Tesla has stolen a march on rival electric car makers but can it make the vehicle affordable?

September 4, 2013 6:31 pm

Automobiles: Electric shock

By Henry Foy and Richard Waters

Tesla has stolen a march on rival electric car makers but can it make the vehicle affordable? Move over PorscheAudi and Jaguar. In the world’s most cutting-edge car market, Tesla Motors has the fastest-growing luxury sedan. And it has no exhaust pipe. Barely a year after its launch, the company’s electric Model S is California’s third most popular luxury car. It is a must-have for Hollywood superstars and technology titans, a serious challenger to established premium marques and an answer to the biggest question in the automotive industry: can green cars sell?

By making an environmentally friendly, electric-powered car that is cool enough to park outside a five-star hotel and profitable, Tesla and chairman, chief executive and product architect Elon Musk, achieved what many thought impossible.

And having overcome a challenge that has so far confounded General Motors, Toyota and Volkswagen, the company and its ebullient head have brought a far larger one into view: making affordable, mass-market electric cars a reality.

Electric vehicles have proved costly to build, tough to sell and have been crippled by technical limitations. Most can only drive fewer than 100 miles on a charge and recharging can take more than six hours, vastly reducing their usefulness. But Tesla’s Model S has a top range of 260 miles and can charge 80 per cent of the battery in 40 minutes.

Mr Musk, whose other company puts rockets into space, says he thinks production of a mass-market electric car with a range of 200 to 300 miles is at least three to four years away. But he says Tesla will get there technologically – and there will be a market waiting.

“I don’t think we’ll be able to make enough of them,” Mr Musk says of a volume vehicle priced around $35,000. “The market will be several hundred thousand to millions a year.”

So far, Tesla is navigating a tricky path that has claimed many victims.

Fiat loses $10,000 every time it sells an electric version of its 500 model, and the public implosion of hybrid carmaker Fisker and bankruptcy of Better Place, a battery-swapping company, underlined the perilous risks of betting solely on green.

If Mr Musk can find a way to take that technology and make the jump from premium cool to affordable mass-market, it will be the most disruptive event in the automotive industry since the rise of the Japanese brands in the 1970s.

“They should get cracking on electric cars and take it seriously,” says Mr Musk, 42, who considers Big Auto’s attempts to focus their electric ambitions on cheap, small cars as a crucial mistake.

Born in South Africa and educated at Wharton at the University of Pennsylvania, Mr Musk spent just two days on a Stanford PhD programme before dropping out to become an entrepreneur. The co-founder of online payment gateway PayPal, he is often compared to Tony Stark, the fictional tech magnate who saves the world in theIron Man films.

In 2006, Mr Musk, below, outlined a strategy to start at the top of the car market and let the technology trickle down. He is still sticking to the plan.

“What I’m hoping is that big manufacturers over time will see what we’ve done and increase their focus on electric vehicles. I hope it will make them take it seriously,” he tells the Financial Times. “They’re taking a wait-and-see approach, to see if the demand [for the S] is sustained – they don’t make quick decisions. There are a lot of great engineers at the big car companies, if they’re just pointed in the right direction.”

Industry watchers have long considered whether a failure by big carmakers to focus enough on green vehicles could open the door to an innovative outsider such as Tesla to steal a march – and a large slice of what most agree will be a vast market by mid-century.

“It’s simple: Tesla put electric vehicles on the front page of Time magazine,” says a top executive at a global carmaker. “The cars are far from the complete solution to the problem but what they’ve done is really reminded us major players what we need to do.”

Andy Palmer, executive vice-president at Nissan, says: “People like Tesla definitely stimulated the zero-emission market. [It] was really a confirmation that we were on the right track.”

The Model S, which starts from $62,400 inclusive of a $7,500 federal tax credit offered on all new EVs, trails only the Mercedes-Benz E-class and BMW 5-series in luxury car sales in California this year. It recently broke the record for a US car safety test. And, the company says, it is already profitable.

“For any product to sell well, it must provide value for money at the price you sell it at … Even though it’s a premium car, the value that consumers see in it is high,” says Mr Musk. “The car looks good, it has great acceleration and great handling … It has the most advanced infotainment by far. It is an entertainment platform, not a car.”

Tesla, named after Nikolai Tesla, father of the alternating current and one of history’s most celebrated geeks, in May reported its first quarterly profit.

It also raised its annual sales forecast by 1,000 vehicles to 21,000, eight times what it sold last year.

Formed in 2003 and public since 2010, its shares are up almost 500 per cent since January. With a market cap of more than $20bn, it is worth a third of that of Ford.

Tesla’s Silicon Valley roots, its cool branding and larger-than-life chief executive make comparisons with Apple so easily drawn they have become trite.

Yet Tesla’s implementation of Apple’s strategy – marketing a desirable concept as much as an attractive product – has broken the electric vehicle mould. It has also shown the industry that making money from EVs is possible. “A hundred years from now, Elon Musk will be a familiar name and Steve Jobs will not. Musk is Henry Ford,” says Howard Hartenbaum, a partner at August Capital, which has not invested in Tesla. “Jobs created a popular product with a short half-life that won’t be popular four years from now. People have to move. The combustion engine hasn’t changed in 100 years. GM isn’t going to move fast enough.”

. . .

It is a common joke in the car industry that the world’s best-selling and most successful EV is the humble milk float, first built in 1889. Cherished mainly in Britain for creeping around suburban streets at dawn delivering pints to doorsteps, folklore holds that it was the first vehicle given permission to break London’s 2mph speed limit and overnight became a must-have item.

