- Major automakers are entering the EV market in force.
- Tesla’s lead has been equaled or surpassed.
- Major automakers leveraging economies of scale.
- Competition is already cutting into Tesla’s market share.
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Tesla (TSLA), with a rich valuation and facing an increasingly competitive environment, looks like a sell at these levels. The company has had the electric vehicle (EV) market largely to itself for years. None of the major automakers around the world such as Volkswagen (OTCPK:VWAGY), Toyota (TM), GM (GM), Hyundai (OTCPK:HYMLF), Daimler (OTCPK:DDAIF) or Ford (F) have put much effort into the small but growing EV market, now approaching 3% of new vehicle sales globally, or around 2 million units annually. Until now.
Now the major automakers are combining to overtake Tesla in EV unit sales, technology, profits and market share.
Majors Entering the EV Market in Force
Now that the EV market is beginning to show the kind of growth and volume that can support new product lines, the world’s largest automakers are entering the EV market in force – dedicating tremendous resources to EV production and development.
For example, back in late 2017, VW, the leading carmaker by unit volume worldwide, approved a plan to spend an additional $40 billion dollars over five years to become the #1 seller of EVs by 2025. More recent estimates put VW’s investment in EVs at $91 billion. That investment is beginning to bear fruit.
VW isn’t the only major making big investments in EVs either. Daimler has announced investment of over $40 billion in EVs, including a purchase of 20 billion euros just on battery cells from the major battery makers. GM announced 20 billion in EV investment through 2025 earlier this year, and Ford announced a plan in 2018 to spend $11 billion on EVs by 2022. South Korea’s Hyundai announced plans to spend nearly $52 billion on EVs between 2020 and 2025.
Overall, by mid-2019, future private investment in EVs totaled roughly $350 billion worldwide. Tesla spends a little over $1 billion/year on research and development.
Norway: An Advanced Look at EV Competition
In most countries, EV sales represent only a small percentage of overall light-vehicle sales. One exception to that is Norway, which is an important proving ground for EVs, as new models often come first to Norway, in part because of the high percentage of new vehicle sales there (60+%), and because it’s actually difficult to sell internal combustion engine vehicles (ICEs) there, so the market and consumer is really focused on differentiating EVs. The results may come as a surprise. Below is a chart from elbilstatiskk tracking new EV registrations in Norway, which closely track sales, through September 24, 2020, showing both YTD and September numbers:
The chart above shows only EVs with a least 1,000 registrations YTD. Tesla’s Model X had a total of 410 registrations YTD, and the Model S just 203.
YTD, there have been 51,115 EV registrations in Norway, and Tesla EVs have accounted for about 7% of that total. This compares with Tesla’s worldwide market share of EV unit sales estimated at 16% in 2019. In 2019, Tesla registered 16,738 vehicles through September in Norway. This year, with only a few days left in September, Tesla has registered only 3,613 – a decline of 78%.
Part of that decline in registrations is likely due to the Fremont factory shutdown early in the year, where Model 3s are exported to Norway, but this doesn’t explain all or even most of the losses. Clearly competition from new EV models has hurt Tesla’s sales in Norway in a big way. Tesla’s Model 3 was the best selling car in Norway in 2019, EV or ICE, with unit sales of 15,686. So far this year, unit sales are just 2,992. Here is a little insight that supports the idea of competition negatively impacting Tesla in Norway, written by a Tesla enthusiast and shareholder. Here is another article describing Tesla’s drop in customer satisfaction ratings in Norway due to a variety of complaints, which also may have contributed to it’s sharp drop in sales in 2020.
By contrast, VW’s (which includes Audi, Porsche, Skoda, Seat, Scania, among other brands) market share in Norway is nearly 36% – 5x that of Tesla. In fact, Tesla trails not only VW in Norwegian market share, but also Nissan and Hyundai.
And while Norway is only a small market (but also the #3 market for EVs as recently as early 2019, behind the US and China), it does represent an advanced look of what a more competitive EV marketplace may look like in western markets. In fact, with 500 EV models estimated to be available worldwide by 2022, the EV marketplace could become even more splintered and competitive.
