes from gas vehicles, diluting brand identity as more manufacturers introduce EVs.
With range anxiety abated, consumers will notice EV operating cost advantages. Regulators are emboldened. Driving 10,000 miles in the San Francisco Bay Area in a premium vehicle costs $500 in electricity versus $2,000 in gasoline. For Kansas City, KS, the numbers are $400 & $1,500, respectively. And this is before savings on brakes, transmissions, and other components. Example: commercially operated Model S’s travel 300,000 miles between brake changes. Consumers are cost sensitive even at most luxury price points, and for many consumers EV costs savings will compensate for remaining objections such as the problem of occasional inter-city trips.
Of course, EVs won’t be for everyone for a long time: anyone traveling frequently between distant cities is much better off sticking to a gas engine, and Elon Musk’s cross-country demonstration only supports our point. However, for meaningful, profitable segments of the automotive market, EVs are rapidly becoming an acceptable and perhaps a superior choice. It’s no coincidence that the availability of attractive EVs has emboldened governments in France, the U.K., and elsewhere to begin outlawing combustion engines, creating a virtuous circle (if you’re Tesla), of natural and forced EV adoption.
In future installments, we’ll discuss EV and Tesla impact on the supply chain, dealership structure, and self-driving.