Tesla's (NASDAQ:TSLA) goal this year used to be to sell at least 100,000 cars. Then it became 80,000 to 90,000 and now 80,000 looks more like the best-case scenario, despite dramatic discounting driving unit sales especially in the third quarter.
But do you know what other premium car is targeted to be selling at a rate of 80,000 a year on a global basis? You'd never guess, because it's one that's largely unknown and ignored in the U.S.
It's the Kia Cadenza, which is just now becoming available in a completely new version, where 100% of the car is new from scratch. It goes on sale in the U.S. within the next few weeks.
Before I explain where this car will be sold, and how the sales volumes are expected to break down geographically, what's the story behind this car anyways?
The Kia Cadenza has its strongest market in the home country, where it is also built, in South Korea. It's a car for executives who may not be as high up as C-level in the largest companies, but just one step below. In other words, you may have a driver, but not a bodyguard.
For the few who have been paying attention, there has been a Kia Cadenza in the market already, sold not only in the Korean home market, but also in the U.S. and in parts of the Middle East. In the U.S., sales have been very poor -- only 7,343 in 2015, down from 9,267 in 2014. Basically, a very insignificant drop in the bucket by almost any measure.
The thing is, Kia is now introducing an all-new Cadenza. It's got nothing in common with the outgoing, poorly selling Cadenza, except for the price and general size of the car. The outgoing Cadenza looked very… nondescript, to put it politely. It was not a premium design to which premium car buyers aspired. Not at all.
The all-new 2017 Cadenza is something different altogether. Basically, the design has been elevated to being on par with the finest luxury cars costing twice as much. This has been driven by Kia's head of design, Peter Schreyer, who was previously a top designer at Audi where he penned the iconic TT.
As you can see from the picture of the 2017 Cadenza above, Kia has gone for the Maserati (NYSE:FCAU) look, as it tries to compete with much more expensive cars. Speaking of price, the new Cadenza will carry MSRPs from approximately $33,000 to $45,000, including $895 delivery charge.
With the all-new 2017 Cadenza, despite the fresh and upscale styling, Kia has gone for a very conservative and defensive approach in terms of some of the engineering parameters. Here are two examples of how Kia is almost literally fighting Tesla in two areas:
The doors are 18% more dent-resistant.
Think about that for a moment. Who shops for a new car analyzing the extent to which a door is relatively dent-resistant or not? It's important for your happiness and for your relationship with your insurance company, but honestly: This is something most people don't think about when they go buying a car. You can see these and many more product details in this presentation.
The Kia Cadenza's dent-resistant doors are helpful in defending against being parked next to a Tesla Model X, whose front doors have a reputation for opening up automatically, smashing into the car parked next to it:
So when the Model X owner parks next to you, and the Tesla decides to dent your car with its auto-opening front door, the 2017 Kia Cadenza either (A) won't get a dent in the first place, or (NYSE:B) the impact will be milder, reducing the cost of repair.
Short of fixing the fundamental problem, what the Tesla really ought to have, so that it does not dent the cars parked next to it, is a protective feature that Skoda is now introducing on the 2017 Kodiak SUV, which is sold in Europe. Look at the 4 minute and 27 second mark in this video to see how it works.
It is basically a rubber strip that automatically deploys when you open the door, quickly "turning around" the door's edge and protecting the door against an accidental dent. Combined with Kia's defensive door-dent engineering, this may help reduce the societal damage caused by Tesla's malignant doors.
2. The engine has undergone extreme durability testing.
Kia tests its engine by, among other things, running it at full throttle (max RPM) for 41 days straight. They claim that's 100,000 miles. Clearly the engine has a much longer life than 100,000 miles, but by running it at full throttle around the clock for 100,000 miles, that should tell you something about its design for durability.
Contrast the requirement that every Kia can be run at full throttle around the clock for 100,000 miles, with Tesla. The reported data shows that two-thirds of Teslas -- at least as reported a year ago -- had experienced at least one drivetrain swap-out by the time they hit 60,000 miles. How would you like to have your engine being changed out once or twice every 30,000 or 60,000 miles?
