Tesla Will Trample The Mass Market

A couple weeks ago, an article came out from Bloomberg called “Tesla Will Get Trampled By the Mass Market.”

It made me laugh. Bloomberg also released a video recently which tracked Tesla’s sales as very similar to the Ford Model T.

So what gives? It seems like there’s not much consensus at Bloomberg, so I dug into the article. Disclaimer: I’m super long on Tesla, so I’m about to rip this article to shreds. In fairness though, I’m going to do it with facts.

The core argument of the article is that a mass-market car is a mistake for Tesla. Ed’s reasons are numerous, but mostly wrong, so I’m going to refute them one at a time.

1) Tesla’s quarterly numbers were dismal.

This is true. The numbers weren’t what any analyst would call excellent. However, Tesla’s numbers have often been dismal because everyone knows it costs an arm and a leg for a new car company to ramp up production. The market so far has often given Tesla the benefit of the doubt as long as they appear to be making progress. There are very few metrics from Q4 2015 that were worse than Q3. Progress. Plus, on this last earnings call there was light at the end of the tunnel. Tesla will be cash-flow positive in 2016.

2) Margins are shrinking, not growing.

This is misleading. Tesla had a particularly bad quarter margins-wise because it was the first production quarter of the Model X, which by objective accounts is the most complex vehicle to manufacture in the history of the automobile. It was a feat for them to turn a profit at all on that beast of a car, plus they are tracking positive margin growth on both X and S through 2016.

3) Even at their goal of 500k cars by 2020, their scale is still only a small fraction of that of competitors, which means they’ll still be at a disadvantage.

This is just flat out wrong. Margins are important, but sales win at the end of the day. Tesla doesn’t have to get better insurance coverage than GM in order to survive past 2020. They merely need to sell all the cars they produce at a profit. They’ve done that consistently, and they will continue to do so.

4) Competition will be too great in the mass-market category.

The Bolt? Who else is going to have a 200mi. range full electric in 2018? Do you think the Leaf will do 200mi. with that battery configuration? IF GM can get the Bolt to market at 200mi./charge, and that’s a big IF, then this battle will be GM vs. Tesla.

GM is the villain in this story. They’re the ones who killed the electric car. Anyone who has ever seen a Tesla would never buy a Bolt instead. Tesla is the good guy in this story, the one that didn’t go bankrupt and take a bailout. When pricing lines up, the mass market is going to pick the good guy.

5) A mass-market car cannot be luxurious in its price range, so most competitors make bland, boring “economy” cars instead. Since Tesla’s brand won’t benefit from an association with “economy” style, they’d be better off just staying in the luxury category.

Bland, boring economy cars… like the Bolt. Tesla’s brand is not about luxury. They’ve made two kick-ass luxury cars, but their culture is set up to kick ass in any category. They do it by going above and beyond the expectations of consumers. They will kick ass in the mass-market just like they did in sport and luxury by building a car that’s better than anything else on the road in all the metrics that matter most to the masses.

6) Tesla’s superchargers already have long lines, which will get much worse when production scales into the mass market.

Um, no. The Tejon Ranch supercharger notoriously had a huge line ONCE on the day after Christmas in 2015. This is the only time lines at superchargers have been reported by the media. Tejon Ranch is the charger just north of Los Angeles along Interstate 5. It’s possibly the busiest route for electric cars in the United States, and the 101 & PCH were closed that day due to fires. Tejon Ranch happened to be the only supercharger route into northern Los Angeles that day. This was an isolated incident. Normally, there is a spot open at a supercharger as soon as you roll up.

The alternative, BTW, is paying for gas wherever you go. I think I’d prefer free electricity.

What about when Tesla is selling 500K cars per year? Won’t the superchargers back up then? No again. Tesla has successfully ramped supercharger infrastructure to meet demand, and they have mountains of data coming in from real-time use of cars on the road. Five years ago, there were zero superchargers. Today, there are hundreds. Five years from now, there will be thousands.

Side Note: GM has zero superchargers. Tesla is open to the idea of licensing their network to competitors. Tesla might be getting revenue from other brands in the future to cover the cost of expanding this infrastructure. (Ace in the hole #1)

7) Tesla has no dealership network like other manufacturers, so service will be increasingly problematic compared to competitors.

Tesla has hundreds of retail locations, and they always receive glowing customer service reviews. Anyone arguing that their straight-to-consumer strategy is a disadvantage has simply not talked to Tesla customers.

Parts, service, and maintenance is minuscule for electric power trains when compared to gas-powered cars, For this reason, Tesla has an enormous advantage as the auto industry begins to realize margins will actually go up as they cut the middleman dealerships out of the equation. State-by-state regulation is a huge barrier for auto makers already selling through unionized dealerships. It’s a battle Tesla has mostly won already. (Ace in the hole #2)

8) Tesla’s experience with well-off, enthusiastic early adopters does not prepare it well for the competitive realities of $35,000 and under.

Wrong again. Remember that 500K cars is a drop in the bucket compared to auto giants like GM? Early adopters typically exist within about 5–10% of a market. 2018 Model III buyers ARE EARLY ADOPTERS, and they’re just as ravenous for their Tesla as anything we’ve yet seen from the luxury category. (Ace in the hole #3)

9) Tesla may feel it has already invested too much into Model 3 to turn back now.

No, no, no. Tesla’s most major infrastructure preparation for Model 3 has been the Gigafactory, which is the world’s first factory of its kind to operate at a net zero cost. In addition, owning the Gigafactory positions Tesla to be a major player in the energy market as well as the auto market. Even if Model III did completely crash and burn, Tesla would be in position to become the #1 supplier of batteries to the entire world anyway. (Ace in the hole #4)

More importantly, Tesla’s culture was built from the beginning around one idea: Bring about the mass-market adoption of electric vehicles as quickly as possible. It’s always been about the mass market. Their brand doesn’t say cool styling or 17” touch screens. Those are perks. Their brand says revolution.

10) Tesla is far better off finding a sustainable niche as a Silicon Valley Porsche than chasing its founder’s hubristic goal of bringing electric cars to the masses.

Henry Ford was hubristic. If you ever wonder who are the modern titans of industry in the making, overlooking Tesla is a mistake. Sometimes a market needs the hubris of a person who won’t lay down and follow the crowd.

This Bloomberg article implies that Elon Musk has suddenly decided to steer Tesla off a cliff just when things were starting to go well. Wrong. Everyone at Tesla knew the plan from the beginning, and that’s why Tesla has retained some of the best engineers in the auto industry. It’s not about making nice cars. It’s about the mission. They don’t work at Tesla because it’s a sexy brand. They work at Tesla because they want to tell their grandkids that the skies are as blue as they’ve ever been.

If GM thinks they can trample that, they’ve got a short memory. Goliath tried to kill David once already, but David has several aces in the hole this time.

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