Why Tesla is Winning on Electric Cars
Tesla and GM Are Losing Big on Electric Cars
A 5% margin.
This is what it will take for electric car manufacturers to make money on “affordable” electric cars...
That is, electric cars that are competitively priced against similar internal combustion models.
As it stands today, Tesla (NASDAQ: TSLA) is likely to lose $2,800 on the base version of the Model 3 and will break even at $41,000.
Early analysis indicates that most Model 3 owners will pay more than $41,000 in order to get all the bells and whistles. Still, this leaves little room for error.
GM (NYSE: GM), which now has its own “affordable” electric car on the market — the Chevy Bolt — will also lose money on this model. Estimates from UBS show a loss of $7,400 on every vehicle sold. Interestingly, GM’s power train is more than $4,000 cheaper to produce than earlier estimates, but GM’s lack of scale is slowing progress — although by 2025, GM should hit that 5% profit margin on an EBIT (earnings before interest and tax) basis.
So again, very little room for error.
When the Knuckle-Draggers Caved
When Tesla first hit the scene about 10 years ago with its Tesla Roadster, it was heavily criticized and mocked by the major carmakers.
They all bet against Elon Musk and his vision, telling the world that Tesla would never make it.
Today, every major carmaker on the planet has an electric car in the showrooms or in production.
Elon Musk raised the bar, and the knuckle-draggers in Detroit eventually caved and jumped on the bandwagon. In fact, some analysts are now suggesting that the major carmakers are going to leave Tesla in the dust when it comes to electric cars. After all, companies like GM, Ford (NYSE: F), and Nissan (OTCBB: NSANF) all have significant advantages, including serious marketing muscle and huge war chests of cash.
But the question that must be addressed is, do they have the will to make it happen?
The truth is, if GM really wanted to own the electric car space, it could. All it would have to do is scale and commit to delivering a vehicle that meets the same high standards as a Tesla.
A lot of folks compare GM’s Bolt to the Tesla Model 3, as both offer similar driving ranges and price tags. But there’s something Tesla has that GM doesn’t: a good reputation.
Most Tesla owners will tell you that Tesla vehicles exceed the status quo of what we’ve come to expect from our cars. From tech applications to the quality of ride to the basic design, Tesla continues to win on all fronts.
GM could also meet those high standards, but it has chosen not to.
Don’t get me wrong; the Chevy Volt and the Bolt are great cars. I’ve driven both and found them to be quite impressive. And who knows? I have yet to drive a Model 3, so maybe the Bolt will prove to be a better car than the Model 3. But if we use history as an indicator, this is unlikely.
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The Cult of Profitability
If there’s any company that has shown the power of customer loyalty and cult-like status, it’s Apple (NASDAQ: AAPL).
Steve Jobs showed the world that if you can get first-mover advantage and provide a quality product, you can build the most loyal customer base on the planet.
Tesla has done the same thing.
Last year, when I went to the Tesla store to reserve my Model 3, I was the eleventh person in line. That was at about 5:00 in the morning. By the time I got in to make my reservation, there were about 500 people in line behind me.
While the major carmakers do have significant advantages, what they don’t have is the cult-like status that Tesla currently enjoys. It is that status and that kind of customer loyalty that separates Tesla from the other carmakers.
Now, when the Model 3 does arrive later this year, Tesla will still lose money. But here’s the catch …
With Tesla’s Gigafactory in place and pumping out product at such a large scale, the company is likely to see a 35% reduction in battery costs.
Assuming the basic 55kWh battery pack, Tesla could see its battery costs fall from about $10,450 to $6,875. This means that the breakeven point falls to around $37,400, which is well below what most Model 3 owners are expected to spend on their cars.
So now you have what is likely to be the best-in-class “affordable” electric car on the market competing against other electric cars produced by the major automakers but likely falling short on quality, price, and popularity.
And by the way, additional cost reductions outside of battery costs are also expected in the coming years.
Now, while I’m in no rush to buy shares of Tesla today, as it’s fairly overpriced at these levels, I have no doubt that Tesla will continue to rule the electric car space for at least the next three to five years.
If you did manage to place your order for a Model 3 within the first couple of hours the company started taking reservations, you’ll be among the first to drive a machine that will one day go down as being just as important as the Model T.
And if you were one of the first to invest in Tesla back when you could buy it for $40 a share, congratulations. You’ve likely made enough money to buy a couple of Teslas for yourself.
Of course, the big money on Tesla has already been made. I do hope you took my advice back in 2010, when I suggested buying shares. But if you didn’t, don’t worry. There are plenty of new opportunities to make a boatload of cash in other new and exciting industries — like the legal cannabis industry, for instance.
I’ve been making money hand over fist for the past three years by investing in legal cannabis stocks. And quite frankly, that money continues to roll in.
In fact, just last week we got word that the government of Canada has decided to streamline its medical cannabis production licensing process. That means over the next few weeks, we’re likely to see a handful of new cannabis companies get licensing approval. And with that approval will come a huge boost in value and share price.
In my latest e-book, “A Beginner's Guide to Getting Rich in the Legal Cannabis Market,” I actually list 46 legal cannabis stocks that you can buy right now. Some of these will land those licenses within the next few weeks, so you want to be in those stocks now.
To get a preview of this list, click here.
To a new way of life and a new generation of wealth...
@JeffSiegel on Twitter
Jeff is the founder and managing editor of Green Chip Stocks, a private investment community that capitalizes on opportunities in alternative energy, organic food markets, legal cannabis, and socially responsible investing. He has been a featured guest on Fox, CNBC, and Bloomberg Asia, and is the author of the best-selling book, Investing in Renewable Energy: Making Money on Green Chip Stocks. For more on Jeff, go to his editor's page.
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