Tesla Competition - A business discussion

[Discoducky]

Nice read and it will be great to re-read in 3 to 5 years when there *might* be competition. I'm still of the opinion that competitors will be hard to find at that time unless someone sneaks in a 18650 design under the radar.

 

[lolachampcar]

Someone correct me if I am wrong here but the ONLY way I see for G3 is for Tesla to be bought by someone that sees the light and has the stones to do it. The "spin off" approach ala Saturn or Lexus that was mentioned earlier with Tesla as the seed makes the most, if not only, sense. The IP is there and the dealer network thing is solved (if you think Tesla is having a hard time, how do you think the WMB spin off of BMW will do?).

Assumptions for the Above-
G3 battery supply needs to be funded soon and Tesla does not and will not have the money in time.
Tesla can not afford to create demand and not meet it.
200 mile rated range in a $35K (no tax incentives) 3 Series size MS will generate 500K/yr demand almost instantly (ie. not enough time to allow for an orderly ramp in battery capacity).

Ok, shoot this down.

 

[30seconds]

For starters I think the very successful Model S launch and continually upward projections around sales will have the existing battery suppliers take notice. If I had P&L responsibility for batteries at Panasonic I would be showing the Finance Heads on how to get a 25% IRR by investing in new plant capacity right now. It is probably one of the highest return investments Panasonic has to choose from currently given the rest of their businesses. Successful launch of the Model X would further support this. Also remember, they do not need to build the plant in a way that has it running at full capacity on day 1.

Also other heavy industrial companies, Samsung for example, are always looking at ways of entering new markets. Samsung has the added advantage of having their own construction company and a very good track history of taking the long bet for this type of disruption.

There is no reason to think that TSLA will need to fund the battery supply from the plant level up.

And of course if the demand is there they can always change their plans - "Sorry we can't build a 35k car due to battery supply constraints, but here is a $45k 3-series type car that is better in every way, and hey we will make a lot more profit" sounds like a reasonable strategy to me.

 

[Discoducky]

Anyone have an idea of global shipment #'s for 18650? Not many laptop's ship with this form factor currently so I'm thinking TM might be getting the lions share of the global supply.

 

[lolachampcar]

For me, its a free lunch thing. I can see someone like Panasonic investing if they see an industry opportunity but I can not see them investing ($20B-$30B) on a single (start-up) customer opportunity without some protection ($s). Although mitigated, all the same risk factors exist. All Tesla has to do is have one fire that burns down a house and takes out a family (sorry, but the exposure is there and there are a lot of people sitting on the sidelines just waiting for ammunition to take them down). The best entity for telling the story to raise the $s is Tesla and they simply do not have the financial clout (to guarantee purchases or build capacity).

WRT capacity, I have heard numbers like 20% of world capacity for the 150M cells consumed so far run rate at Tesla. Elon remarked on the last CC that G3 will require significantly more than the world's current capacity. I peg G3 at over 2B per year at a 500K/yr unit run rate. If Panasonic's big plant is 600M per year, that is a four plant commitment. Sure, you do not need the capacity on day one. Tesla will have to ramp production but you can bet the demand will be there.

If you take Musk/Tesla at their word, the plan is to build a car that generates that type of demand. Upping the price to reduce the volume (and increase profit) is not the stated goal.

I would love to hear what Elon's true thoughts are on this. This is operations 101. Given the presentation from 2008, they have been contemplating these very issues for over five years. I wonder what Musk's real plan is here.

 

[smorgasbord]

G3 battery supply needs to be funded soon and Tesla does not and will not have the money in time.
Tesla can not afford to create demand and not meet it.

Yes, this is quite interesting. Competition is usually problem #1. But if you believe as I do, that Tesla has no significant competition, then problem #1 is execution. Those at Teslive know that Musk himself picked battery production as Tesla's biggest problem: "We need a lot of batteries. The sheer number of battery plants that needs to get built is quite staggering."

Today, Tesla claims to be production constrained by its suppliers. Imagine what happens when volumes are 10X where they are today? The good news is that by then everyone will be taking Tesla seriously. Does anyone know what Panasonic's stake in Tesla is worth today?

As for Gen-3 being feasible, note that while I claimed that Infiniti pushed back their EV due to not being able to compete with Tesla, Infiniti itself says it was pushed back to be able to use new battery technology. So, it's no secret that better batteries are coming (except to Mr. Petersen). BTW, I still believe that the real reason for the delay is their inability to compete with Model S, but the upcoming battery tech is real and so is a great excuse.

So, yes lolachampcar, getting enough batteries for hundreds of thousands of EVs per year is a big problem for Tesla to solve in the next few years.

 

[Citizen-T]

So well articulated. Very nice job.

 

[Soflason]

Awesome article Smorgasbord, this is the article that needed to be written, keep expanding on this and I'd recommend you do a TMC blog post on it -- even better submit as an article (maybe SA?) so it continues to get more notice. Virtually every Bear/Short piece I've read misses these ultra-critical points you've made.

I commented on the piece itself and pointed out two other articles in this same area, but, I think you can really write the definitive piece on it.

