GM's Chevy Bolt Is Not Serious Competition For Tesla's Model 3

| About: General Motors (GM)
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Summary

Reviews say GM's Chevy Bolt is a great car, but the hype has gone too far. The Bolt is not a "Tesla killer" or even serious competition for Tesla.

Tesla's Model 3 is far superior to the Chevy Bolt in charging, aesthetics, and ADAS technology. Excluding tax credits, the Bolt also costs more.

The data seems to indicate that electric cars will soon be cheaper than equivalent gasoline cars, if they aren't already.

As a result, although electric cars are a small percentage of sales today, their share will grow rapidly, eventually constituting the entire automotive market.

With the Chevy Bolt, GM appears to be taking electric cars seriously. However, Tesla is much better positioned to capitalize on the coming wave of electrification.

General Motors (GM) deserves kudos for the Chevy Bolt, which is both apparently a great car and a step forward for electric vehicles. However, the hype around the Chevy Bolt has gotten a little out of control. Some view it as a serious competitor to the upcoming Tesla (TSLA) Model 3. Bloomberg, for instance, referred to it as a possible "Tesla killer."

These assessments overlook striking differences between the two cars, particularly the Model 3's considerable advantages in charging, aesthetics, and advanced driver assistance system (ADAS) technology. On top of this, the Chevy Bolt costs $2,500 more than the Model 3. Finally, GM plans to produce only 30,000 Chevy Bolts per year, whereas Tesla plans to produce 400,000/year.

The Chevy Bolt (left) and the Tesla Model 3 (right).

The significance for GM and Tesla

This is significant for GM because it shows the company is still behind Tesla in the car industry's transition to electric vehicles, although GM appears to be ahead of other competitors. Bloomberg New Energy Finance (BNEF) forecasts that electric cars will achieve cost parity with gasoline cars in 2022 when the cost of battery packs falls to $200/kWh. Tesla has already pushed its battery packs below that threshold. This suggests that if BNEF's forecast is correct, a cost advantage for Tesla's electric cars is close at hand. Much may depend, therefore, on how quickly automakers can transition to electric vehicle production. GM still has a lot of work ahead to catch up with Tesla, but the Chevy Bolt is a sign that the company is taking electrification more seriously than most.

This is significant for Tesla because it means that the only serious competition for the Model 3 will be gasoline cars. Gasoline cars in the Model 3's price range typically also have an aesthetic disadvantage. All cars have a disadvantage in ADAS technology. Gasoline cars also lack the acceleration, handling, noise, energy cost, and environmental advantages of electric cars. With the Model 3, Tesla has the potential for an industry altering product that sets new expectations for what a car is.

In Part 1 of this article, I'll compare the Chevy Bolt and the Model 3 in five areas: price, charging, aesthetics, ADAS technology, and planned production volume. In Part 2, I'll explore the implications of this comparison for the competitive positioning of GM and Tesla in the automotive industry as it transitions to electric vehicles.

Part 1: The Chevy Bolt and the Model 3

Chevy Bolt

Model 3

Base Price

$37,500

$35,000

Charging

50 kW maximum

145 kW maximum

Aesthetics

6% prefer it

94% prefer it

ADAS technology

Basic features

Autopilot

Planned production volume

30,000/year

400,000/year

Price

At a $37,500 base price, the Chevy Bolt costs $2,500 more than the Model 3 at $35,000. All else being equal, the less expensive car is preferable. The Model 3 has an advantage from the start.

However, in the United States, both cars will initially receive a $7,500 federal tax credit. The tax credit begins to phase out when a manufacturer sells a cumulative 200,000 electric vehicles. Tesla will hit this threshold before GM, meaning that at some point the Bolt will become $5,000 cheaper than the Model 3 in the U.S.

By the same token, if GM sells the Bolt (or other electric vehicles) in a similar volume to the Model 3 - Tesla plans to sell 400,000 per year - then its tax credit will also be phased out. The tax credit therefore does not provide GM with any advantage over Tesla in competing on total sales volume.

