High fives, low expectations.

Photographer: Richard Lautens/Toronto Star via Getty Images

The Empire Strikes Back at Tesla

Edward Niedermeyer, an auto-industry analyst, is the co-founder of Daily Kanban and the former editor of the blog The Truth About Cars.
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Last week, a record number of automakers flocked to the Consumer Electronics Show in Las Vegas in the hopes of rebranding their cars as "the ultimate gadgets" and making the industry relevant in the information technology revolution. But this week, the world has moved to Detroit for the North American International Auto Show to reaffirm that business as usual in the auto industry is alive and well. With its usual barrage of big trucks, muscle cars, luxury sedans and supercars, the Detroit auto show seems determined to remind attendees that it's still a very good time to be in the traditional auto business.

But behind the bravado lurk unmistakable signs that "business as usual" won't last forever. Though trucks and SUVs are turbocharging profits as oil sinks to new lows -- and a number of new products were announced in those segments this week -- no executive would admit that low prices at the pump have forced any immediate changes to their product plans. Instead, the industry seems to be gearing up for major competition from electric vehicles in the next two years.

General Motors jump-started the EV sweepstakes by showing off its Chevrolet Bolt concept, which it says will deliver 200 miles of all-electric driving range for around $37,500 when it hits the market in two years. Nissan Chief Executive Officer Carlos Ghosn pledged to maintain his company's dominance in the EV segment by revealing that the next-generation Nissan Leaf will match -- and possibly exceed -- the Bolt's projected range. Honda promised a new EV to complement its 2016 fuel cell vehicle, which in turn will battle Toyota's Mirai FCV sedan and Hyundai's FCV Tucson.

Most automakers put an emphasis on these vehicles' roles in meeting global carbon emissions standards, but looming over the building green-car brawl is the industry's most credible challenger in decades: Elon Musk's Tesla Motors. Though Tesla currently represents only a tiny fraction of the industry's massive scale, it has captured what Ghosn recently called an "information halo," generating excitement on a scale not seen in decades. With Tesla planning to launch its $35,000 entry-luxury Model 3 EV into the 200 mile-range segment around 2017, the industry is preparing its competitive buzz saw for the Silicon Valley upstart.

Completely unfazed by this furious counterattack, Musk bearded the industry in its own den, welcoming his competition with open arms at a speech to industry and auto media luminaries outside the show. Urging automakers to accelerate EV programs, Musk went on to predict that Tesla sales would grow from around 35,000 units last year to "a few million cars by 2025." But he also admitted that China sales declined last quarter, and that Tesla would not be profitable until 2020. Though Musk's bravado may have showed down his Detroit critics, Tesla shares declined significantly in after-hours trading following his remarks.

Tesla's short-term challenges are enormous, but Musk's long-term confidence strikes a note of optimism that has long been missing from the auto industry. For all its short-term prosperity selling trucks, SUVs and luxury cars at inflated profits, the industry has no real answer for Musk's sense of purpose and long-term vision. If Tesla can survive and deliver a Model 3 that lives up to the Model S, there's little doubt but that it can carve out a profitable niche for itself. But for mainstream automakers, unless they start investing today's profits wisely and finding new ways to connect with consumers, slowing global auto sales growth portends brutal consolidation ahead. Musk may be worried about short-term stock volatility, but the traditional auto industry has to worry about how to keep investors interested over the long term. 

Whether Tesla survives the coming green-car war, it will have made an undeniable impact on the industry. And with an even greater boogeyman -- Google's self-driving car -- lurking in the wings, it's a very good sign that Musk is being taken seriously. As the automotive and tech industries continue to converge, the challenges will only get more daunting.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Edward Niedermeyer at edward.niedermeyer@gmail.com

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net