Tesla Motors (NASDAQ:TSLA) must deliver an electric car road trip solution equivalent to mainstream ICE cars or they will be stuck making specialty electric cars and never generate the returns many of their investors hope for.
Tesla has come a long way since delivering Model S cars in June. Dan Neil of the Wall Street Journal said, Model S "goes like the very stink of hell", their factory is working, orders pour in, and CEO Elon Musk tweeted about profit. Tesla will likely deliver 20,000 cars in 2013. An optimist looking at reservations might imagine 30,000 Teslas this year.
Given an ASP of $80k a car, Tesla's 2013 car business looks like $1.6 to $2.4 billion. Throw in another $200 million for drivetrains and services and this year's top line might go as high as $2.6 billion. If Tesla achieves 25% gross margins and brings 10% to the bottom line, they might conceivably earn $260 million. With shares at $34.52, and a $3.93 billion market cap, that's a 15.1 PE. Compare this with PEs of 9.6 for Ford (NYSE:F) and BMW (BMW:GR), 9.3 for Daimler (DDAIF:US), 7.7 for General Motors (NYSE:GM) and it's hard to get excited about Tesla stock. An investor might even go short, and quite a few have.
Interest in Tesla is not about where they are, but about where they are headed. If Tesla disrupts the car business, they could end up selling 5 million mainstream cars a year at a $40k ASP, and if they bring 10% to the bottom line and have a PE of 9, their share price will be a tidy $1,582.70. Investors at the current price will see a 4,584% return. This is why the 'longs' buy when the 'shorts' sell.
Owning Tesla stock is a bet on where they are headed. Shorting the stock is a bet they won't arrive. Smart investing involves figuring out if they will make it. To make it, Tesla must deliver mainstream cars and mainstream cars do road trips. So investors need to know if drivers can make a road trip as quickly and conveniently in a Tesla as in an ICE car and if other companies will solve the electric car road trip problem too, diluting Tesla's competitive advantage.
To understand if electric cars will work, we will look at several cars taking a 360 mile road trip, figuring travel time as a function of driving speed, including the time needed to stop and charge. How travel times compare will tell us how close Tesla is to solving the road trip problem, how their coming Gen III cars will work the road trip problem better, and how other manufacturers' small battery electric cars and Level III charging compare with Tesla's road trip solution. But first, some bits about the model.
Three hundred and sixty miles is a real road trip, say San Clemente, Ca to Mammoth Lakes for a weekend of skiing: 354 mi. Two 360 mile segments are a day's drive crossing the US, say from the Park City, UT Holiday Inn to the Kearney, NE Holiday Inn: 727 mi. It is the kind of road trip thousands of ICE cars make every day, that today's electric cars can't perform.
- Yes, Tesla's Model S can make trips this long, but only in those few areas where SuperCharger stations exist. Tesla even offers a trip time calculator on their website. Our model differs from Tesla's online calculator for reasons discussed at the end of the article but the results are similar.
For baseline we'll use an ICE car able to drive the 360 miles at any speed between 55 and 85 MPH and assume the driver makes one stop of 30 minutes during the 360 mile journey. This is real world travel with an ICE car.
The Nissan (OTCPK:NSANY) LEAF will represent a short range EV that uses Level III fast recharging. Two Tesla cars, the Model S (85 kWh battery) and the BlueStar (56 kWh battery) will let us explore Tesla's road trip solution. Model S is Tesla's current offering. BlueStar is Tesla's Gen III car. In an earlier article I describe a potential Bluestar car.
- BlueStar is aimed at the BMW 3 series, is smaller than Model S and likely will use next generation Li-ion batteries. In our model BlueStar cars use upgraded 120 kW SuperCharger stations (mentioned during Tesla's SuperCharger announcement event). BlueStar, with a smaller battery and using the 120kW SuperCharger recharges twice as fast as Model S (50% charge in ~15 minutes for BlueStar vs 50% charge in ~30 minutes for Model S).
We didn't model EVs like the Ford Focus EV that use slower, Level II charging because slow charging makes road trips impractical, nor did we model range extended EVs like the Volt, Cadillac ELR, Fisker Karma and Prius Plug-in because these perform (and burn gasoline) like the baseline ICE car.
