As the reservations for the Tesla (NASDAQ:TSLA) Model 3 approach the 300,000 mark worldwide, this unveiling is certainly one for the history books. There should be little doubt the automotive and battery industries have fundamentally changed this week for the reasons we discuss in this article.
Shorts can find holes in the reservations all they want, but it's a telling commentary on how Tesla and battery electric vehicles, or BEVs, have caught the public's imagination when customers are willing to put even a token deposit down for a car that is likely three years out.
While a good fraction of the Model 3 deposits are likely from mid-range luxury car buyers, we find it likely that a very significant percentage of the orders are from Uber (UBER)/taxi drivers, long distance commuters and other ROI oriented buyers. These buyers see value in buying a BEV either due to carpool or other soft benefits or low O&M costs consistent with their usage model.
Beyond the value buyers, Tesla is likely attracting significant interest from consumers who are stretching their budget for the Model 3 purchase.
All things considered, it is likely that the ASPs of the vehicles in the order queue may be significantly lower than what a recent Musk tweet indicates (image below). Nevertheless, there should not be any doubt that, with this announcement, Tesla has emerged as powerful volume brand in the luxury car market instead of being a niche green subsidy driven brand.
The sheer size of these reservations is a wakeup call to traditional auto vendors - especially luxury brands such as Acura, Lexus, Infiniti, BMW (BAMXY), Mercedes, Porsche, and Cadillac. Regardless of how one wants to cut the order queue, it is safe to say these luxury brands are at risk of seeing significant declines in their market shares in the 2018/19 time frame.
Competitive forces imply that nearly all these vendors will respond with competing automobiles in the next two to three years. While Infiniti, BMW, and GM (NYSE:GM) may be ahead of other players in terms of in-house BEV experience, we can expect substantially the entire luxury market to introduce BEVs from organic or third party designs.
Simultaneously, a robust non-luxury segment of the BEV market is starting to develop with vehicles in the mold of Nissan (OTCPK:NSANY) Leaf, GM Bolt, BYD E6, etc. Outside of the US, urban vehicles are being redefined with automobiles such as Renault TWIZY - for about $10K-15K USD, depending on battery charges.
Couple these developments with the arrival to market of hybrids with the high voltage battery architecture, we are now potentially looking at an explosion of battery demand far in excess of most market research forecasts.
A beneficiary of this trend towards higher battery volumes and lower costs is likely to be solar and utility storage markets. The battery price declines from learning curve will be significantly steeper than past predictions due to the higher than expected volumes. These price declines will further accelerate the adoption of wind and solar in the energy markets which in turn will drive the battery market further.
While batteries are likely to be a commodity industry with few sustainable long-term winners, in the near to mid-term, battery manufacturer stocks will likely do well as demand exceeds supply. Excess demand will likely lead to healthy margins even in this commodity industry.
We believe we are about to enter a virtuous cycle with battery adoption and most strong battery players are likely to outperform the market for the next three to five years. While it is premature to talk about dollar impact on individual players, the likely beneficiaries of this trend are battery suppliers such Panasonic (OTCPK:PCRFY), LG Chem (OTC:LGCEY), BYD (OTCPK:BYDDY) and some lesser known manufacturers.
Disclosure: I am/we are long BYDDY.
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.
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