Why Tesla Is Still The Leader In EV
The world of EV (Electric Vehicles) has been dominated by Tesla. It still remains (in early 2022), despite the competition getting tighter. Legacy automakers have not matched the same level of production output. The pure EV challengers have not made any major gains in the market either. Tesla has some of the most advanced features in the market when it comes to technology (e.g. tabless electrodes, Giga Press) and performance (e.g. longer range and faster charging).
What keeps Tesla going has to do with what they are about, and it is not just making cars. Tesla is a technology company that has diversified into various industries involved in their auto business. They not only build the cars, but also manufacture some of the parts. Tesla is also into renewable energy systems (e.g. Solar Wall), power distribution (e.g. Powerpack), self-driving technology (e.g. FSD) and intelligent software (e.g. Tesla Vision).
In the auto industry, Tesla is innovating new ways of manufacturing parts for EV and improving the battery system. Despite the progress Tesla has made, there are always criticisms about its founder (Elon Musk) and their “over hyped” market valuation.
The Business Model
One of the main differences Tesla has with other car companies, is its business model. Tesla uses a direct sales and service approach, and not auto dealership franchisees. The company is their own dealer, so whatever they sell is what they earn. No middlemen are collecting a share of the revenues from the sale of Tesla cars. While traditional automakers use dealerships in accordance with state laws in the US, Tesla runs their own galleries that also function as sales centers. According to Hotcars, some US states support this since they consider it:
“… beneficial to consumers because it removes the dealership markup and encourages better business practices.”
It can also be due to a conflict of interest as to why Tesla does not rely on franchising. Many dealers will have gasoline-powered cars, which is in conflict with selling EV. It could lead to dealers not even wanting to have a Tesla in their showroom if they expect more sales from legacy brands.
As an EV car maker, Tesla has accelerated ahead of the bigger players due to their manufacturing techniques. It was not easy at first, but a struggle for mass production. Tesla had to face some manufacturing hell as they started to figure out how to build their cars at scale. Tesla’s method seemed counter intuitive as an automaker. Instead of mass producing cars for affordability they focused on the quality and performance to drive demand.
The criticism here is that Tesla should have started by producing budget cars for the market. What they do is develop the technology and incorporate it in a high-end model. It seems that Tesla’s approach had more to do with refining performance to define a product, and then scaling it down to a more affordable version (e.g. Model 3). This is opposite of what most automakers do, with the exception of luxury car manufacturers.
What is also keeping Tesla ahead of the curve is their focus on research and development. It is already well known that some of the world’s brightest engineers and scientists are working at Tesla. Tesla’s contribution to R&D amounted to $1.5 Billion in 2020 alone. According to a report, Tesla spends more on R&D than any other automaker. That amounts to $2,984 in R&D investment per vehicle.
The Market
According to a report on EV sales by manufacturers, in 2021 Tesla had a market share of 14%. This makes them the leader worldwide. Tesla delivered 936,000 units in 2021 alone, as they continue to ramp up production. Compare that to 2018, when they were only able to deliver 197,517 units. That is a 373% increase in deliveries, showing strong demand for cars like the Model Y and Model 3. Overall, Tesla has become the first EV automaker to sell over 2 million units worldwide.
Tesla has become the most valuable automaker in 2020 by surpassing Toyota. At the end of 2020, Tesla was valued at a $795.8 Billion market cap. They have surprisingly overtaken the major automakers since the company only makes EV and not conventional ICE cars. It is a day and night comparison to other EV automakers, with the closest being Lucid Motors at a market cap of $42.43 Billion.
Tesla stock prices have also seen massive gains. Since reaching a closing price of $1,229.91 in November 4, 2021, it has settled at $900+ in early 2022. Tesla stocks are a part of some notable funds that are traded on the stock market. The trend to the upside began in 2020, after the start of the COVID pandemic. From a price value of $88.60 in 1/3/20 to $1,229.91 by 1/4/21, that is an increase of 1,288%.
The injection of capital from government to keep the economy afloat during the pandemic has been beneficial for Tesla. The higher price valuation can also be due to stronger investor confidence (higher demand for TSLA stocks on NASDAQ) and higher consumer demand (more unit deliveries to customers).
The Competition
The Volkswagen Group is perhaps their biggest competitor with a 12% share. The group is backed by 10 European brands: Volkswagen, Volkswagen Commercial Vehicles, ŠKODA, SEAT, CUPRA, Audi, Lamborghini, Bentley, Porsche and Ducati. With regards to development, they have committed $7.1 Billion for 25 EV releases by 2030. They are also going toe-to-toe with Tesla as they have announced a manufacturing plant in Germany close to Tesla, by 2023.
Among the legacy automakers, Ford/GM have bigger aspirations to dethrone Tesla from the top position. The automaker has the most successful line of SUV and pickup trucks, but wants to get their electrified vehicles going (e.g. Ultium Battery). The problem for the GM group has been producing larger volume of EV. This is where Tesla has the advantage, and this is now GMs objective for getting more EV to the market (e.g. Mustang Mach-E and the F-150 Lightning). What they are doing by producing at scale can also bring prices down for a new generation of electric cars.
