Should Tesla Be Worried Of Competition ?

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As large automakers increase their focus on electric vehicles (EVs), competition in this space, considered to be Tesla Motors‘ (NYSE:TSLA)  home ground, is intensifying. Ford Motors announced earlier in December that it will invest an additional $4.5 billion in electric vehicles by 2020. [1]  General Motors’ battery powered Chevrolet Bolt, which will have a range of 200 miles between charges, is expected to be launched in 2016. [2] Given the focus on clean vehicles and long term targets of zero emission, [3] an increasing number of automakers are now investing heavily on electric vehicles. Tesla has a competitive edge in this market given its supercharger network and direct selling model. Further, most new players are planning to enter the non-luxury segment, where Tesla’s Model 3 is yet to be launched. Even though Chevrolet Bolt of General Motors appears to be a direct competitor for Model 3, we believe given the low penetration of EVs in the auto market, as more players introduce these cars it should lead to a greater acceptance of this category, creating a larger market for all players and competition should not be a concern in the near future.

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Tesla Has A Competitive Edge In The EV Market

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Tesla’s supercharger network which hosts more than 3,000 superchargers in the U.S. providing convenient charging options to its car users, definitely gives it a competitive edge , given that  no other player has been able to replicate this kind of network so far.  While other car makers are working on fast charging alternatives — Ford stated that it plans to commence production of the new Ford Electric next year, which will deliver 80 percent charge in 30 minutes (similar to Tesla’s Model S) — competing with Tesla on the charging network might be tough for other auto makers, given its first mover’s advantage. Tesla is the only automaker exclusively developing electric cars on a significant scale and this gives it an edge over other automakers that also need to focus on their traditional models. Further, this allows Tesla to have a direct selling model which reduces overhead costs. Given the after sales service requirements of traditional cars, it is difficult for other automakers to adapt a direct selling model.

Success Of Gen III (Model III) Will Be Key

Tesla plans to introduce its third major vehicle currently referred to as Gen III, in 2016 which will target the mass market electric cars. We expect Gen III to capture a market share of nearly 10% in the EV market by the end of our forecast period and this model accounts for more than 30% of Tesla’s valuation according to our estimates.

General Motors’ battery Chevrolet Bolt appears to be a direct competitor to this model and is expected to be launched around the same time. However, we believe introduction of  these models should expand the low cost EV market, thus working in favor of Tesla. A report by Frost Sullivan states that electric vehicles will see a surge in popularity by 2020 as the focus increases on environment sustainability. [4] Several players such as BMW, Daimler, Volvo are expected to launch new models by 2017.  As an increasing number of countries impose strict emission standards, the focus on electric vehicles by traditional car makers will increase, leading to many more entrants in this market. However, in the near future we believe this will work towards the advantage of Tesla as it will enable expansion of the EV market. As Gen III’s launch coincides with other vehicles in this space, its success will be key for Tesla’s valuation in future.

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Notes:
  1. Ford Press Release, December 10, 2015 []
  2. Will Chevy’s Bolt Mark a Turning Point For Electric Vehicles in the U.S., The Street, December 23, 2015 []
  3. Jeff Brown wants all new cars in California zero-emission by 2050, The Sacramento Bee, December 3, 2015 []
  4. Electric Vehicles Poised For Popularity By 2020: Report, Luxurydaily.com, August 2015 []