Charging

The Chevy Bolt is impractical for driving distances longer than its range of 238 miles. Attempting to take the Chevy Bolt on a long road trip entails "a fruitless search for a charging station or waiting hours (and hours) for the car to be adequately recharged." Not only does the Bolt lack access to an extensive Level 3 charging infrastructure, the car itself lacks the hardware to charge faster than 50 kW. To drive the 383 miles from San Francisco to Los Angeles, a driver would have to stop for about an hour to charge.

By contrast, Tesla has an extensive Supercharger network that allows convenient travel across North America. Superchargers charge at a maximum rate of 145 kW. On the same road trip in a car with the same range, a driver would only need to stop for about 20 minutes.

Although most drivers rarely travel more than 238 miles in a day, range anxiety remains a top concern for prospective electric car buyers. Being tethered to a 119-mile radius is not something people like, particularly in North America where for geographical, infrastructural, and cultural reasons the ability to drive long distances is important. For instance, a sizeable percentage of American households take a yearly family vacation by car. Even if the family car only travels more than 238 miles in a day once a year, car buyers may consider the ability to do so conveniently a must-have.

Aesthetics

Aesthetics is the most important factor in a car buyer's decision. I decided to conduct my own research on the aesthetics of these two cars by surveying 100 people located in the United States. The respondents chose to complete the survey (for which they were paid) via Mechanical Turk, and were otherwise a random sampling. The names of the cars or the companies was not mentioned in the survey description or in the survey itself.

The result: an astonishing 94% of respondents said they preferred the Model 3. Which car is more aesthetically appealing to consumers? No contest.

ADAS technology

The Chevy Bolt includes only basic driver assistance features. The Model 3, on the other hand, is equipped with advanced software features and full self-driving hardware. Although Enhanced Autopilot features should be available later this year, in the chart below I've only included features that are currently enabled on Hardware 2 versions of the Model S and Model X.

Another distinct advantage of the Model 3's ADAS technology over the Chevy Bolt's is that the Model 3's will receive performance updates about every month or so and will continuously improve over time. The Chevy Bolt has the technical capability to receive over-the-air updates, but it appears that GM intends to use the capability to patch existing software rather than to improve performance or add new features.

Chevy Bolt

Model 3

Lane departure warning

Lane keep assist

Low-speed automatic emergency braking

Forward collision warning

Side collision warning

Traffic-aware cruise control

Automated steering

Automated lane change

Self-parking

Summon

Planned production volume

Obviously, if GM produces 30,000 Chevy Bolts per year and Tesla produces 400,000 Model 3s per year, GM can take away a theoretical maximum of 30,000 sales per year from Tesla or 7.5% of its planned total annual sales volume. Unless GM's production plans change or Tesla's production plans fail to come to fruition, this is the worst-case scenario for Tesla.

When GM still qualifies for the $7,500 federal tax credit and Tesla no longer does, the price of the base Chevy Bolt will be $5,000 less than the price of the base Model 3. Is a savings of $5,000 worth accepting a car that is impractical for driving long distances, that is less aesthetically appealing, and that has far more rudimentary ADAS technology? Without market research on this question, I can't say for sure. However, based on the general principles of consumer behavior in the automotive market - for instance the paramount importance of aesthetics - I'm skeptical that more than a very small minority of consumers would choose the Chevy Bolt over the Model 3.

The Bolt is good for GM, but the Model 3 is better for Tesla

The Chevy Bolt is a critically acclaimed, long-range, relatively low-cost electric car for the mass market. GM's accomplishment here should not be understated. Right now the low sales volume of the Bolt has a negligibly small effect on GM's top line because the company sells 10 million vehicles per year. However, the Bolt is a promising sign for the company's future, as long as GM keeps its eye on the ball and continues to iterate. In order to appeal more to consumers, GM should redesign the look of the next generation Bolt. It should also upgrade the Bolt's charging hardware and add its Super Cruise ADAS technology. If it can do that cost effectively, as well as build out more and faster Level 3 charging infrastructure and ramp up production, then it may have a true hit on its hands.