This torture-testing is one of the reasons Kia is able to offer a 10 year 100,000 mile warranty, and not see its warranty expense skyrocket as a result.
The rest of the 2017 Kia Cadenza has some similarities, and some important differences, when compared against the Tesla Model S:
The definitional differences are easy to describe. The Tesia is a rear wheel (or all wheel) drive all-electric car, whereas the Kia Cadenza is a front-wheel drive gasoline-only car. That's an important difference for some buyers, whereas others care little about such technical "under the skin" differences.
The similarities are more in terms of the user experience: Both the Tesla Model S and the 2017 Kia Cadenza are very comfortable cars that can fit five adults. They have extremely compliant suspensions, and are library-quiet inside the cabin. The front seat comfort in both cars is excellent, as are their seating positions and premium steering wheels.
In the rear, there are some differences: The 2017 Cadenza has a vastly more spacious and comfortable rear seat. The Tesla's passenger interior space is 94 cubic feet. The 2017 Cadenza is at 107.8 cubic feet.
However, unlike Tesla Model S, which is a hatchback, the Cadenza is a sedan. As such, the Tesla has a far more versatile cargo area, more akin to a crossover.
The instrumentation is very different: The Tesla has its famous all-touchscreen, which I generally like very much. The Kia has a more elegant mix of buttons, knobs, and a screen where Apple (NASDAQ:AAPL) CarPlay and Android (NASDAQ:GOOG) (NASDAQ:GOOGL) Auto are available. I like both approaches, but would like Tesla's more if it were able to match Kia's ability to display Apple CarPlay and Android Auto.
Then there is the price.
At $33,000 the Kia Cadenza's starting price is almost exactly half of Tesla's pre-subsidy price. Keep in mind that on a Kia -- just like on many other cars in the market -- you can typically get a 10% or greater discount from your dealer, especially if you take one off the lot instead of custom-ordering it.
Until now, the Kia Cadenza was obviously not cross-shopped by Tesla buyers. This may change with this all-new 2017 design, as far as these two cars compete in terms of the sheer beauty of the design and general size/practicality. You want a really beautiful car in this general size, and an SUV/crossover isn't to your liking? Well, then you may consider both of these two cars.
A more traditional comparison would be to compare the 2017 Kia Cadenza with these cars:
-- Buick (NYSE:GM) LaCrosse, starting at $32,990
-- Lexus ES, starting at $39,875
-- Cadillac XTS, starting at $46,290
I started out by saying that Kia expects to sell approximately 80,000 Cadenzas per year in 2017, slightly more than its rate of sales over the last year or two. So what are we really talking about here, with these 80,000 units per year? Where will Kia sell this car?
It breaks down like this:
-- South Korea: 5,000 cars per month
-- North America: 1,000 cars per month
-- Middle East: Almost 1,000 cars per month
All in all, that would mean close to 84,000 per year, or most likely slightly more than Tesla will sell world-wide in 2016 -- and that includes the Model X, not just the Model S.
It is obvious that until this point in time, Tesla has been growing faster than Kia's Cadenza franchise, and odds are that it will continue to be the case. However, which is more profitable -- Kia's Cadenza franchise, or Tesla overall?
What does all of this mean for Kia's valuation? At $200 per share and 162 million fully-diluted shares, Tesla's fully diluted market cap is around $32 billion. Does that mean that Kia too ought to valued in that neighborhood?
Does Kia's presumed superior profitability mean that it ought to be valued higher? Or does the Cadenza's presumed lower growth rate mean that it ought to be valued lower? Or ought those two factors mostly cancel each other out?
While we await the outcome of that debate, however, Kia has not waited with its engineering: The all-new 2017 Cadenza has 18% more dent-resistant doors, protecting itself against the Tesla Model X and its aggressive door-denters.
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 and long FCAU and GOOGL. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers. Kia hosted a product launch event.