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Big Auto faces a dilemma as it tries to chase Tesla
Posted on April 06, 2020 by Charles Morris
The years of steady sales and plentiful profits for carmakers have experienced a “rapid unplanned disassembly,” if I may employ a bit of Muskian dark humor. The future is unpredictable, but no one doubts that the auto industry has a very ugly year ahead of it.
Above: Tesla Model Y (Source: EVANNEX; Photo by: Casey Murphy)
There’s an argument to be made that Tesla may suffer less than others, and that the current crisis situation may accelerate the disruptor’s rise to dominance, and the fading away of the legacy automakers.
At first glance, this may seem surprising, to say the least. Comparatively tiny Tesla has nothing like the financial resources available to the global giants, and it’s certainly true that, despite the company’s current strong cash position, it could get into trouble if the production shutdown of its US plants lasts too long.
On the other hand, Tesla’s vehicle sales have been comparatively strong. For Q1 2020, delivery figures were up 40% compared to the previous year (despite the expiration of the federal EV tax credit), while the overall US auto industry was down 29%.
Above: Model 3 and two Model S (Source: EVANNEX; Photo by: Casey Murphy)
As Loup Ventures sees it, Tesla’s demand is outpacing that of the auto industry as a whole, and it’s going to get harder and harder for the legacy automakers to catch up. In a recent article, the venture capital firm tells us, “Tesla is winning because they have a product that is measurably better than both gas and electric competitors.”
The first quarter’s strong delivery numbers aren’t likely to last—Tesla, along with all the other automakers, is bound to see sales slide in the next quarter. However, for the full year, Loup Ventures expects Tesla’s sales growth to outshine other automakers by 15-25%. “As the company scales to meet demand, Tesla’s price performance gap versus other car makers will widen,” says Loup.
How can this be? Other automakers have strong new EVs on the market, and if they start producing those in volume, they could leave Tesla in the dust. This is just what many in the mainstream press have been insisting would happen for the past couple of years. However, as better-informed observers have pointed out, this isn’t likely to happen, because the legacy automakers aren’t producing EVs at scale, and they have no intention of doing so.
Above: A look back at Loup Ventures' Gene Munster and his earlier views on Tesla's threat to Big Auto (YouTube: Benzinga)
As Loup puts it, the fossil brands are “producing EVs at subscale, which creates a dilemma: If traditional auto releases a car with features and range at parity and sells the car at cost, it will be priced 10-25% higher than a comparable Tesla. This will soften demand and lead to further market share loss. If traditional auto subsidizes vehicle cost to gain market share, they will lose money with limited margin cushion. The more they sell, the more money they lose.”
How does this topsy-turvy tale conclude? “Taking it to the logical end,” write Loup Ventures’ analysts, “we believe car companies that have been around for 50-plus years will eventually (10 years from now) be forced to restructure or go out of business.”