Here are the two I've read prior:

Tesla Motors Inc (TSLA): Tesla's Competitors Are Beginning To Give Up The Electric Car Race - Seeking Alpha


Tesla Model S is Slowly But Surely Eliminating Potential Future Competitors

But, your take is a much more in-depth analysis that takes into account a key factor here: corporate culture slowing progress...

 

[30seconds]

And Panasonic announces that they would like to continue riding this train to the future and commits to expanding Li battery production

http://www.reuters.com/article/2013/08/21/panasonic-autos-batteries-idUSL4N0GM1ZB20130821

 

[JGard]

Great article!

I also like the part where the first person to criticize things was the same person not smart enough to know that the dollar symbol goes in FRONT of the number for the dollar amount. $10, not 10$. Such a pet peeve and I'm seeing that way too often lately.

 

[AudubonB]

It's a good essay and I commend you for it.

Here are a few points to consider if you care to re-create it for other audiences.

EV Comp section
* You appear to focus on 0-60 as a defining point in making comparisons. You may wish to tailor your Important Criteria when assessing your audience/readership. Just a thought.
* You write "...provides better performance, luxury, and convenience at the same price levels..." Do NOT omit adding safety to those criteria!

NON-EV Comp section
* It would be excellent for you to pair Lutz's comment with that made two weeks or so ago by GM's current CEO regarding TM. Makes for a delicious time-tempered counterpoint.
* Preantepenultimate paragraph ( look it up): "Tesla focused on....." --> once again, insert safety . This is an ace-in-the-hole for which it is nigh-IMPOSSIBLE to provide a counterargument.

CONCLUSION section
* You nicely and appropriately focus on the difference between technological vs. business model disruption, citing Polaroid, but then you do not follow through with that when discussing BMW. With a little more work, I think you could elegantly keep that flow and strengthen your argument.

EPILOGUE section
* Regardless of the fact that as a long-term shareholder, I disagree with your assessment of the stock price, I think that your discussion of its present price is weak. You presented this essay, after all, in Motley Fool. The rest of the excellent piece deserves a stronger justification of your opinion.

Once again, good job!

 

[Ludus]

Great piece. There are a lot of historical examples of disruptive products coming from companies with no stake in the current industry that illustrate how hard it can be for players with a large existing customer base to react quickly enough. GM did this to the railroad locomotive industry with it's Electromotive Division by the 1950's. The companies that dominated the industry with an expertise in highly evolved steam locomotives just couldn't act quickly enough. It would have meant cannibalizing sales of a product that was profitable that they understood well for a product they didn't know very well. They tried making Diesel-Electrics but not fast enough or well enough.

It seems odd but a little over 6 years ago Apple was a computer company that had no involvement in the huge global cell phone industry. RIM dominated phones used for other features like data. When the iphone first came out RIM said it was a toy and business users demanded a real keyboard. By the time they emulated it, it was too late.

There are already signs we are seeing the same process in the auto industry. The model S has only been clearly successful in the last few months and it's probably enough to get the industry serious about emulating it. It appears that up until now no major car company has gotten a start trying to do that. BMW's recent electric illustrates that the company Tesla most clearly targets has been busy pretending that Tesla wasn't going to matter. There's no question BMW could theoretically have produced an electric 7 Series sedan that was a real Tesla model S rival...but it would first have taken sales from the regular 7 series IC line and I'm sure that was a painful prospect internally. If they start now in 3 or 4 years they'll be ready, but by then Tesla will be challenging the 3 Series and it may be a little too late.

 

[smorgasbord]

It seems odd but a little over 6 years ago Apple was a computer company that had no involvement in the huge global cell phone industry. RIM dominated phones used for other features like data. When the iphone first came out RIM said it was a toy and business users demanded a real keyboard. By the time they emulated it, it was too late.

I agree the iPhone analogy really does apply here. It wasn't that long ago when people knew what they needed from a cell phone. They needed a keypad. They needed secure email. They needed 3G connectivity. In 2007 Apple came out with the iPhone, which had none of those. It didn't even get 0.5% of the cell phone market, and it was priced well above the competition. RIM called it a toy, and Nokia kept pushing fashion phones. Heck, even by 2010, Apple had barely 4% of the cell phone market. It was called "niche" back in 2008, but the writing was already on the wall. Other companies copied the touchscreen, and some even went to "hybrids" with things like pull-out keyboards to "get the best of both worlds," but as we know, in the end the companies that were the biggest (Nokia, RIM, Ericcson) are now shadows of their former selves and the new upstarts (Apple, Google) won the day.

Today, people need internet browsers, productivity and all sorts of other apps that let them customize what they use their phone for. And who buys low end digital cameras or camcorders anymore now that their phones have 8 Megapixel cameras and shoot HD video? Companies that used to concentrate on web sites and SEOs for business now concentrate on apps and mobile social media presences. It wasn't that long ago that patients in doctors' waiting rooms were reading magazines. Today the magazines gather dust because everyone is on their phones and tablets in those same waiting rooms.

Tesla is a classic disruption story in the making, both on technology and business model fronts. The competition is asleep, and even if Tesla's early success has awoken them, they don't have the guts and determination to do what it'll really take to participate in the future of the automobile. A year ago most would have laughed if I said that Tesla will be bigger than BMW. Now, they're only slightly skeptical.

 

[lolachampcar]

RIM; it could not have happened to a better company