Last month, Tesla (TSLA) surprised everyone by announcing it had delivered 20% more vehicles than forecasted in the fourth quarter and that it would increase production from 600 to 1,000 cars per week in 2014. Though there has been much debate as to whether the recent run-up in Tesla's stock price is warranted and sustainable, the fact remains that Tesla is winning the battle for mindshare in the alternative-powered vehicle segment.
To the winner go the spoils, and one of the spoils of victory in the marketplace is the ability to set standards. If traditional automobile manufacturers were reporting similar growth in hybrid and EREV (extended range electric vehicles) sales, the future might look different. With Tesla leading the charge for the BEV, however, the continued dominance of technologies with one foot in the gas-powered past seems increasingly unlikely.
The Temporary Nature of Transitional Technologies
Dominant technologies often change as a product moves through the stages of market diffusion. Take for example the predecessor of the modern day smartphone, the PDA. Those who have been around long enough to remember will recall that the PDA replaced products like the Franklin Planner, which were essentially glorified calendar books. Palm succeeded (for a time) because it smartly bridged the gap between the ancient technology of paper and pen with screen and stylus. The PDA has since converged with the smartphone, and no one makes a smartphone with a stylus. Today, the interface has fully evolved into the touchscreen.
Just as Apple (NASDAQ:AAPL) ushered in the replacement of the stylus with the touchscreen, Tesla will likely be the catalyst for the replacement of the hybrid/EREV with the BEV. The elegance and efficiency of the Tesla drivetrain is infinitely more appealing than the idea of drivers having to haul around a back-up gas motor (in the case of a hybrid) or a back-up gas generator (in the case of an EREV) with them everywhere they go. Just as the stylus bridged the gap between the pen and the touchscreen, hybrids and EREVs have bridged the gap between the ICE (internal combustion engine) and the BEV. Tesla's growth suggests that consumers are getting more comfortable with putting both feet in the future.
Style Points Matter
When comparing competing technologies, it is easy to discount the importance of style in determining which will ultimately win over consumers. When it comes to automobiles, the power of curb appeal and branding is as unquantifiable as it is undeniable. Elon Musk has proven himself to be very adept at creating a covetable brand (without spending much at all on advertising). In contrast, the champions of hybrids and EREVs are finding it difficult to match Tesla's cachet.
Consider how the new Cadillac ELR (an EREV) compares to the Tesla Model S. In terms of luxury and price point, it can be expected to compete directly with the Model S. However, Cadillac remains hobbled by its association with the aging baby boomer demographic that defined it for decades before General Motors (GM) gave the nameplate street cred and a facelift with the CTS-V. With that generation's low interest in performance-inspired styling, ELR sales are off to a slow start. Consequently, the first few months of Cadillac ELR sales have been dwarfed by those of the Tesla Model S (see chart).
If the new Cadillac doesn't prove up to the task of defeating the all-electric Model S, perhaps GM can look to the better established Chevrolet Volt as a champion for the EREV platform. Unfortunately, the leading EREV is suffering from a slowdown in sales relative to the competition. Tesla Model S sales were up a whopping 612% from 2012 to 2013, compared to a slight drop in sales growth for the Chevrolet Volt. (The leading hybrid, the Toyota (TM) Prius Liftback, also experienced a slight drop in sales in 2013).
Given that 2013 was the first full year of Model S sales, it may not be fair to compare its sales trajectory to that of the older Volt. The Nissan (NSANY) Leaf would provide a more apples-to-apples comparison, having been released in the U.S. at the same time as the Chevrolet Volt and aimed at roughly the same customer. Unfortunately for the EREV, Leaf sales increased 130% in 2013 (see chart below). Though the Leaf is the current sales leader in the BEV segment, the Model S is catching-up quickly. With Tesla having given guidance of a 55% increase in deliveries in 2014, it will likely surpass the Leaf to lead the BEV category in 2014.
What It Means for the EV Industry
Ultimately, the EV standards battle is not a zero sum game. There will not so much be winners and losers as there will be degrees of winners that will avoid losing by playing the wild card of adaptation.
Right now, the BEV has the advantage because Tesla is blowing the doors off the competition. In the hybrid/EREV camp, no one is holding their breath in anticipation that GM and Toyota will announce they are doubling weekly production of the Volt and Prius Liftback to keep up with demand. If the trend continues, however, it does not mean that GM will shut down EV production for good any more than the failure of the EV1 ended its electric aspirations. Conversely, should the BEV platform lose, it does not necessarily spell the end of Tesla. Worst case, a company as innovative and entrepreneurial as Tesla will simply adapt and carry on.
Obviously, an all-electric future would be better for the broader EV industry. For example, an EV charging provider like OTC-traded Car Charging Group (OTCPK:CCGI) stands to benefit no matter who ends up making the industry-leading BEV. Much like oil companies in the early days of the automobile, it doesn't matter which car company is the most successful, they all need fuel. With Car Charging having just announced it will resume sales of Blink HQ residential level II chargers, it's in a good position capitalize on Tesla's vision of an all-electric future.
X-Factor Tips the Scales
Predicting winners and losers in consumer products is not simply a function of determining which technology is the most advanced, elegant, or even sustainable. It may sound flippant, but what tips the scales in favor of BEVs is that fact that Tesla is making them. If it were up to the old guard auto manufacturers to make BEVs popular, the battle between hybrids/EREVs and all-electrics could take decades to sort out. With Tesla leading the charge, we will probably have an answer much sooner. Like Apple, the impact of Tesla's x-factor on its industry should not be underestimated.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Business relationship disclosure: Business relationship disclosure: Market Exclusive is a team of analysts and writers. This article was written by Carlos Uribe, one of our Group contributors. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.