China: Half of the Global EV Market
In China, the largest EV market in the world, Tesla’s now locally made Model 3 is easily the best selling EV model this year, with over twice as many units sold (59K through July, 2020) as it’s nearest competitor. It’s Model S and X, however, are being marginalized and are even being way out-sold by new imports from Audi and Porsche. Overall, Tesla’s market share in the most important EV market is 13% this year (down 1% from 2019), 2nd behind BYD at 15%, and ahead of SAIC at 12%. VW is a more distant 4th place, with a 6% market share.
The problem for Tesla is that until now, most of the EV models sold in China have been smaller Chinese models, including micro EVs, that haven’t really been direct competitors to Tesla’s Model 3. That is changing. For example, BYD (OTCPK:BYDDY) has just launched it’s new flagship EV sedan called the Han, which represents a more direct model competitor to the Model 3:
In terms of size and specs, it competes with the Model 3, but at $32,800 it undercuts it on price. And with 30,000 reservations already, it will become a best seller in China – and cut into Tesla’s market share.
But Chinese competition is only half the problem for Tesla moving forward. The Europeans and Americans are also coming, and with locally-made products that will also compete directly with Tesla. VW will produce it’s new ID.4 compact SUV at two plants in China, and the Audi e-Tron will also be produced in China, along with an e-Tron Sportback model. VW will also produce it’s ID.3 in China in partnership with SAIC. Porsche is also entering the Chinese market with it’s high-end Taycan model EV, along with a host of other new models entering and being produced in the Chinese market this year and next.
Tesla’s Technology Lead Evaporating
At it’s recent Battery Day event, CEO Elon Musk touted the company’s recent in-house battery development, which if/when successful could reduce the cost of batteries for Tesla’s EVs by as much as 56%, getting them to the under $100/kwh threshold, which is seen as parity for fuel cost compared to ICEs. The new batteries would also bring a number of other performance enhancements including up to a 54% increase in range. Elon Musk, who has developed a reputation for over-promising on timelines for product advancements, put a 2-3 year timeline on the availability at scale of the new battery design, despite the fact that they don’t actually work yet in their pilot program. Musk’s former chief design engineer of the Roadster estimated the timeline at closer to five years.
That’s a long time considering all the advancements in EVs expected over the next few years, particularly when all your new models are depending on them for production. In the meantime, the major legacy automaker’s approach is to quickly harness their economies of scale.
For example, when it comes to batteries, easily the largest cost in producing an EV, VW isn’t messing around trying to redesign batteries themselves. They negotiated a massive contract with the large battery suppliers at a big discount, and let them figure out how to cut costs. And so while Tesla will likely get under that key $100/kwh threshold if/when their new battery design is successfully implemented, VW is already there. A VW company executive revealed to The New York Times last year that the company already pays less than $100/kwh for its batteries. GM has also introduced it’s Ultium battery, also reportedly costing less than $100/kwh, with specs similar to Tesla’s current batteries. GM will include the Ultium batteries in it’s upcoming launch of several new EV models.
All these scale efficiencies are allowing them to undercut Telsa pricing, while also selling the EVs profitably. The ID.3 model, which is just coming out, was briefly the best selling vehicle – not just EV – for VW in Germany, with 37,000 pre-orders. In it’s first month in the Norwegian market, it looks like it will finish with half the YTD Model 3 sales in only one month.
Going forward, VW expects full output from it’s ID.3 factory in Germany – 330,000 units annually in just one model and factory. That’s 66% of Tesla’s estimated 500,000 total unit production in 2020. In terms of charging stations and standards competition, Tesla is also losing it’s lead, as the US and Europe converge on the CCS standard, which Tesla was forced to adopt in Europe, and also now offers the same charging capabilities as Tesla. In China, the government has basically mandated the use of the GT/B charging standard, and is moving forward with wireless charging as well.
