Why the German Car manufactures should be scared… (in particular BMW, Daimler and VW)

Three German automakers: BMW, Daimler and Volkswagen are under threat to be disrupted by the current 267,000 pre-orders of Tesla 3

Currently Tesla is still a long way from “disrupting” the global auto giants, due to small quantity 50,000 and a clear sign that Tesla X was already a big struggle for the company. However I am certain Elon Musk will take extra care and apply a further capital raise, secured against the pre-orders. Clearly Tesla is not profitable, is spending heavily on capital expenditure, but this is in some way very good, as he is the only one who can afford it. Try this same spending plan at BWM, VW or Daimler. Shareholders would certainly be not very happy.

Even they today make cars in the millions, it does not matter. As Nokia versus Apple and Android has shown. I remember the first encounter at Google with Jyri and Petteri (two ex-Nokia employees, who developed Jaiku, an early version of Twitter (on Nokia’s) (acquired by Google)). Both showed me an early version of an Android phone. Numerous meetings without any progress, between truphone.com (a company I founded) and Nokia to make installations of Wifi Calling Apps less than 35 un-commercial and customer unfriendly steps, now rings a bell. This experience will be repeated in the car industry.

However as Tesla can already proof in the luxury segment in U.S. sales of its Model S sedan trounced those of directly comparable sedans from the German brands that have long dominated the global luxury-car conversation. And if I look at the market in Los Angeles TESLA S is clearly a market leader. Very rarely you see a BMW or a Daimler or an Audi on the streets of Santa Monica, Hollywood. Its a Tesla city, state, soon maybe country. The US takes the lead in Electric Cars, German will feel it heavily in lost pension, lost jobs in the coming years and decade. (disclosure I am German born, educated as a mechanical engineer in Germany, USA, UK), and have lived the past 20 years in Silicon Valley, New York and London.

THIS CHART FROM TESLA’S FOURTH-QUARTER SHAREHOLDER LETTER TALLIES U.S. MODEL S SALES AGAINST THOSE OF DIRECT LUXURY RIVALS. SOURCE: TESLA MOTORS

Cleary BMW, Daimer and VW did fine in 2015, of course, thanks in part to other vehicles in their portfolios (particularly luxury SUVs). (and to be clear I am fan of them as well).

But for BMW, Audi, and Mercedes-Benz, sedans are their core products — and compact sedans have long been their high-volume mainstays.

So here’s the question: Given the huge number of Model 3 reservations, how will the new baby Tesla compare with BMW’s vaunted 3 Series and its German rivals?

So this is how I see the Model 3 will impact the compact luxury sedan segment

Tesla CEO Elon Musk said on Sunday that the company had received in my opinion a fairly decent 276,000 “reservations” for the Model 3 sedan it unveiled late last week. I asked Elon Musk on Twitter if he could disclose the country break down, but so far we do not know the details.

Assuming that Tesla’s ramp-up to production goes roughly as it hopes, (and there is no issue like with Tesla X (which I believe was a mistake to build, and several owners of Tesla S and X have reported the X is mediocre in several aspects to the S).

How will Tesla Model 3 reservations translate into U.S. sales in 2018, when Model 3 deliveries are likely to begin in earnest? My assumption might be wrong but here they are:

  1. Assume that 75% of those Model 3 reservations will “convert,” meaning that the people who hold them will end up actually buying a Model 3 when their turn comes up.
  2. Assume that all of those cars will be delivered in 2018 (and that any further reservations will be for delivery in 2019 or later).
  3. Assume that half will be delivered to U.S. customers. (Just over half of the 50,557 vehicles delivered by Tesla in 2015 went to customers in the U.S.)

Those three assumptions give us a total of 103,500 Model 3s delivered to U.S. customers in 2018. How does that compare to the Germans?

If 2015 U.S. sales are any indication, it compares very well indeed.

BMW (the current leader)

BMW 3- and 4 Series

140,609 (2015)

142,232 (2014)

Change –1.1%

Mercedes-Benz C-Class

86,080 (2015)

75,065 (2104)

Change +14.7%

Audi

A4 and A5

41,947 (2015)

50,613 (2014)

–17.1%

As you can see, my projected number for 2018 would have put Tesla’s Model 3 in second place in the segment in 2015, trailing only the combined total of BMW’s four-door 3 Series and two-door 4 Series.

And of course, that doesn’t really express its true likely impact, as it will almost certainly steal at least some sales from the Germans.

But even if the new Tesla doesn’t steal many sales from the Germans, it represents a lost opportunity to capture over 100,000 U.S. buyers that were willing to step up for a great electric luxury sedan.

Either way, executives including the German old and outdated board members, management teams within the giants, and employees) at those three brands have a lot to think about.

As one can see even politics can be disrupted (GOP Republican) party TRUMPism, hence the Germany companies could follow easily follow the Nokia route.

The Germans will likely respond with electric cars of their own, but how when the competition has gone so far to build 1) the worlds supply required for batteries 2) had driven millions of miles autonomous before BMW, Daimler and VW have any data 3) is in Silicon Valley and LA and has access to A.I., machine learning in a way German companies could only dream about, 4) and has the mentality on its board, its management team to execute and the capital structure.

I do think that the Model 3 will steal sales from more than just the German luxury brands. If the Model 3 didn’t exist, some of the 276,000 reservation holders might well buy a 3 Series or C-Class.

But as with the Model S (and almost certainly the new Model X SUV), Tesla will rightly be able to say that it trounced the German luxury brands if things play out as we’ve assumed. That has to hurt in Munich, Stuttgart, and Ingolstadt — and rumors suggest that all three brands are already working hard on new electric vehicles in hopes of matching or beating Tesla at its own game, just as Elon Musk has long hoped. However, if I would be a founder / CEO of BMW, Daimler or VW, I would opt for an emergency board meeting to set an agenda to not be disrupted.