But away from Tesla’s celebrity owners and Mr Musk on the front page of magazines, today’s EV manufacturers are finding cultivating similar stardom tough.

Global sales of pure electric, hybrid and fuel cell cars topped 110,000 in 2012, according to the International Energy Agency, more than double 2011’s sales but less than 0.2 per cent of overall sales. The US has about 75,000 EVs on its roads, far below the 1m target by 2015 set by President Barack Obama in 2011.

Hampering progress is that carmakers are at best unsure and at worst in opposition over which green power traintrain – the engine system – is the best solution to the emissions question. “The powertrain story is becoming a polarised story,” says Carlos Tavares, the former chief operating officer of Renault, who stepped down last week.

“If you ask me if it is going to happen in the next two years, next five, next 10 years, I have to be honest and say ‘I don’t know’,” says Mr Tavares. “But I want to be there when it is going to happen. And I want to be ready when it happens.”

Whichever technology ultimately replaces combustion engines, batteries will be at the heart of it. And batteries, as everyone in the industry bemoans, are just not up to scratch.

“Frankly, with the cost and weight of batteries today, the less battery you put in the car, the better,” says Xavier Mosquet, automotive head at Boston Consulting Group. “Nobody has today, in their labs, a battery technology that would make electric vehicles financially viable.

“For smaller cars, advanced versions of gasoline engines will be the solution,” says Mr Mosquet.

Much of Tesla’s success is down to its advanced battery technology. Under the Model S chassis, the carmaker’s engineers have developed innovative ways to link power cells in a battery pack to deliver faster charging, bigger storage and greater output for the same weight.

Big advances in battery chemistry, still at an early stage of development in a number of start-ups, promise further gains, says Steve Jurvetson, a Tesla director.

Battery efficiency is improving at about 5 to 8 per cent a year, he says, bringing the technology to the mass market in three to five years. Some mass-market manufacturers have defied the electric naysayers. Nissan’s chief executive Carlos Ghosn in 2007 pledged that the Japanese company would produce the first mass-market electric vehicle. Four years later its Leaf became the world’s biggest-selling electric car.

But with sales of about 26,000 last year, it is still far from a household name: Porsche sold the same number of Carerra 911 sports cars in the same period.

Renault, Europe’s biggest electric car company by sales with 51 per cent of the continent’s zero-emission market, expects its EV sales to double this year to 36,000. “Timing is running on our side. This story will only go in this direction,” says Mr Tavares, his hand shooting upwards. “You are educating your kids, and I am educating my kids and my grandkids in a way that they understand they only have one planet.”

. . .

Established carmakers are hampered by their big investment in the internal combustion engine, making it hard to make the leap to a new technology that, in its early stages, appears less promising.

The Zoe, Renault’s compact EV, starts at €21,000 in France. But next to it in the showroom is a petrol-powered Clio, which costs €8,000 less. Insides big car companies, comparisons like this have made it hard to justify ramping up their investment programmes in electric.

Tesla faces no such qualms. “It’s a reality of business that disruptive changes always come from new entrants … It’s kind of the iPhone moment,” says Mr Jurvetson. “If you’re in the auto industry it’s the most disruptive change you’ve seen in a long time.”

If the Model S turns out to be the forerunner of an electric-powered vehicle with mass appeal, however, the established carmakers will soon be forced to react far more aggressively than they have up to now.

“I believe the Model S will be considered more important than the Model T,” says Mr Jurvetson, displaying the bravado that typifies Tesla. “[It is] a catalyst that will eventually transform all transportation. The true mass market will happen much faster than anyone thinks.”

Additional reporting by Tim Bradshaw

Model S: Thumbs up for the fancy alternative to an Audi

Cameron Diaz, Morgan Freeman and Jennifer Garner are just a few of Hollywood’s A-listers with a Tesla in the garage. But it is not just with the rich and famous that Elon Musk’s all-electric cars are catching on, write Richard Waters and Tim Bradshaw.

“To me it’s absolutely phenomenal,” says John Haskins, a Tesla Model S owner in Santa Cruz, California.

“I wanted to get out of internal combustion [engines] but I wanted something with the range, and a family car,” says Mr Haskins, who paid $89,000 for the car in December and has already clocked up 14,000 miles.

Tapping into more and more customers like Mr Haskins, who are looking to replace a traditional oil-powered car rather than buy a cool, environmentally-friendly additional vehicle, is crucial if Tesla’s strategy to move down-market is to succeed.

“People are suddenly saying I want one of these [but] I’m paying no more than I would for my fancy Audi or Lexus. There doesn’t seem to be a huge trade-off. When you get that right with any product, you unlock markets,” says Tim Brown, CEO of Ideo, a California design company that has worked with Apple.

The cheapest version of the Model S sedan boasts a range of 230 miles and the carmaker promises a network of free battery superchargers that will allow a journey from San Francisco to New York by the end of 2013.

“Every electric car up to now has not quite got it right in the eyes of the consumer. The trade-off between quality, reliability, range and price have not been enough. It doesn’t go far enough for the money it costs,” says Mr Brown. “With the S, people have got over the threshold that it doesn’t matter any more.”

Tesla sold around 10,000 cars in the first six months of 2013, many in California, where they are becoming a common sight on the state’s roads.

“A lot of people are very excited. I get thumbs up all the time on the freeway. People ask me questions when I pull into parking lots,” says Mr Haskins, who bought stock in the carmaker that has appreciated by almost as much as the cost of the car.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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