Even when you are not a car-enthusiast, you have probably heard of Tesla, the American manufacturer of high-end electric cars. Even though the company hasn’t been in existence for a long time, it already generated lots of publicity and is valued very highly by investors, trend watchers and an increasing amount of consumers. What is the basis of their success and what will the future bring? Can Tesla live up to the expectations? Let’s put the gear of this story in D.
In 2003 Tesla was founded by, among a couple of others, Elon Musk (now CEO). He is also one of the cofounders of PayPal and SpaceX, which is bringing space travel to consumers. You could say that Musk knows about innovation and is able to change markets. Looking at Tesla, this is definitely true.
The traditional car seems dead when you take a look at the characteristics of Tesla. Tesla is changing the concept of the car entirely. Tesla cars seem more like a gadget than just a means of transportation. People are not buying the car because of their wish to travel from point A to B, but to make a statement. Of course, this is not entirely new (look at the success of the more expensive German brands like Mercedes, BMW and Audi). What is new, is that Tesla introduced a car that is different than any other car. Fully electric with the advantages of a smartphone: two big tablet-like screens enable you to control everything, from the air conditioning to the satnav. When Tesla decides an update is needed for the car they just send it to every Tesla worldwide and it is simply downloaded. So don’t be surprised when your car has improved overnight. They also did this for the Roadster, a model that has been out of production for a couple of years now. This all sounds very technologically advanced, especially for a car. Maybe it is no surprise that the headquarters of Tesla are found in Palo Alto, in the middle of Silicon Valley.
But not only the car itself is different from the competition. Also Tesla the company is working in novel ways. An incredible decision Tesla for instance made is their choice to make their patents freely accessible to everyone with good will. For them it is not important to make a lot of money on their patents or to prevent competitors from using their technology. Their intent is that all cars should be electric as quickly as possible. When their technology is freely available they speed up this process. The main focus doesn’t seem to become the best selling car manufacturer or something alike, but to be a company that changes markets for the sake of the whole world.
Right now Tesla is working with Panasonic on a gigafactory where the car’s batteries will be built. Required investment: $ 5 billion. Just as with the free patents, this is not only about making a profit. By having such a large plant for batteries, costs can be driven down. Eventually this will make all electric vehicles cheaper. Again Musk has a clear vision: electric transportation has a bright future.
This vision also comes forward when you hear Musk talking about autonomous driving. He thinks that in 2020 Tesla’s can drive entirely autonomously which should be much safer than driving is today. As a precursor, the smaller Tesla Model III that is about to be introduced in 2017 will be able to drive on a semi-autonomous modus.
That investors love Tesla’s story becomes clear when you look at the share price. The company is valued at close to $ 30 billion. With some 33,000 cars sold in 2014 this amounts to $ 900,000 per car. When you compare this to the world’s largest car manufacturer, Toyota, you get something quite different. Toyota is selling about 10 million cars and is worth almost $ 220 billion dollar. Per car this is $ 22,000. What is happening here?! Every car Tesla produces is worth some 40 Toyota’s! It is incredible to see these huge differences. Of course the average Tesla is more expensive than a Toyota which likely results in higher margins. Nonetheless this doesn’t account for the total difference in valuation. So there needs to be more to it. It might mean that investors think Tesla is the next big thing in the automobile industry, that Tesla is leading the way to a new era.
It seems that Tesla has changed the car industry dramatically and created a car that can’t be matched by another car. But how long will Tesla keep this advantage? Their production is not that large and they rely on just one model (at the moment). One innovative competitor or a heavily investing incumbent can break Tesla. Tesla needs a broader model range in order to sustain their high growth numbers. The more spacious (and less pretty) Model X will be available in about a year and a smaller saloon will be marketed in 2017. It’s a guess whether that would result in huge sales.
And there is the question whether electric cars will set the new standard. Maybe gasoline cars can be made much more fuel-efficient (and oil prices can decline, as happened lately). Or perhaps fuel cell cars that drive on hydrogen will entail more advantages. When electricity is not the answer, Tesla has to question its existence.
At the moment the sales of Tesla are also depending on government subsidies because of the zero-emission characteristic of the car. In Norway the Model S was the best selling car for a couple of months. Normally a car of the equivalent of $ 65,000 doesn’t sell that well. Also in the Netherlands Tesla’s are heavily subsidized (where the car is over $ 80,000), but also in the USA itself (10% ‘discount’ in several states). Can Tesla survive when these subsidies are gone?
In the end the question arises whether Tesla offers enough to keep growing this rapidly and become a major player. Will Tesla be a profitable investment for the years to come? Can it compete with the incumbents that dictate the industry today? As always with these innovative companies, they might be the next big thing or they will perish. The next couple of years will be exciting for Tesla. So far it’s looking good.
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