Rising EV Tide Doesn’t Necessarily Raise All Boats
Tesla doesn’t have the profit margins, economies of scale, and model line-up to match the best of the major automakers, which can leverage 10 million unit volumes, hundreds of models, dozens of factories, millions of customers, and often billions in profits. Those advantages will allow Tesla’s big competitors to gain market share, in some cases at Tesla’s expense, as they exploit advantages and convert ICE customers to EVs.
But the thinking is that even though Tesla will likely lose market share as competition heats up and new EV models are introduced, the increase in the number of EV sales worldwide will still allow Tesla to grow substantially, increasing sales and profitability along the way.
That may not be the case. According to the BloombergNEF EVO report in 2020, new EV sales are expected to increase to 8.5 million in 2025, from around 2 million or less in 2020. China is the largest EV market at roughly 50% of global EV sales, and is expected to remain near that level for the foreseeable future. Europe is the fastest growing region for EV sales, which is likely to continue as governments like Germany have introduced and now doubled their incentives for purchasing EVs.
Meanwhile EV growth in the rest of the world is expected to be more modest, with a lack of new government incentives, along with more challenging economic conditions.
The problem for Tesla is it isn’t well positioned to take advantage of where the growth in the EV market is. For example, the growth in new EV sales in China is likely to be concentrated in smaller, cheaper EVs and micro EVs, which are way more affordable than Tesla’s Model 3. Tesla has no products to compete in these categories in China, and so far no plans to introduce any models in these categories either.
Secondly, Tesla’s Model 3 hasn’t had a lot of direct model competition in China, but that competition is now hitting the market. As described above, BYD’s Han is a cheaper, Chinese competitor with similar specs that will likely eat into Model 3 sales in China. Additionally, the planned foreign automaker launches over the next couple years, many of them made in China, will also compete with Tesla and take market share, not to mention more competition from Chinese brands, who can offer similar products cheaper.
Tesla’s prospects in Europe don’t look much better. Once again, Tesla is competing with basically only the Model 3, as the Model S is being phased out and the high priced Model X has very limited sales. The Model Y will be produced in the Gigafactory near Berlin, but not until after construction has been completed. Most likely that means deliveries won’t begin until 2022.
In the meantime, a host of competitors will be launching and selling numerous new EV models competing directly with the Model 3 and Model Y in Europe. As the Norwegian market data show, that new competition is going to eat into Tesla’s sales and market share.
Lastly, in the US, Tesla will face the onslaught of competition it’s seeing now in Europe. VW will begin selling it’s ID.4 in the US next year, a direct competitor to the Model Y, and producing it there in 2022. Ford will also compete against the Model Y in the US and Europe with it’s Mustang Mach-e, and a host of other new models will compete with the Model 3, Model Y, and Model X. Cox Automotive has a new forecast for US auto sales for September out showing Tesla unit sales declining 13.1% for the month, and 1.5% YTD. What happens when EV competition increases?
So far, Tesla has responded to the increased competition by cutting prices, in some cases multiple times, across all models, in multiple geographies. Given that Tesla doesn’t have the profit margins to cut prices without taking losses on sales, that doesn’t bode well.
Being first to market doesn’t necessarily mean you’ll win the race. Tesla’s technological head start, particularly with batteries, has been narrowed and in some cases surpassed in some key aspects – like cost. Cruise now competes with Autopilot in autonomous vehicle software.
In the meantime, in all the markets in which Tesla competes, an onslaught of unprecedented competition will hit Tesla from all sides – something that Tesla has never had to face before – as carmakers big and small inundate the EV market with new models and choices.
All that competition comes at a bad time for Tesla, which is currently depending on the Model 3 for nearly all of it’s unit sales, with the Model Y just beginning to come online, and other new models likely some years off. It’s competitors will bring a host of new models that will attract new EV customers, and undoubtedly take market share from Tesla. How fast Tesla responds to a suddenly much more competitive EV marketplace may well make the difference in whether the EV pioneer survives, or is able to thrive in a market competing against companies with much more extensive product lines, resources, manufacturing footprints, and loyal customers.
Author: Warren Ludford
Source: Seeking Alpha: Tesla Is Being Overtaken