Report Claims Mercedes Ditches Tesla And Upgrades Electric Car To 310 Miles Of Range

Summary

• Auto Motor Und Sport, the leading German auto magazine, reports that Mercedes will stop buying Tesla powertrain components - batteries, motors, etc.
• Tesla's recent 10-Q and 10-K filings provide numbers that help an investor quantify the financial impact to Tesla of lost sales to Mercedes.
• Adding insult to injury, the article also says that this new all-electric Mercedes will get approximately 310 miles of range.
• The timing of this new all-electric Mercedes is uncertain, but is unlikely to arrive in US dealerships in the next 12 months.
• For Tesla to lose its Mercedes revenue, and to gain a new long-range electric car competitor, is not a positive incremental investment development.

Back in 2009, Daimler (DDAIY) (owner of Mercedes) bought a 9.1% stake in Tesla (NASDAQ:TSLA), which was sold less than a year ago. Now we learn why.

Germany's most prestigious automag, Auto Motor Und Sport, which usually has some of the best scoops about the future product plans of German automakers, now reports that Mercedes will replace Tesla as a vendor for its B-Class all-electric car. Starting a little over a year ago, Mercedes started delivering this car to US customers, to begin with in California.

Thus far, for the first seven months of 2015, 1,368 of these cars have been sold in the US, up from 774 in 2014. I do not have the complete statistics for how many were sold outside the US.

For this car, Daimler purchased the entire battery-electric drivetrain from Tesla - the battery, the electric motor, the inverter and the associated components. This has generated very helpful revenue for Tesla. From TSLA's most recent 10-Q filing:

As of June 30, 2015 and December 31, 2014, our accounts receivable were derived primarily from amounts to be received from financial institutions and leasing companies offering various financing products to our customers, sales of regulatory credits, as well as the development and sales of powertrain components and systems to automotive original equipment manufacturers (OEMs). As of June 30, 2015, we have two customers who individually account for 11% and 10% of our accounts receivable.

And from Tesla's most recent 10-K:

Powertrain component and related sales for the periods presented were related to powertrain component sales to Daimler under the Mercedes-Benz B-Class Electric Drive program which commenced in April 2014 and to Toyota under the RAV4 EV program. Powertrain component and related sales for the years ended December 31, 2014, 2013 and 2012 were $113.3 million, $45.1 million and $31.4 million. During the third quarter of 2014, we completed the RAV4 EV program.

In any case, if Daimler is one of the two largest customers for TSLA's accounts receivables, it could represent 10% of accounts receivable. In 2014, which was not a full year for this program, it was $113.3 million combined with a stub year for the Toyota (TM) program that didn't last the full year either.

At some level, this development was just a matter of time, but it now appears that this revenue will go to zero for Tesla. Mercedes had already gone to Panasonic (OTCPK:PCRFY) directly (without Tesla as the middleman) for purchasing the batteries for all of its other plug-in cars. Mercedes has already launched three of them (S550e, C350e and GLE550e), and has committed to launching seven more plug-in hybrids by the end of 2017, for a total of ten models.

Adding insult to injury, Auto Motor Und Sport also reports that in this process, Mercedes will upgrade the range for its all-electric car, the B-Class Electric, from today's approximately 100 miles to 310 miles. If this is on the US EPA cycle, it would put Mercedes in the market with a longer-range car than Tesla. Of course, there is good reason to be suspicious about the test cycle used for this range claim. We could very well be talking about the far more lenient European test cycle, which would put the range to barely above 200 miles, not barely above 300 miles.

Still, even at just over 200 miles, that would make Mercedes a direct competitor with the anticipated Tesla Model 3 due perhaps as early as late 2017, assuming no further delays. Given what we learned from Tesla's Model X, which was announced in February 2012 and promised for delivery in late 2013, one can't be faulted for believing that it might not arrive until 2019 or even later. My sense is that 2017 remains a (remote) possibility, but that 2018 would be a lot more realistic.

In any case, Mercedes sells its B-Class Electric for $42,375, plus destination charge, and if it keeps the price for a 310-mile range version, sans Tesla's powertrain, that would create a huge double-whammy for TSLA's investment case:

1. Tesla loses perhaps 10% of its accounts receivable, assuming that Daimler is one of the two TSLA customers constituting 10% or more of its accounts receivable, as per the most recent 10-Q cited above.

2. The company gets one new formidable competitor, selling a car with potentially more range for potentially approximately half the price. Even if the range turns out to be "only" 200-something miles, it means one more competitor for Tesla's Model 3, and a time-to-market challenge.

There are obviously a lot of things we don't know from the Auto Motor Und Sport article. We don't know the timing of this next-gen car. I don't think it's about to appear in US dealerships in the next 12 months. This sounds like something closer to two years away than one year. At a minimum, whether the "general" non-electric next-gen B-Class Mercedes will be available at some particular point, isn't the same as this all-electric non-Tesla-based version would be available at such time.

We don't know which battery vendor Mercedes will use for this car. It has been using Panasonic for its other plug-in cars, but perhaps it will use LG (OTC:LGEAF) or Samsung (OTCPK:SSNLF) for this car. It really shouldn't matter, as long as it gets the job done.

More fundamentally, the Auto Motor Und Sport article itself - and its two major claims, vendor shift and tripling the range - is speculation, as if that weren't obvious anyway. But ask yourselves: How often is Auto Motor Und Sport wrong about these kinds of details? The reason for its reputation in predicting German cars under development is that it tends to be right. That said, the reader should be aware of the single-source nature of this information, which is always a major risk, even if that source is considered to be the best in the business.

The bottom line is this: This kind of development was almost 100% inevitable. It has been part of the short thesis on the stock. However, it's one of those things that was always so far out on the horizon that it didn't feel like a major alarm bell. This is what now changes. Tesla's Mercedes relationship, from an investment standpoint, now goes from a plus in the revenue column to a minus, as well as becoming a major competitive threat with what sounds like a formidable product.

Basically, Tesla loses the revenue, gets a new competitor, and sees a reduced (eliminated?) scarcity value for its investment case. Not an incremental positive, to say the least.

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.