EVs start off with the highest charge recommended when rapid charging - 80% full battery for the LEAF and 77% full battery for the Tesla Model S and BlueStar. Charging stations are located along the route so that, using moderate air conditioning, the cars can make it from one charger to the next at the fastest modeled highway speed (120 miles between chargers and 85 MPH for the Tesla cars, 45 miles between chargers and 70 MPH for the LEAF). Electric cars stop and recharge at each charging station. Calculating the stop time for charging, our model allows 1 minute to exit the highway and plug in to the charger, time to charge to the maximum recommended charge assuming 90% of the charger rated power is stored in the battery, and then one minute to unplug and return to the highway.
The following table lists the cars. The range listed for the electric cars assumes starting with the maximum recommended charge for rapid charging and moderate HVAC use. The span of range values reflects driving at different highway speeds (55 - 70 MPH for the LEAF and 55 - 85 MPH for the Tesla cars).
|ICE||LEAF||Tesla Model S85||Tesla BlueStar|
|Range||N/A||56-45 miles||238-142 miles||231-127 miles|
|Charger||Gasoline||Level III 50kW||SuperCharger 90kW||SuperCharger 120kW|
|Stops||1 stop, 30 min.||Every 45 miles, 7 stops||Every 120 miles, 2 stops||Every 120 miles, 2 stops|
The reason electric cars have trouble competing with ICE cars at long distance travel is that electric cars spend too much time charging. The model results below show how travel time for electric cars and ICE car compare. As electric cars are driven faster, they use more energy per mile and need more time at every charging stop. This gives the ICE car a greater travel time advantage the faster you drive.
Tesla's Model S, using 90 kW SuperCharger stations delivers a road trip solution approaching mainstream ICE cars. Tesla's smaller, more efficient BlueStar used with 120 kW SuperCharger stations gives essentially the same travel time as the ICE car. By contrast, short range, small battery electric cars like the LEAF, even with Level III fast charging stations don't begin to solve the road trip problem.
To further appreciate how these electric cars stack up against ICE cars consider a cross country road trip, say eight 360 mile segments from our model. This is like driving from Los Angeles to Hartford, Connecticut in four days. The table shows the extra travel time for the electric cars.
|Car||Time on the Road||Time Penalty|
|49hrs 26min||1hr 7min|
|Model S85||53hrs 19min||5hrs 0min|
|LEAF||68hrs 31min||20hrs 12min|
Crossing the US in four days is a serious road trip. With enough charging stations along the route, any of the cars compared could make this trip. The LEAF would turn 12 hour driving days in the ICE car into seventeen hour slogs, the Model S would stretch time on the road by an hour and a quarter each day, but the BlueStar would lengthen the driver's time between breakfast and bed by just 17 minutes. It's hard to see the LEAF as a viable road trip solution. Tesla's Model S is probably good enough for Tesla's early adopter market. The BlueStar is just as good as an ICE car. And that ladies and gentlemen, is the ball game.
It is the ball game of course only if there are enough SuperCharger stations.
If Tesla executes a timely SuperCharger roll out their road trip solution can work, but this is a big undertaking. While 23 SuperCharger stations will cover the 2,880 miles between L.A. and Hartford for Tesla cars, the challenge isn't covering just a single route. There are 207,000 miles of US Interstate Highways and US Numbered Routes. To cover all of these highways would take 1,600+ SuperCharger stations.
To support short range EVs like the LEAF, 64 Level III charging stations are needed for the L.A. to Hartford route and 4,000+ are needed to cover America's major highways. Even then short range EVs like the LEAF wouldn't work very well for road trips.
Tesla has a marginal road trip solution with their Model S and 90 kW SuperCharger stations. Tesla's solution is much better than short range EVs and Level III charging. It does make long distance travel with Tesla cars practical. There is some time penalty compared to ICE cars, but it is probably good enough for Tesla's early adopters. Tesla's proprietary road trip solution will only be realized when enough SuperCharger stations are in place.
Tesla's Gen III BlueStar with up-rated 120 kW SuperCharger stations is a different story. For road trips, BlueStar will be just like an ICE car. When Tesla rolls out the BlueStar in 2016, with SuperChargers already in place, Tesla's Gen III road trip solution will be disruptive.
Short range EVs like the LEAF, even combined with Level III fast charging stations, are not a competitive road trip solution, and for that reason will not be a threat to Tesla.
