Tesla: The Empty Threat Of The Chevy Bolt

| About: Tesla Motors (TSLA)

Summary

The Chevy Bolt appears to be positioned to compete with the forthcoming Tesla Model 3.

The Chevy Bolt is uncompetitive with existing hybrid cars in its price segment, and will flop as a result.

The Tesla Model 3 represents a different and more productive path to achieving a truly affordable EV and will succeed as a result.

The Chevrolet Bolt by General Motors (NYSE:GM) is being hailed by Tesla (NASDAQ:TSLA) bears as the car that will beat the Model 3. It will do nothing of the sort. The Bolt is a terrible car that consumers will flee from in droves. The Bolt's fundamental flaw is that it makes no economic sense for value-conscious consumers.

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Source: GM

The Unsolved Problem

The reality of the Bolt that Tesla bears and GM would like investors and consumers to ignore is that it doesn't solve the fundamental problem of reducing battery pack cost, usually expressed as a ratio of cost to energy storage: $/kWh. Instead, GM has chosen to make the Bolt "affordable" (at a starting price of about $30,000 after Federal tax incentives) by wrapping a very small cheap car around an expensive battery.

The car offers a range of 200 miles that is inadequate to make it a principal family car, once again in order to reduce the size and cost of the battery pack. Without the benefit of supercharging capability, the car is reduced to being an urban commuter only.

The fact that the car is being touted as a competitor to the as yet unrevealed Model 3 is ludicrous. The Model 3 is not really the competition for the Bolt. The real competition for the Bolt for consumer spending choices will be any number of gasoline and hybrid vehicles that offer considerably better value for the consumer's dollar.

The Bolt is just slightly larger than a Honda (NYSE:HMC) Fit, but smaller than a Honda Civic and much smaller than a Honda Accord. For the Bolt's starting price of $30,000, the consumer can buy an Accord Hybrid sedan, which starts at $29,305 or buy the Civic Hybrid Sedan which starts at $24,735 and use the balance to defray fuel costs. The Honda hybrids are much better cars by almost any objective standard. They are roomier, don't suffer from any range limitation, and are generally highly regarded for build quality. Unlike the Bolt, the Honda hybrids can serve as the principal family car.

The Bolt is a typical exercise in GM "me too" engineering, having been rushed into production using EV components from LG. LG is supplying the battery, electric motor, and even the display system. The fact that the car only has a 200-mile range despite its size demonstrates that it not only doesn't solve the fundamental problem of battery cost, but also that GM still doesn't take EVs seriously. The Bolt is clearly a car for an assumed fringe market of EV aficionados who can't afford a Tesla.

Solving the Problem

The reader may recognize that my objections to the Bolt are similar to the longstanding objections raised by Tesla bears to EVs in general, that there were better, more cost effective hybrid and plug-in hybrid cars available. Such considerations do have validity. If the Model S were offered at a lower price, Tesla would undoubtedly sell more of them.

Now that the Tesla bears have found a champion for their cause in the Bolt, such considerations suddenly seem to have fallen by the wayside. They shouldn't have. Basic economic considerations can't be dismissed simply because they're inconvenient. Any car introduced into the roughly $30,000-40,000 price segment has to be competitive with other vehicles in that price segment, regardless of their means of propulsion.

The fact that the Bolt isn't competitive points to the very clear difference between the Tesla strategy for the Model 3 and the Bolt. It's been very clear for some time that Tesla has no intention of building a vehicle that can't be used for a general purpose family car. This is why Tesla continues to build out the Supercharger network.

More importantly, Tesla is taking a fundamentally different approach to building a more affordable EV in the Model 3. This is the essence of the Gigafactory strategy, to reduce the basic cost of the battery pack by 30%.

For those of you who might have missed my recent article on the Gigafactory, let me reiterate some of my fundamental conclusions. First of all, the issue of the size of the Gigafactory that has received so much attention from the Tesla bears really turns out to be a red herring. The Gigafactory is already large enough to fulfill the ultimate goal of producing 500,000 battery packs a year by 2020. Tesla simply overestimated the size it needed for the Gigafactory when it was first announced.

Furthermore, the Gigafactory will be able to realize the 30% cost reduction in battery packs at a volume of about 100,000 packs a year. It doesn't need to ramp up to 500,000 in order to do this, although there are additional cost reductions as volume increases. This means that the 30% cost reduction will be available almost from the start of Model 3 production. This is because TSLA will be able to shift battery production into the new facility to support Model S and Model X, which will also benefit from the battery cost reductions.

Reducing the battery pack cost allows the company to build a practical, more affordable Tesla that really can be used as the principal family car. And this is essential to making a car in its price range competitive. Although most have assumed that the Model 3 would have about a 200-mile range, I doubt that Tesla will offer the Model 3 with less than 250 miles.

Trimming a third off the cost of the battery pack only saves about $5,000, reducing the cost to about $10,000. Whether this is sufficient to bring the car's total price down to $42,500 (before incentives) is certainly debatable. It's a legitimate argument on the part of the Tesla bears that the company doesn't have a good track record of making its price targets.

However, missing to the high side is preferable to what GM has done in building a car with such limited capability. Most likely, the Model 3, fully optioned out, will be more of a luxury compact car, with range approaching 300 miles, autopilot, and performance comparable to the Model S. I wouldn't be surprised if the price tag tops out at $60,000 (before incentives).

Investor Takeaway

I believe that investors should be okay with a Model 3 that doesn't achieve the affordability goal of a $35,000 (net purchase price, after incentives) car. I don't believe that even with the cost reductions provided by the Gigafactory, that the state of the battery technology is quite ready for the EV to go mainstream. Going mainstream really means being able to take on the Accord or Civic hybrids. Is Tesla ready to do that? I don't think so.

But I don't think it has to, either. Tesla should stay in the luxury car market for the time being. That's where the profits are, and if TSLA has any hope of becoming profitable, that's where it will need to stay. A truly mainstream EV will probably require further advances in fundamental battery technology.

Tesla's Gigafactory will give the Model 3 a fundamental advantage over contemporaneous EVs such as the Bolt. The Gigafactory will also allow all of Tesla's cars to become more affordable and more profitable. If Tesla stays in the luxury car market exclusively, it can expand annual production to 100,000 vehicles or more between the three models, and achieve profitability. I continue to rate Tesla a hold, but I'm more optimistic about its long-term viability after seeing the Bolt.

Disclosure: I/we 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.