Next year, Cadillac will offer their ELR plug-in electric coupe. Many Tesla (NASDAQ:TSLA) fans will dismiss Cadillac's ELR outright, but it may prove a significant competitor - in different ways, for different reasons than some investors think. Those seeking to justify a Tesla share price well above $150 should consider and understand the kind of competition the ELR represents for 2014 and in the years that follow. Tesla's market cap is approaching the value of companies like Ford (NYSE:F) and General Motors (NYSE:GM) and considering Tesla's high earnings multiple investors are clearly counting on Tesla one day selling cars in volumes similar to Ford or GM. Let's see how the Model S and the ELR perform where it counts, in the showroom.
Tesla's Model S is a great car. It's super-car quick, handles like a sport sedan, has the passenger / cargo capacity of an SUV, gets better mileage than a Prius and it is arguably the safest car made. But most cars are not the fastest, largest, best handling, safest or most efficient. Real world car companies make their money selling mediocre cars, in volume, at a profit. The fact is Tesla doesn't have a mediocre car to sell, and their sales organization isn't set up to sell such a car if they did. So, will Tesla be successful in the real world, mainstream car business and does the ELR offer some insight in this regard?
Let's start by getting the issues of relative performance, features, pricing and range out of the way. The Cadillac ELR is basically a Chevy Volt with more weight, higher drag and half the doors for twice the price. And, even with its gasoline range extender, a full tank and a full charge the range will be about 300 miles according to Cadillac's ELR specifications. At first glance, the ELR doesn't seem a car to make Tesla tremble in their boots. But the ELR has a secret.
Technology is where the ELR looks to blow the Model S away. The ELR is filled with technologies that Tesla simply cannot match. For example, the ELR has LED light-blade tail lights with the word Cadillac precision etched into the plastic. Tesla doesn't have those. The ELR offers optional 20" aluminum wheels with "precision painted pockets". You can't get these on a Tesla because presumably there are no precision wheel pocket painters on Tesla's Fremont team. ELR technology offers greater safety, too. The ELR driver can engage regenerative braking by just pulling a steering wheel mounted paddle while the Tesla driver must lift their foot from the accelerator. It's much easier to see what your hand is doing on the steering wheel than it is to watch what your foot is doing without taking your eyes off the road. Score one more for the ELR.
Before, dear readers, you declare this author barking mad for belaboring these banal examples of the ELR's superiority, consider why Cadillac has included these features on the ELR and why perhaps, Tesla has not done the same with Model S. For Tesla, the importance of features is to make the car a better car. For Cadillac, the importance of features is to sell cars. This may sound trite, but Tesla is selling their cars in a different way than Cadillac sells cars. And that makes all the difference.
Tesla is a new car company, delivering at the moment a single car model which is breaking entirely new ground as the world's only long range, fully electric production sedan. To attract customers, Tesla must offer a highly differentiated, critically respected vehicle. Most would-be car buyers don't know Tesla exists and all things being equal would not even consider buying a car from a start-up. In short, Tesla has to make their car so good that all things are not equal when comparing Tesla to Cadillac.
With Cadillac, things are different. Cadillac is part of General Motors, an established car maker. There are hundreds and hundreds of Cadillac dealers around the world that sell many Cadillac models. From Beijing to Boston to Bulgaria car buyers know the Cadillac brand. Cadillac doesn't need an electric car that creates "brand buzz". Customers will show up at Cadillac dealerships as they have for decades, driven by Cadillac's respected brand. All Cadillac needs is a car with batteries they can show to the customer who says, "But, do you have an electric one?" The ELR is that car. And this is where all those ELR technical advantages I mentioned earlier come into play.
You see, Tesla doesn't sell cars in the same sense that Cadillac sells cars. Tesla's stores and galleries just take orders (in Texas they don't even do that). Cadillac dealers sell cars. Taking orders and selling aren't the same thing. Selling involves convincing the buyer to hand over money to buy or lease your car instead of the other fellow's car. To do that, the salesman must convince the buyer that his car meets the buyer's needs. As any seasoned salesman knows, what the buyer wants and what the buyer needs are not the same thing.
A car buyer may want the leather seats, the touch screen controls, the eco-friendly electrically powered car. But what the buyer needs is to be able to park his new car in the driveway and tell his neighbors, his in-laws, his wife and his kids how the car he just bought (or leased) is superior to other cars and how wise and skilled he was in negotiating the great deal for the utterly superior car now sitting before them.
The features Cadillac built into the ELR are there to meet the needs of the customer. Yes the ELR has leather seats. Yes, the ELR has touch screen controls. Yes, the ELR is electric. Yes, the ELR will go 300 miles. And yes, the ELR is a Cadillac, you can see that because the name "Cadillac" is precision etched into the tail lights. Oh, and did I mention the far better looking aluminum wheels with their precision painted pockets - far classier than anything from Tesla...
Today Tesla builds superlative electric cars. They have cornered the market that needs such a car. But not every car buyer has the same need. Cadillac's ELR may be a mediocre car compared to Model S, but it meets the needs of a different set of customers. The ELR is a "Cadillac". The ELR is made by an established company. The ELR doesn't come with range anxiety. The ELR has "light blade" tail lights and aluminum wheels with precision painted pockets.
Many investors believe Tesla will command ever growing market share because they offer superior performance, range, cargo capacity, safety and efficiency. This view is inconsistent with the mainstream car market as it is and has been for a century. The world is no more likely to be overrun with Tesla road-rockets from Silicon Valley than red Ferrari station wagons from Italy.
Model S, Model X and Model E are niche vehicles. What the ELR does is establish a boundary for Tesla's Model S niche. Have $80k for an electric car with 300 mile range? With the ELR, Tesla is no longer the only game in town. Other car makers are setting bounds on Tesla, too. An electric car with German engineering? Try a BMW i3, Mercedes B Class or Smart. Economical electric car from reliable Japanese manufacturer? How about a LEAF or a RAV 4? Something cute, red and Italian? Here is a 500e. None of these cars directly compete with Model S but every time someone buys an EV from Fiat, Toyota (NYSE:TM), Nissan (OTCPK:NSANY), Mercedes, BMW, Ford, Cadillac or Chevy, that's one less car for Tesla to sell. These competitors don't need to be bigger, faster, better handling or safer than Model S, they just have to meet a car buyer's need. In some cases at least, aluminum wheels with "precision painted pockets", or LED light-blade tail lamps, combined with good salesmanship, may be all it takes. Optimistic Tesla investors should think about that.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.