Among European automakers, luxury car giant Mercedes has unveiled a monster competitor to Tesla’s Model S (100kWh+ battery). The Mercedes EQS is the longest range EV available in the market (in early 2022), with a rating of 485 miles (107.8kWh battery). This is ahead of the Model S range of 405 miles. Range does not determine the overall performance, but it shows what Mercedes engineers are always capable of. Otherwise, Mercedes still lags way behind Tesla when it comes to EV sales (as of 2022).
As for the other purely EV competitors (non-legacy automakers), they still don’t come close to Tesla’s market share. Rivian has become a disappointment in 2022, after they announced a cut in their production forecast despite promises of delivery. That eventually led to their stock price tanking by 35% after investors lost confidence. Lucid seemed to be ready for a breakthrough, but have also announced that they will be producing fewer cars in 2022. These EV automakers have been affected by both logistical and supply chain issues.
Perhaps the most disappointing competitor has been Nikola. They have been embroiled in a scandal that involved their CEO about fraud allegations. Prior to that, Nikola has made claims that appeared misleading. They had also been in talks with a partnership with GM for the Badger SUV, but that has since scaled back.
Tesla’s Success
Tesla as an independent automaker, is a success story. This is a hard market to penetrate since it is capital intensive and driven by brand recognition. It is even harder because Tesla is an EV automaker, which has not had much of a track record when it comes to production at a grand scale. EV sales tend to lag and never exceed a few thousand or so units. In other words, prior to Tesla the demand for EV was not strong.
Tesla came along and changed the attitudes toward EV. It started with the technology to build faster and more efficient EV using state of the art electro-motors and high capacity batteries. It started with the flagship models like the Model S and Roadster. The same technologies would then be scaled down to a more affordable version like the Model 3 and diversify the lineup to include the Model Y and Model X (SUV line).
The introduction of self-driving capabilities is perhaps what differentiated Tesla with the competition early on. Tesla is also a software company that utilizes AI machine learning techniques and sensor development. Tesla is perhaps the only self-driving car company that relies more on its visual camera sensors rather than a LiDAR-based system.
Tesla has now focused its strategy to attract a wider market. This led to expansion overseas for the American company. Tesla has manufacturing plants in China, where they are able to produce cheaper parts. Tesla has also made partnerships with battery makers like Panasonic to help produce battery packs at scale.
While some critics have called Tesla a failing company in the past, the company has actually started posting profits beginning in 2020. In that report from the LA Times, in 2021:
“Tesla made $2.32 billion in the fourth quarter. Excluding special items such as stock-based compensation, the company made $2.54 a share. That beat Wall Street expectations of $2.36 a share. Revenue for the quarter was $17.72 billion, also ahead of analysts’ estimates of $17.13 billion, according to FactSet.”
2021 could be described as a breakthrough year for Tesla. They made a total of $5.5 Billion (2021) in profits, which is the second straight year of exceeding expectations. While the profit share has increased, the average price of a Tesla car has decreased. This is due to the popularity of the Model 3 and Model Y, which are not at the more expensive high-end of the brand’s line.
Synopsis
While many would still consider EV to be a niche market, it is steadily growing. It is also expanding to other regions, aside from Europe and North America. One of the leaders in promoting EV is Tesla. As the market grows, so does the competition. This is bringing about a new race to build EV with desirable features that cater to the mainstream market.
Tesla has not followed the trend of mass producing for budget cars. They have instead innovated on features to create demand, and it appears to be successful. That has led to larger sales of Model 3 and Model Y, while the premium Model S remains a luxury class. While most automakers spend the money on advertising and marketing to promote sales, Tesla does not follow the same practice. They have poured in more money to R&D that could probably have been used for ads.
Many critics also rant about Tesla because of its big kahuna, Elon Musk. Perhaps it is fair to say that Tesla is not the same as Elon Musk. He may run the company, but the company is not just one person. It is the minds that work for Tesla that has made the company great. In no way are Elon’s tweets a reflection of Tesla the company. Those things should be separated, otherwise there is a bias toward the person that extends to the company.
It is best to understand that Tesla’s success is what has paved the way for EV. Even if taxes in the US helped subsidize Tesla’s operations, it had good results that can benefit everyone. They were not the first EV automaker, but they were the first to begin massive production of EV to the market thanks to the government subsidies that helped keep them running. You can argue that legacy automakers like Mitsubishi or Nissan had started mass production many years ago. However, they were not able to sell many units or achieve the same level of performance in range and charging as Tesla. It is no easy feat for that matter.
Tesla’s very success in EV is also what has driven the market through more competition. Legacy automakers could have just sat back and watch their revenues grow from producing affordable gas-engine cars. Perhaps they realized that there was a market for EV, after Tesla surpassed 100,000 deliveries. This is good for the market, as it drives competition for greener and more efficient technology as well. That is one of the keys to Tesla’s success. Until then, whoever is the leader in the EV space is the benchmark to follow.
“Pace of innovation is all that matters in the long run” — Elon Musk
Disclaimer: This is an opinion piece with cited references linked. Please DYOR always to verify information.
