GM And Nissan Send Thank You Letters To Volkswagen: Adios, Tesla

| About: Tesla Motors (TSLA)

Summary

Volkswagen to spend $2 billion to build a competitor to Tesla’s Supercharger network in the U.S.

This removes Tesla's single most important competitive advantage in electric cars.

This capital investment also includes a hydrogen fueling network for fuel-cell cars.

GM and Nissan are the main near-term beneficiaries of this giant gift from Volkswagen.

Toyota, Hyundai, Honda and Mercedes also send Volkswagen thank-you letters for funding the hydrogen car future.

The first two battery-electric cars that will have 200-240 miles of range and cost under $40,000 will be the Chevrolet Bolt (NYSE:GM) and Nissan (OTCPK:NSANY) LEAF 2.0. The Chevy Bolt will be in the market by the fourth quarter of this year, and the Nissan LEAF 2.0 is rumored to be in the market six months thereafter, the second quarter of 2017.

The only fly in the ointment for GM's and Nissan's long-range electric cars has been the long-distance charging network. Tesla (NASDAQ:TSLA) has the only realistic long-distance battery-electric solution in the market today, thanks to its investment in its "Supercharger" network.

While Tesla's Supercharger network isn't as convenient as regular gasoline or diesel, it's also the case that it is infinitely better than any other electric car charging network. For those of us who have used all of these charging networks, it's obvious why. The Tesla Supercharger network is faster, and the stations are located in the right and relevant places, with many stalls in each location.

So the question has been: What will GM and Nissan do, in order to compete not only on the car itself, but also with respect to the electric car charging network?

Today, we learned the answer. Volkswagen (OTCPK:VLKAY) will pay for it!

Here is the relevant document.

And here is the relevant section:

The Consent Decree also requires Volkswagen to invest $800 million dollars in ZEV infrastructure and access over a 10-year period in California. Volkswagen will be installing zero-emission vehicle fueling infrastructure (for both electric and hydrogen-powered cars), funding consumer awareness campaigns to increase the zero-emission vehicle market, and investing in projects such as car-sharing programs that will increase access to zero-emission vehicles for all consumers in California. These brand-neutral projects will support the next generation of zero-emission vehicles that will be sold in California, helping to grow the state's burgeoning ZEV program, and will help lay the zero-emissions foundation for achieving the State's air quality and climate goals.

Under the terms of the settlement, Volkswagen will submit ZEV investment plans every 30 months, covering $200 million dollars in investments in each plan, until the full funding level is expended. ARB will provide comments and approve each plan after those comments are addressed. Under the broader national settlement, Volkswagen will be investing an additional $1.2 billion under the settlement's National ZEV investment requirement through the other states for similar projects that support the transition to zero-emission vehicles in areas of the U.S. outside California.

What does this mean? In short, it means Volkswagen will be spending $800 million to build out the electric car charging network in California, plus another $1.2 billion for the rest of the country. That's $2 billion in total.

I can hear your objection already: "But doesn't Tesla benefit from this as well?"

Yes it does, sort of, in isolation. Using an adapter, Tesla owners should be able to use this network just like all other electric cars.

However, you can't look at it that way - in isolation. There is a far larger and much more important point here, which yields the opposite conclusion:

And that point is: Today, Tesla is the only one with an acceptable long-distance battery-electric car charging network. As a result of this settlement and what Volkswagen will be funding, it won't be the only one anymore. Every other automaker will be up to par. Tesla's one remaining advantage of any significance evaporates.

If that's not clear enough, let me spell it out for you in another way: Let's say that at some point between October 2016 and December 2017 you're looking to buy either of these three cars:

  1. Chevrolet Bolt, with 200-240 miles of range.

  2. Nissan LEAF 2.0, with 200-240 miles of range.

  3. Tesla Model 3, with 215-230 miles of range.

Granted, these cars will have a variety of other differences. One might be narrower than the other, have different headroom for the rear seat passengers, a different cockpit/interior that will work better for you and your tastes, etc. Those are natural differences between cars of any type, electric or not.

However, if Tesla is the only company with a long-distance charging network, that may be a particular deciding factor given that these are EVs, after all. The Supercharger advantage will matter to some people, although not as much to others, but all other things equal it's certainly to Tesla's advantage. I've been arguing that for over three years.

For that reason, it was not a matter of if but when and how and by whom precisely, was going to build a Supercharger network for non-Teslas.

Now, we have the answer.

And that answer is that $2 billion will be spent, U.S. nation-wide, by Volkswagen. The main beneficiaries are all of the companies that seek to compete with Tesla, who are now getting this network essentially for free. Do you realize that GM just got a $2 billion gift from Volkswagen?

In the short run, those companies are GM and Nissan, as they are first to market with a relevant product - a long-range BEV priced under $40,000. By 2018, the Audi will be there, and in 2018-2019 we will see most of the other automakers join the party: Jaguar Land Rover, Ford (NYSE:F), Mercedes, Honda (NYSE:HMC), Volvo and others.

Basically, they can now all go to market not worrying about having to invest in battery-electric car charging infrastructure. Volkswagen will have done it for them.

Of course, actually building this network will take time. The settlement says that VW will spend $200 million every 30 months in California. Presumably there will be an equivalent ratio for the other 49 states ($300 million every 30 months). That would mean a $500 million investment every 30 months for the U.S. as a whole.

Look, I know that $500 million every 30 months is peanuts for the global automotive industry as whole, but still - this is huge as far as electric car charging is concerned. Every automaker, starting with GM and Nissan, ought to send thank-you letters to Volkswagen, for now making it easy - and free -for them to compete against Tesla.

There is a second component to this settlement that's also relevant to Tesla. The settlement includes investment in hydrogen stations for hydrogen fuel cell cars. Currently, construction of 100 stations in California has already been funded and are under construction, with at least 40 or so on schedule to be completed by the end of 2016.

This is why you are now starting to see hydrogen fuel cell cars from Toyota and Hyundai on the streets in California. Honda will be joining this party later this year with its model. Mercedes looks to enter this market with a new model by the end of 2017.

Hydrogen stations work much like regular gasoline/diesel stations to the consumer. Basically, you fill your car with 300 or so miles of range in approximately five minutes or less. And the good news is that it scales to larger vehicles, with larger tanks, without adding too much weight or time to fill -- unlike battery-electric cars. You don't need 1,000 lbs of batteries to add an additional 200-300 miles of range, as with a pure battery car.

Once the infrastructure has been built, the problem with hydrogen cars is the price of the fuel itself. Gasoline is currently below $3 per gallon in the U.S., and hydrogen is currently significantly more expensive. However, in the meantime, Volkswagen funding this infrastructure build-out should cause Toyota, Hyundai, Honda and Mercedes to also send thank-you letters to Volkswagen.

Conclusion: This changes everything

With Volkswagen paying $2 billion to build out battery-electric and hydrogen charging stations in the U.S., the remaining obstacle to adoption of such vehicles is removed. While it takes a few years to complete the construction phase, there is no longer any question as to the ability of the auto industry to compete with Tesla's Supercharger proposition.

Disclosure: I am/we are 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.

Additional disclosure: At the time of submitting this article for publication, the author was short TSLA. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.