Auto entrepreneurs Preston Tucker, John Dolorean and Malcolm
Bricklin learned a very tough lesson years ago. You can beat the
big automakers at their own game with compelling designs and clever
engineering. But your businesseswill fail anyway. The amount of
resources needed to compete in this capital-intensive business is
just too large for smaller car companies to survive. All three of
these men finally ran out ofcash and had to close shop.
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Fast forward to 2012, and an up-and-coming company --
Tesla Motors (Nasdaq:
TSLA
)
-- isn't just surviving, but thriving. The company's Model S sedan
has just won the Motor Trend "Car of the Year" award and Automobile
magazine's "Automobile of the year" award.
Yet if you dig deeper, as I'll be doing in this two-part
article, then you'll find a remarkable company that could
fundamentally change the way we think of cars and driving in
general. But is the company worth investing in? Before I get into
that, let's understand why this is truly a story of resilience and
innovation...
Silicon Valley in its DNA
Launched in 2008, Tesla's first model -- the Roadster -- is an
all-electric sports car with a range of 245 miles per charge and
the ability to accelerate from zero to 60 mph in four seconds. Yet
it's the Model S, which was launched this past June, that
represents the first "ground-up" effort and is truly the showcase
for the company's engineering and product development efforts.
Virtually every aspect of car has been rethought from the
traditional norms of vehicle design, and this isn't simply a
traditional car with an electric motor. From the chassis and the
interior to the body, this vehicle could have easily been produced
by engineers from
Apple (Nasdaq:
AAPL
)
. It's that different and it's that good, according to the auto
enthusiasts and magazines. Indeed, the company's Silicon Valley
headquarters emphasize the distance from Detroit and other
traditional auto industry hubs.
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Even the Model S' dashboard, which features a massive 17-inch
touch screen, looks like it was designed by a consumer-electronics
firm.
Tesla has sought to rewrite the auto industry playbook in other
ways, too:
- It owns a network of 31 dealerships, so it can capture retail
rather than wholesale prices for its vehicles.
- Tesla repurposed an old GM/Toyota plant for less than $100
million, compared to the nearly $1 billion that a new plant would
have cost.
- This plant avoids the use ofoverhead conveyors to move
partially-built vehicles down the line, saving millions of
dollars in tooling costs.
- Each factory floor robot conducts five separate tasks,
slicing millions more in capital costs.
Yet it's the performance of this car that may have really set
the industry on its head. "The crazy speed builds silently and then
pulls back the edges of your face," wrote Automobile magazine's
David Zenlea. There is instant power in the high-performance
version of this car, pushing a sporty 443 pound-feet of torque at
zero RPM, unlike most gas engines which don't begin to build power
until around 2,000 RPM. In comparison, a 2013 Chevy Camaro SS
offers 420 pound-feet-torque, putting the Tesla S Performance model
in the same group of American muscle cars.
Tesla S Signature model: 0 to 100 MPH in Under 10 Seconds
In a nutshell, we can now say that an electric-powered car is
capable of speeds that most street-legal, gas-engine cars under
$100,000 could only hope for. And the fact that this Tesla sedan
gets the equivalent of more than 100 miles to the gallon (on a
comparable electricity-usage basis) makes this power-plant
comparison a non-starter.
Electrics are the future
While all-electric vehicles such as the Chevy Volt and the Nissan
Leaf have seen underwhelming initial demand, the core technology is
quickly improving. Within a few years, an increasing number of
vehicles will be able to drive 200 miles or more before needing a
recharge. And most vehicles will be able to take a quick partial
charge that boosts range by 50 miles at a series of
soon-to-be-deployed charging stations that will soon dot the U.S.
landscape. In effect, the era of "range anxiety" that has
constrained electric vehicle sales will soon be coming to an
end.
Electric vehicles will reach an industry inflection point when
their construction costs finally drop to the level where they are
competitive with combustion-powered engines. That will happen --
perhaps in five years -- thanks toMoore's Law , the idea that a
technology's performance or capabilities doubles every two years.
But for now, many automakers have actually found it more cost
effective to straddle the fence by combining an electric motor with
a combustion engine to create hybrid models. Indeed, that's the
approach every automaker in the world is taking. They have all
concluded that they can't sell enough all-electric cars at a price
that yields profits -- except for Tesla.
Yet here's where the Tesla story gets tricky: The base Model S
Sedan starts at $55,000, but the performance version, which is what
will likely see the greatest demand in the near future, starts at
roughly $80,000. You can also expect similar pricing for the Model
X SUV, which will launch in 2014 on the same platform as the Model
S.
Problem is, $80,000 vehicles can only appeal to a select group
of consumers and many of them have a long track record with other
premium brands such as Porsche, BMW, Mercedes, Jaguar and the
like.
Not only are these companies working hard on their own paths to
electric/hybrid product lines, but they possess some weapons that
Tesla will simply never have.
Action to Take -->
Tesla has definitely found its place in the sun. By building the
next generation of vehicles that are getting industrywide raves,
the car company has not only been able to survive during the
downturn, but it has done so while launching new products.
And though this has become a great story, it's not reason to go
buy the stock. In part two of this article, I'll look at the
considerable hurdles that remain in place for Tesla, and why the
company --and its stock -- should be looked at in a very different
light. Investors would be wise to take note.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.