Tesla Should Be Afraid of German Carmakers
German car companies have made clear they plan to match Tesla's luxury electric vehicles with models of their own. Instead of being a disrupter able to capitalize on a technological breakthrough, Elon Musk's company will only serve as a catalyst for industry incumbents. Tesla's first-mover advantage is questionable, especially in Europe.
At the Frankfurt Motor Show, which will run until the end of next week, all four top German luxury car producers -- Volkswagen's Audi and Porsche, Bayerische Motoren Werke and Daimler -- stressed electric models, some of them explicitly meant to be "Tesla killers." To be sure, most of these cars are still concepts, and they won't make it to market before 2018, but given Tesla's sales trajectory, there's no need for its competitors to rush.
Porsche's Mission E will accelerate from zero to 62 mph in 3.5 seconds, about as fast as the sportiest of Teslas, go 310 miles on a single charge and take 15 minutes to bring the charge level to 80 percent. The Audi E-tron Quattro SUV promises the same long range, about as much power and only slightly slower acceleration, reaching 62 mph in 4.5 seconds. Mercedes didn't show its Tesla rival in Frankfurt but declared its intention to start selling one, with a range of 250 to 310 miles, in 2018. BMW has a slightly different strategy: It's not promising any long-range miracle cars but expanding its product lineup -- new plug-in models will be available as soon as next year along with the already produced i3 and i8.
Range, of course, remains the weakness of electric vehicles. Tesla has been dealing with it better than others, but under real-life conditions even its electric cars can't go as far on a single charge as the company claims. In Norway, the country with the most electric vehicles per capita in the world, the local EV association asks manufacturers to state minimum and maximum ranges for their cars (given in kilometers on the chart below; 1 km equals 0.62 miles):
Tesla is way ahead of the competition, most of whose cars can only go about 50 miles on a charge under adverse conditions, but it still cannot deliver a range close to those running on traditional fossil fuels. Besides, it's expensive. In Norway so far this year, the VW e-Golf, with a price tag only a third to a quarter as high, has outsold it two-to-one. In August, Tesla was also beaten by the i3 (which is about 60 percent cheaper) and the Nissan Leaf. Many buyers clearly don't believe Tesla's mileage advantage is worth the price difference.
The Norwegian system of incentives -- no import tax or value-added tax on battery-powered cars, access to bus lanes for all such vehicles, a government-sponsored network of about 6,000 charging stations -- makes electric cars about as attractive as gasoline-powered ones. It's a subsidy-driven market, like Tesla's home one in California. Yet even in Norway, Tesla is not the leader.
In Germany, which doesn't subsidize electric car sales, Tesla is only sixth in unit sales so far this year, behind local manufacturers, Mitsubishi and Kia.
Tesla's revenues are higher than those of competitors for now because luxury cars have a higher price point. The new models from Porsche, Audi and Mercedes announced in Frankfurt this week are meant to rectify that as well as deliver the kind of range that traditional car buyers are used to -- something that will justify the luxury pricing. The German manufacturers have now set a 310-mile goal for the next three years, and Bosch, the world's biggest car part supplier which sells batteries to Volkswagen and other carmakers, is confident it can be achieved.
Tesla may well be competitive in that area when the new models go on sale, but it will be just one of a number of companies with similar offerings. And its relatively mass-market Model 3, expected to launch in 2017 unless there's a customary delay, will enter an already crowded field.
The traditional producers have important advantages over Tesla. They sell millions of gasoline-powered cars, allowing them to absorb the development costs of electric vehicles, and they can save by using many of the same parts across several models. Tesla, which lacks this ability, is hemorrhaging money. It lost $338 million in the six months to June 2015. The company's sky-high valuation sustains it, but once the traditional manufacturers match its product offering in every market segment, the valuation will be hard to justify.
Besides, in Europe -- and in China, where local manufacturers dominate the budding electric vehicle market -- local companies have a lot more lobbying power than Tesla does. Once their commitment to electric cars becomes commercially important (certainly with the launch of the "Tesla-killer" models), governments will be pushed to develop charging infrastructure and the stations will be built to local manufacturers' standards, not to Tesla's own network. Tesla's legendary status and valuation are based on a narrative of technical superiority and on a dismissal of traditional carmakers as arrogantly slow-moving. Tesla's unit sales increased to 28,700 last year from 22,477 in 2013. Even if the company manages to double that by 2018, VW, BMW and Daimler won't be hopelessly behind. And those numbers are miniscule by their standards: VW sold 1.7 million Audis last year.
Believers in tech disruption often underestimate the sheer power of established industry. Incumbents rarely need to move as fast as newcomers. Watching upstarts experiment and burn cash usually makes more sense.
Many expected the Apple Watch to undermine the traditional Swiss watch industry, but that's not happening: Swiss watch exports, including cheaper electronic ones, are rising so far this year. The Swiss companies are also experimenting with smartwatches, but they don't have to race Apple -- it's more productive to learn from its experience in the new market. That's what Apple often does itself, aping competitors' moves when they prove successful. The German carmakers -- and their Japanese rivals -- are patently staking out Tesla, and it's not out of their reach even in the U.S., where it is the electric car market leader.
It's hard for a first mover to survive in an industry of cash-rich, technologically advanced players putting a lot of resources into their second move. Even if Tesla manages to stay ahead of the pack technologically, its advantage is likely to be eroded sooner rather than later.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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