Tesla has no competition in electric-car market

Great car, small
market.
Hollis Johnson/Business
Insider

• Tesla
  critics and short-sellers have offered dire warnings about
  impending electric-car competition coming for the
  automaker.
• But globally, EV sales amount to only about 1% of sales
  — there’s no meaningful basis for competition at that
  level.
• That doesn’t mean that EVs are a bad bet — over time,
  the market for them should grow and at some distant future
  point, become very competitive, and Tesla
  could be a leader.

Electric cars have been a topic of frenzied discussion for almost
a decade. The chatter has greatly intensified as Tesla has grown
and at times become the most valuable US automaker by market
capitalization, beating out the Detroit Big Three: General
Motors, Ford, and Fiat Chrysler Automobiles.

True, there are quite a few more electric vehicles coming to
market in the next few years than have been in the market for the
past 10. This has led Tesla naysayers — the likes of Jim Chanos,
who has built up an oft-proclaimed short position in Tesla shares
— to adopt a tough-minded thesis about CEO Elon Musk’s carmaker.

Tesla is in trouble, the argument goes,
because the competition is coming. 

Nice soundbite, but totally misguided at best and disinformation
at worst. 

The global auto market is enormous. In the US, about 17 million
new vehicles were sold in 2017. In China, the market could hit 40
million in annual sales at some future point, if the most
optimistic predictions are correct. By the end of 2018, close to
100 million so-called light vehicles — cars and trucks designed
to carry passengers and moderate amounts of cargo — will get
sold.

Almost all of them will be powered by petroleum, either gasoline
or diesel. How many is almost all? That would be 99%. EV sales
should come in at around 1%.

This is the “market” that’s about to be beset with
Tesla-undermining competition. Which is to say that it isn’t a
market at all. It’s an experiment. 

We still live in an all-gas world

Tesla short seller Jim Chanos.
Reuters

Over time, it will become less of an experiment as EV sales pick
up speed. But let’s be honest: if the global EV market doubles,
the gas-powered market will still by 98% of everything. If EV
sales notch gains of ten times their current levels, the
internal-combustion engine will be 90%.

This doesn’t mean that Tesla can’t have a great business with its
slice of a small pie; if it records double-digit profits selling
mainly luxury electric cars to well-heeled early adopters, there
won’t be anything to argue about. 

But as for the rest of industry, big automakers aren’t so much
looking to take on Tesla as they are aiming to simply be in the
EV space. Tesla has served the extremely useful purpose of
validating a market of sorts for EVs, and the Porsches and
Jaguars and Audis and Mercedes of the world don’t want to fall
too far behind.

These automakers also need to add zero-emission vehicles to their
lineups to meet more stringent global-emissions and
fuel-efficiency requirements. That’s why they’re willing to run
their EV portfolios at a loss. If you look at an company such as
FCA — whose former, late CEO, Sergio Marchionne, famously
lamented losing over $10,000 on every electric Fiat 500 he sold —
you see an automaker that lives on full-size pickups and SUVs,
hardly the most fuel-sipping products. 

But those pickups and SUVs are insanely profitable. To keep that
business all good, EVs and gas-electric hybrids have to be
sold. 

I realize this is a depressing reality. But it isn’t helpful to
deny it. 

Nor is it sensible to accept the notion of a coming competitive
assault on Tesla as a dire prognostication. At its current rate
of production, Tesla can reasonably expect to deliver 200,000
vehicles per year globally as a baseline. New factories would
obviously increase that two or three times, again at a baseline,
but still far fewer vehicles than GM sells annually.

Electric cars are a science project

Tesla CEO Elon
Musk.
Kevork Djansezian/Getty
Images

This isn’t a market that in 2018 is worth spending serious money
to compete in. Pickups in the US are such a market. So are
smaller hatchbacks in Europe. Increasingly, compact crossover
SUVs are becoming a ferociously competitive market.

EVs are a science project. That’s why Tesla occupies outsized
mindshare: it’s selling so many EVs relative to the size of the
market that it typically compares its vehicles, erroneously, to
gas-powered cars, as if consumers are somehow cross-shopping
various propulsion technologies. They aren’t. There are just a
lot of people with resources out there who want a Tesla. The
brand is powerful. And the cars are pretty cool.

As for the dozens of other car companies on Earth, it’s unclear
whether they’d really be making EVs at all if there weren’t some
edge-case justifications to take the plunge and the other 99% of
the auto market wasn’t doing so well (the US has been running at
a record or near-record sales pace for three straight years). On
top of that, most people I’ve talked to about competition and
Tesla aren’t worried about it. They think the next 10 years will
present an all-boats-rising-on-a-tide-of-improving-sales
scenario.

An EV is still just a vehicle, and until some level of scale
arrives — if it ever does — margins aren’t very appealing. Or
they’re nonexistent. Or simply, you know, negative. Carmakers
know all about the economies of making cars. If you build small
ones, you make less money. If you build cars nobody wants, you
lose money. If you build successful cars, you can post profits,
but they can range widely. And at the low end, we’re talking
single digits.

New lines of business that may or may not be electric

Waymo could be worth $175 billion.
Waymo

This is why big car companies have started to create new lines of
business in mobility or transportation as a service. GM has its
Cruise self-driving division, which it plans to conjoin with
ride-hailing; a recent joint investment with Japan’s SoftBank
valued the business at $11.5 billion, roughly a fifth of GM’s
market cap. 

Waymo, formerly the Google Car Project, wants to follow a similar
path. Morgan Stanley thinks it could be worth a staggering $175
billion.

These services, as former Ford CEO Mark Fields often argued,
could yield 20-30% margins. Right now, Ford is hoping to hit 10%,
best-case, with its core auto business.

Sherif Marakby, CEO of Ford’s
standalone autonomous vehicle division, Ford AV LLC,
recently told me that Ford is intentionally not tying itself to
EVs for some of its prospective new enterprises because it
doesn’t want to have to take vehicles off the road for extended
recharging times. 

This isn’t to suggest that EVs are at threat of being
also-rans or that the larger project — Tesla’s project — of
eliminating tailpipe emissions should be abandoned. Electric cars
have lost out to gas-powered vehicles for over a century, but
since about 2010 they appear to have entered a tipping-point
period where their small market is stable and
sustainable. 

If we look forward another century, it’s a fair bet that
EVs will constitute a much larger market and unless the entire
present structure of global car brands collapses and is replaced
by entirely new players operating from monopoly or near-monopoly
bases, then that future market would turn out to quite
competitive indeed.

That’s when we can start talking seriously about how much
competition Tesla and everybody else is facing — a long, long
time from now.