Reuters just dropped a bomb with respect to the timing of General Motor's (NYSE:GM) quest to ensure that Tesla (NASDAQ:TSLA) will have a really hard time ever making any profit margins. Its sources inside GM and with suppliers indicate that production of GM's inexpensive 200-mile EV will begin in Michigan in October 2016.
In my article from early January, I estimated that GM's dealership availability for this car could be September 2017. As a result, the big news in the Reuters reporting is that GM is proceeding on an accelerated schedule, delivering the car almost a year earlier than expectations.
Let's back up for a second and consider the central thesis of the investment case for Tesla. Seeing as Tesla has not been able to make a profit on the $70,000-$130,000 Model S, and the similarly priced upcoming Model X could simply cannibalize Model S sales, Tesla's longer-term profit prospects depend almost exclusively on the Model 3, which has been promised for a price of $35,000.
The problem is that the Model 3 timeline has been slipping. At some point, it was supposed to arrive in 2015, 2016, 2017… On January 13 in Detroit, Elon Musk commented that it looks like it's three years away. That would be 2018.
It's not difficult to see a path to further delays of the Model 3. At various points, Tesla has talked about the Model 3 being tied to production in the Nevada battery factory, which looks to be turned on in various stages, but not firing on all cylinders until 2020. That could still mean that the Model 3 could be produced some time before 2020, but the question is how much earlier?
Likewise, in the same Detroit Q&A session on January 13, Musk said there is still debate as to what the Model 3 will look like, physically. The very reasonable baseline scenario that most observers had considered until recently, had simply been a 20% or so smaller Model S. And, that would have been a relatively safe way to play it.
Apparently, judging from Musk's comments, a far more radical design approach is on the table and has his backing (which means that's what will happen). One can certainly see the analogy with the Model X falcon wing doors here. You know, the ones partially responsible for delaying the Model X from the originally promised December 2013 delivery date, with the current 3Q 2015 date.
In other words, using the Model X analogy, you could consider an almost two-year delay in the Model 3 to be within the range of possible. Depending on your point of origination, that could take us closer to 2019.
It is here where you see the difficulty in Tesla's position. Almost the entire investment case for TSLA has been based on Tesla bringing an affordable 200-mile EV to market faster than the competition.
Now, it looks like GM will bring its Model 3 competitor to market approximately two years ahead of Tesla. Short of some new factor entering the equation from left field, this basically ensures that GM will be in a position to control this market, either with a Gen-2 product hitting the market right after Tesla enters volume production of the Model 3, or via aggressive pricing that GM can afford but Tesla can't.
Tesla bulls will surely make these arguments to try to deflect this 180-degree turn of the tables:
- But the Model 3 will be faster, better-looking, etc.!
Good luck with that one! At this stage, this is pure imagination. No doubt the Tesla Model 3 will be a fine car, when it eventually becomes available in 2018 or 2019 or whenever. Surely it will be fast. But, will anyone buying a commuter car really care all that much whether it does 0-60 MPH in 7 seconds, 6 seconds or 5 seconds? Really?
- But where is GM's charging network?
Now there's a good question. GM has not yet announced the building of a long-distance DC charging network equivalent to Tesla's supercharging network. And that's a real difference.
That said, these 200-mile EVs are likely to be commuter cars, not road trip cars. If you're going to Florida to visit grandma, fly or take your minivan. While there may be a market for the rare bird who insists on driving an electric car across the country, perhaps GM might just not bother catering to this rare species. Tesla can have that market of 72 extreme enthusiasts for itself.
The reality is that a 200-mile range (shorter in Winter) will basically just ensure that a large chunk of Americans can do their usual thing in their home area - primarily commute to and from work - without having to think about recharging during the day. And that's where the meat of this market looks to be.
- But the Tesla may be $2,500 cheaper!?
GM has talked about a post-tax price of $30,000, implying a $37,500 price until the $7,500 federal tax incentive expires. Tesla has said $35,000, or $2,500 less than GM.
Seriously, folks, do you realize that these pricing proclamations mean very little at this point? GM cut the price of the Volt from $41,000 in 2010 to $35,000 in 2013, and in the meantime discounts up to approximately $5,000 were offered, below those prices. GM just simply printed $199 per month lease prices at the dealerships.
GM will price their cars to whatever point at which they will sell what they want them to sell. If against all odds Tesla's Model 3 is being offered at a $35,000 price, where they magically could earn a profit, GM would simply drop their price another $5,000 or $10,000. In the end, why not just offer it for $19,999 before tax incentives? They'll do whatever it takes in the pricing department to ensure that most people write the check to GM and not to Tesla.
In other words, GM's ability to deliver an inexpensive 200-mile EV approximately two years ahead of Tesla basically ensures that it will be very difficult for Tesla to earn a profit. Perhaps that's what Elon Musk was alluding to when he said in Detroit on January 13 that he didn't expect any profit until 2020. Brace yourselves for further reductions in long-term EPS estimates for Tesla. And keep your eye on the cash burn.
Then again, this isn't just about GM. Just because a few people in and around GM recently started to leak all of this information doesn't mean GM will be alone in competing with Tesla's Model 3. If you don't think that VW/Audi, Ford (NYSE:F), Honda (NYSE:HMC), BMW (BAMXY), Nissan (OTCPK:NSANY) and others have plans to do the same, you're dreaming.
In the next 6-18 months, the plans by companies such as VW/Audi, Ford, Honda, BMW and Nissan to build their own $30,000-$40,000 200-mile EVs should be announced. Perhaps GM will the first to market, perhaps it will be Nissan, but one thing is clear: The competition will be brutal. I would be shocked if any of these companies makes a single penny off these models in years. Pricing will be discounted, and gross margins near zero at best.
For all of those big companies - GM, Ford, Nissan, Honda, BMW and VW/Audi - losing a few bucks on a new relatively low-volume model is a minor annoyance, but will readily be absorbed in the sea of profits coming from trucks and SUVs in particular. For Tesla, however, not being able to earn a gross profit on the one model justifying over 90% of the stock price, could be the difference between staying in business or not.
I can start to imagine the ads from the big car companies already, come late 2016: "Do you buy your 200-mile range electric car from a big profitable company with a huge balance sheet, or do you buy it from a small loss-making company with a lot of debt and a huge cash burn?" The big automakers may simply start to scare the consumer into believing that if you wait a year or two for a Tesla to match the bigger automakers, they may not be in business anymore. And besides, then what happens to the supercharging network and any warranties?
The bottom line is this: GM looks to have shocked us by delivering their 200-mile inexpensive electric car a year early, unlike Tesla which is suffering chronic multi-year delays. Behind every lost battle are two words: Too late.
Disclosure: The author is short TSLA.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: At the time of submitting this article, the author was short TSLA. However, positions can change at any time. The author regularly attends product launch events, press conferences and equivalent hosted by automakers. Those are sometimes paid for in whole or in part by the hosts of the events. The author also regularly reviews cars provided automakers.
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