Tesla has a workable road trip solution in hand with their Model S cars and 90kW SuperCharger stations. When their BlueStar cars hit the road in 2016, Tesla road trip performance will equal mainstream ICE cars and Tesla will have overcome the last technical barrier to disrupting the car business. Short range EVs will not be competitive in this area, leaving Tesla and their partners Daimler and Toyota well positioned to command the coming ICE to electric transformation of the car business.
Our model predicts Tesla will solve the road trip problem and be in a very strong competitive position. They just need to follow their announced plan. To see if this assessment of Tesla's road trip solution is correct, take a look at the model, then you the investor can decide.
About the Model
In our model, the charging stations are placed at fixed intervals along the route and the electric cars begin the trip with batteries charged to the maximum level recommended for rapid charging and top-up charge to this same level at each station they encounter.
Tesla's travel time calculator assumes 100% charge at the beginning of the trip, places recharging station(s) at the optimum location(s), depending on the driving speed you choose for the trip, then adds just enough charge to make it to the journey's end. This is a bit optimistic in that SuperCharger stations don't move around to adjust for your driving speed. Even so, the travel time differences between our simple model and Tesla's trip calculator are small.
When combining 360 mile segments into longer trips, our model assumes a meal stop or an overnight stop between segments. These stops include recharging/refueling and time for these stops is not counted as 'Time on the Road'.
About the Cars
We need to know how much energy each car uses per mile at the various highway speeds. Once we know the energy use per mile, the battery capacity and the initial state of charge, the range and energy use at any speed are easily calculated. Since we are considering how these electric cars compare on real-world road trips, we allow for heating and air conditioning. The following graph illustrates the energy use and range assumptions in our model. On this graph, the range is with a 100% full battery, not the 80% (NYSE:LEAF) and 77% (Tesla) starting charge used in our road trip model.
(click to enlarge)
For Model S, Tesla provides ideal (no HVAC) range vs. speed information on their website. To allow for HVAC use, our model adds a constant 1.3kW load to Tesla's ideal range data. The resulting range used in our model compares closely with Tesla's range calculator for a Model S with standard 19" all-weather tires, AC on, 90F ambient temperature.
BlueStar range and energy use was calculated by scaling the Model S ideal conditions data to the smaller battery capacity of the 300 mile range BlueStar (56.1 kWh vs. 85 kWh), and using a lower 1.0kW HVAC load for this smaller Tesla car.
Energy use for the LEAF is based on EPA L4 Highway testing at 55 MPH with air-conditioning on. For higher speeds, the 55 MPH LEAF data was scaled at the same rate as the Model S.
- Our model makes some very optimistic assumptions about LEAF charging. The LEAF when driven 70 MPH goes for 45 miles, rapid recharges from 0% to 80% charge, then immediately repeats this sequence - in the case of a cross country trip, it would do this fifteen times a day! The LEAF has some battery life issues and Nissan recommends rapid charging no more than once a day. An Argonne National Labs presentation offers discussion of LEAF fast charging limitations beginning on slide 14. The presumption is that Nissan and other makers of short range EVs will get things right by the time Tesla has their SuperCharger network deployed and their BlueStar to customers...
The Big Battery vs. Small Battery Difference
Something stands out from this analysis about the difference in Tesla's approach compared with that of other EV makers. Tesla cars have much larger battery capacity and much longer range than competitors. This design choice has driven Tesla to use light weight construction (aluminum) and high specific energy (W-hr/kg) Li-ion batteries that need sophisticated charge management and thermal control. All of this makes Tesla cars expensive.
What the "big battery" strategy does for road trips is allow much higher recharge rates (driving_miles / charging_time) without damaging the battery. This is why Tesla cars work the road trip problem better. Tesla and their partners Daimler and Toyota are well positioned for the ICE - EV tipping point that is sure to occur when battery performance increases enough and battery prices drop sufficiently. If Tesla puts SuperCharger networks in place early, their proprietary road trip solution will be an incentive for Tesla's partners and other manufacturers to license and adopt Tesla's technology.
The model presented here is of my design. I have had no discussions with Tesla or any other EV manufacturer about the model and have no inside information about Tesla's or Nissan's business strategy or their vehicle designs. Performance data was derived from the literature in the fashion described. I believe this model fairly depicts the relevant differences between the several EVs and the ICE car when used for a typical road trip. There is the assumption appropriate EV charging resources exist along the way. Such resources do not currently exist for most routes in the US. This model and the presented results are believed accurate but are not guaranteed.
Disclosure: I am long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.