However, some industry observers have overstated GM's accomplishment with the Bolt by suggesting that it will be a serious competitor to Tesla's Model 3. As I have shown in this article, the Bolt falls far behind the Model 3 in charging, aesthetics, and ADAS technology. With 373,000 reservations at last count and climbing every week, consumers have expressed a level of enthusiasm rarely if ever seen in the automotive industry. The stories of hundreds of prospective customers lining up outside a Tesla store in the rain to reserve a Model 3 is more reminiscent of the release of an Apple (AAPL) product than a car. As great as the Bolt might be, it just isn't at that level.

Prospective customers line up at 5 AM in the rain at the Tesla Store in Montreal to reserve a Model 3. Photo credit: nitrodude.

Part 2: GM and Tesla in the Electric Future of Cars

Source: The International Energy Agency's Global Outlook EV 2016 report.

The tipping point for electric cars

Here's an underappreciated point about electric cars that I'll illustrate with a thought experiment. Suppose that using Technique A, the industry standard, an ounce of gold can be mined for $200. Using Technique B, it costs $300 to mine an ounce of gold. As a result, Technique B has a reputation as an impractically expensive mining technique.

However, the cost of Technique B is dropping by $25 every year. In five years, Technique B will cost $175 per ounce of gold, while Technique A will still cost $200. In eight years, Technique B will cost $100. Suddenly, the dynamic is flipped. Now Technique A is impractically expensive and Technique B will become dominant.

This is what is happening with gasoline cars and electric cars. The point where electric cars become cheaper than gasoline equivalent is either fast approaching or has already been reached, depending on the estimate you use. The price of battery packs for electric vehicles has been dropping 13% per year on average - and significantly faster for Tesla.

As mentioned above, Bloomberg New Energy Finance (BNEF) estimates that the tipping point for electric cars is $200/kWh. Tony Seba, a lecturer at Stanford University in Entrepreneurship, Disruption and Clean Energy, has this assessment:

Once it gets to $US100/kWh, it is all over. ...when batteries are at $100/kWh, gasoline vehicles will be obsolete. Not on their way out, obsolete.

Battery manufacturers are generally secretive about their costs. Neither GM nor its battery supplier, LG Chem (OTCPK:LGCLF), has disclosed its battery pack costs. However, GM angered LG Chem by revealing the cost of the battery cells - different from the battery packs - in the Chevy Bolt.

In April 2016, Tesla said simply that its costs were "below $190/kWh." Based on a promotional video released by Tesla, Electrek writer Fred Lambert speculates that Tesla's battery costs may have been below $124/kWh as of February 2017. If Lambert is correct, then Tesla is at least close to Tony Seba's $100/kWh threshold and may already have already crossed it. However, it should be stressed that this number has not been confirmed and Lambert may be drawing a mistaken conclusion.

This data suggests that electric car makers could be on the cusp of having a cost advantage over gasoline car competitors. If so, electric cars will outcompete equivalent gasoline cars on price.

Battery cell production at Tesla's Gigafactory 1 in Nevada. Source: TED.

Electric cars are critical in the self-driving on demand market

In the above section, I discussed the upfront cost of electric cars. Over the next few years, another metric will take on critical importance: the cost per mile driven. The advent of shared fleets of self-driving cars that can be summoned on demand will further accelerate the transition to electric vehicles. When cars are either driving or charging up to 24 hours per day, energy costs, maintenance costs, and vehicle lifetimes shift from being somewhat important to being make-or-break for a company's business model.

Analyst Levi Tillemann-Dick estimates that a self-driving electric car could cost up to 80% less per mile than a gasoline counterpart. This means that companies using fleets of electric vehicles will be able to charge significantly less for rides, forcing any competitors that might use gasoline vehicles to switch to electric vehicles or cede the market.

