Tesla Motors (NASDAQ:TSLA) has been doing great things for investors lately. Their stock is up 300% this year and many investors see even rosier times ahead for Elon Musk and his electric car company. Between Tesla's expanding SuperCharger network, coming battery swap stations, Model X SUV and soon to be affordable Gen III car, a future of green pastures, blue skies and sunny days lies ahead for Tesla and for their stockholders. What some investors seem to overlook however is that green pastures are sometimes transected by barbed wire, behind which there can be surly, cantankerous horned cows. Traversing even the greenest of pastures can prove more difficult than one initially imagines and the certainty and degree of Tesla's future success may be less than highly optimistic investors hope.
While Tesla does have the high performance, high-end electric car business cornered for the moment, there are quite a few other car companies now making fully electric cars and plug-in hybrid cars. General Motors (NYSE:GM) makes the Spark and the Volt/Ampera. Fiat (FIATY.PK) makes the 500e. Nissan (OTCPK:NSANY) makes the Leaf and Twizzy. Ford (NYSE:F) and Toyota (NYSE:TM) make both pure EVs and PHEVs. Daimler (OTCPK:DDAIF) makes the B-Class EV, Honda (NYSE:HMC) makes the Fit EV. And so on. While all of the EVs and plug-in hybrids currently on the market arguably fall short of Model S and other manufacturers are not now making electric cars that directly compete with Tesla, this is unlikely to remain the case.
To understand why major car companies will become Tesla competitors in the future, it is only necessary to understand why they are not Tesla competitors today. There are two reasons major auto makers are not currently competing with Tesla. First off, making electric cars is not a profitable business - not even for Tesla. If you take away the tax credits and the ZEV credits Tesla earns today, then move some of the 'Sales' component of Tesla's SG&A over to costs (essentially accounting the equivalent of the dealer mark-up against sales as happens in the conventional car maker accounting model) it becomes clear that Tesla is not making money making cars. This isn't some black mark against Tesla - after all, Elon Musk is operating his start-up car company in a regulatory and tax environment deliberately structured to foster development and deployment of electric cars, but none the less, the making of electric cars is not a profitable business, even for Tesla. When Fiat's president Sergio Marchionne complains his company loses $10,000 on every 500e they sell, he doesn't mention that Fiat / Chrysler is probably saving more than that by not having to buy the ZEV credits earned on every 500e that goes out the door ... And, the same thing applies to the other big manufacturers who have started making electric cars. Neither the major manufacturers or Tesla are making money making electric cars. The difference is that Tesla - selling ZEV credits - recognizes the value of these credits as income / profit. For major ICE car companies ZEV credits earned by their electric cars simply avoid costs for their ICE car business. It isn't a situation where Tesla makes money building electric cars and Fiat or GM don't. The difference is in the accounting ...
The other reason major auto makers are not competing with Tesla in the high-end, high-performance segment is that ICE makers make their highest margins on their top-end ICE cars. There is great disincentive for an ICE car maker to build a high-end electric car and cannibalize their highly profitable high-end ICE cars with an electric car that - aside from the ZEV credits - won't make money. Far better, if you are an ICE car maker, to build a minimum electric car with just enough battery to earn you some ZEV credits. This strategy makes sense today for ICE car makers and it is exactly what we see happening.
Times are changing. The present situation where Tesla operates alone in the high-end / high-performance electric car segment isn't going to last. The very advancements in battery technology that will allow Tesla to build a lower cost / lower price Gen III car will directly and immediately turn electric car manufacturing into a profitable business. That will change the ground rules for the major auto manufacturers and Tesla will likely face much more competition much sooner than many of their investors are counting on.
Any of the major automakers currently making an EV are likely near-term Tesla competitors if batteries improve but it may be most instructive to consider just one hypothetical example. Let's look at what next-generation batteries might do to the Volt. The Volt already has a battery with liquid cooling and sophisticated controls that mirror what Tesla is doing, but GM is using lithium-manganese spinel cathode cells with only 150 Whr/kg specific energy which makes a long range, pure EV version of the Volt impractical. GM has chosen instead to implement the Volt as a 'range extended' EV, splitting the drive line weight between battery and ICE components. Better batteries will widen GM designers' options.
Two and a half years ago, in January 2011, GM made a strategic investment in battery technology start-up Envia Systems. By February 2012, just 13 months after the GM investment, Envia announced a prototype 400 Whr/kg automotive pouch cell. If successfully put into production, Envia's 400 Wh/kg advanced cells would be drop-in replacements for the cells in the Volt's battery, increasing the Volt's pure electric range from 38 miles to 101 miles. If designers then removed the engine, generator, gas tank, catalytic converter, exhaust system, engine cooling system, etc. and replaced these components with additional battery modules, an all-electric Volt with ~200 mile range would result. And a 4-door, 4-passenger hatchback Volt EV with 200 mile range would look very much like Tesla's future Gen III car.
This of course isn't the only way GM might choose to pursue a mainstream electric car. They have a wide range of platforms available and are entirely capable of creating a new pure EV platform should they choose. The question for GM (or Nissan, or Honda, or Toyota, or Daimler ...) is whether making pure electric cars can be profitable. If next generation batteries do in fact allow for the making of money by making electric cars, then Tesla will have competition. And if the next generation of batteries does not allow the electric car business to become profitable exclusive of subsidies, then neither the electric car business or Tesla Motors will matter all that much.
Disclosure: I am short 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. My short position in TSLA consists of puts. I am not currently short TSLA shares.