Are established car companies better placed to lead the EV revolution than Tesla?
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The rise of electric vehicles (EVs) is still in its early stages and will be a slow process.
At the moment they are only 0.2 per cent of car sales and in no market are they more than 5 per cent. But Bloomberg predicts by 2040 they will make up 60 per cent of sales in Australia.
If you were to believe the hype, the revolution will be led by Tesla and potentially other companies that are currently only startups. Existing car manufacturers will either ignore the trend or be held back by their old processes.
Tesla is delivering almost 1,000 new vehicles every day and in 2019 wants to deliver at least 360,000 vehicles.
But Tesla has never been profitable and not only are analysts beginning to take notice, established car players are now entering the space.
BMW wants to release 25 electric vehicle models by 2023 and has predicted it will double its EV sales by 2021. Admittedly, some won’t be fully-electric.
Also, Mercedes-Benz is aiming for electric vehicles to be 20 per cent of its sales by 2025 and is investing $16 billion.
Admittedly, these are luxury brands and EVs are already expensive. But mid-range manufacturers have been getting into the game recently.
Volkswagen recently launched its first electric vehicle and there have been 31,000 vehicles pre-ordered in Europe alone. While they aren’t cheap (at 40,000 euros/$65,000), they will come with free charging for either a year or 2,000 Kilowatt hours, whichever comes first.
Nissan is another late player to the game. It intends to sell eight models by 2022.
To say Tesla and consumer expectations had nothing to do with this would be untrue. But what is also important is the possible job losses. Morgan Stanley estimated earlier this year EV-related job losses in three to five years could reach 3 million which, if eventuated, could be a social disaster.
While these players may need to raise capital, the difference is many of them are already profitable. It goes without saying an entity that has never made a profit is less attractive to potential lenders and investors.
Tesla lacks existing capacity for its latest ambitions and has only built up its existing infrastructure through capital raises.
Since Elon Musk’s ill-fated tweet saying he was going to take Tesla private, it has fallen from US$355 to US$220. Telsa’s future prospects are dividing Wall Street analysts.
Forecasts range from Vertical Group rating it $54 per share to New Street Research rating it $530 per share.
The major banks are divided. Goldman Sachs and Barclays are bearish, rating it a Sell at $158 and $150 respectively. However, Macquarie rate it a Buy at $400 and Morgan Stanley rate it Hold at $230.
One of Tesla most bearish analysts, Needham Rajvindra Gill, argued after Tesla’s annual report that the company “will face gross margin pressure throughout the year, pushing out profitability further”. He also noted Tesla missed estimates and Elon Musk was open to raising capital after previously denying the need.
JP Morgan was overall bearish but less so than other major banks, setting a $200 per share price target. It told its clients:
“Although both technology and execution risk seem substantially less than was once feared, expansion into higher volume segments with lower price points seems fraught with greater risk relative to demand, execution and competition.”
Even if Vertical Group’s prediction came true, this does not imply Tesla will collapse. But perhaps the concern about profitability will have trumped any hype whatsoever.
The electric vehicle revolution is unfurling, but who is best placed to lead it is not settled – yet.