Electric cars are a small percentage of sales today, but their share will grow rapidly

It is this understanding of the future that drives me to put so much focus on the Chevy Bolt - a car with planned sales of 30,000 units per year in a company that sells 10 million vehicles per year - and on Tesla - a company with planned sales of 500,000 cars per year in 2018 in an industry that sold 90 million cars in 2015. Eventually, electric vehicles will be the entire vehicle market. Based on plummeting battery costs and the upcoming advent of self-driving on demand, the transition to that eventuality will occur more rapidly than many industry observers currently anticipate.

If some companies can make this transition faster than their competitors, their competitive advantage could range anywhere from considerable to devastating. And yet there is a prevailing complacent, inert attitude of business-as-usual in the auto industry, with one industry analyst arguing for example that Ford (F) should cut back on developing new technologies and focus instead on incremental improvements to its gasoline pickup trucks. Investors should use an automaker's level of seriousness in its electrification and self-driving efforts to gauge its probable financial and competitive health over the coming years.

The upshot: GM gets a B-, Tesla gets an A+

Electrification and self driving will rapidly take over the automotive industry. Selling gasoline cars to individual human drivers will become a difficult business model. In evaluating an automaker's long-term growth prospects, what matters most is whether the company will be able to surf the wave of change or get crushed by it. For this reason, I view an automaker's present-day financial fundamentals as secondary to its technological and competitive fundamentals. Over a long time horizon, the former matters only insofar as it enables a company to execute a strategy based on the latter.

Internal research and development efforts are often tough to assess. It is hard to distinguish real progress from optically appealing but kludgy demoware or outright vapourware. A crude but perhaps the most effective test of progress - and seriousness - is the most ambitious product that a company has made publicly available. For GM, that is the Chevy Bolt. For Tesla, that is the Model 3 - or will be in a matter of weeks.

With the Chevy Bolt, GM is doing well. I give it a grade of B-. This grade may seem stingy, but GM has yet to prove that the Bolt isn't just a compliance car. If GM makes adjustments to deliver mass appeal and steps up production, I would easily change its grade to a B+ or A-.

The launch of the Model 3 is shaping up to be Tesla's iPhone moment. Venture capitalist Marc Andreessen recently made this comparison:

If you squint at Tesla one way, it looks like Apple circa 2007, 2008 - where they've released the iPhone, they just haven't sold many yet. But they're going to sell a ton. Another way of looking at Tesla is they're Apple in 1992 with the MacIntosh. Yes, their integrated hardware-software is good, but other people are going to come up with software as well. And I think that's the big question on Tesla - which way does it tip?

Tesla's lead in price, charging, aesthetics, ADAS technology, and production volume puts it well in the lead of the auto industry's transition to electric vehicles. Its powerful brand and devoted fan base, willing to endure early morning lines in the rain just to reserve a car, set Tesla up for breakout success with the Model 3 and future vehicles like the Model Y. Tesla gets an A+.

Marc Andreessen's recent interview with Barry Ritholtz. Andreessen's comments about Tesla begin around the 27 minute mark.

A plausible scenario for Tesla is a snowball effect wherein its success with the Model 3 and its self-driving efforts enables it to further accelerate its vehicle production ramp and to fund the development of new vehicles and energy products. This in turn produces more capital to reinvest in manufacturing and product development, thereby preventing competitors from catching up and perhaps even pulling further ahead. This is why even as Tesla trades at a new all-time high I see this stock an immense growth opportunity.

My recommendation: Buy TSLA and hold on a long-term-basis.

Author's note: In a previous version of this article, I mistakenly mischaracterized EnerTuition's argument about the Chevy Bolt and the Model 3. I encourage readers to read EnerTuition's article to gain an accurate understanding of their argument. I apologize for the error.

Additionally, I confused battery cell costs and battery pack costs, which are distinct. The article is now corrected. I apologize for this error.

Disclosure: I am/we are long 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.