Electric Vehicles Far From Being Able To Compete With The Internal Combustion Engine. It Will Not Act As Our Savior.
A niche market by definition is one which captures the interest of a number of people, but does not have mass-appeal. The global EV market is one such market. It is currently a market that needs a lot of financial support, with federal incentives in the US, for each electric vehicle sold at $7,500. For reference, Renault is offering some pretty decent ICE cars for sale in the price range of that subsidy, through its Dacia subsidiary. Some countries such as Norway and China are offering even greater subsidies. For instance, in China one can purchase a Denza and get up to $18,000 in subsidies.
Despite all this help that the EV is getting around the world, in 2014 they only accounted for .4% of all global car sales. What is worse, sales around the world are starting to show signs of stalling out.
Those who want to paint a positive picture of this situation will be tempted to point to the growth achieved year on year. Reality is however that we are looking at a definite slowdown in month on month growth. While I do believe that sales will eventually beat last year's record of 320,000 units, I don't think it will be by much. While for the past three years we have seen dramatic exponential growth in EV sales around the world, evidence is building of a significant slowdown in growth, and may even signal stagnation.
Early indications from Inside EV's suggest that in the first quarter of 2015 around 22,500 EV's were sold in the US. That is a drop of about 30% compared with the fourth quarter of 2014, and it barely matches the sales volume of the first quarter of 2014, or we might learn that sales will be even slightly lower once the final numbers will be in.
In the EU, the fourth quarter of 2014 saw a decline in sales compared to the fourth quarter of 2013.
This might not yet reflect a trend moving forward, but it by no means bodes well, especially if we consider the early signs of stagnation we are seeing from global sales this year. It seems that the EV niche market is reaching its limits, despite all the incentives offered by governments around the world.
Tesla is not the ICE slayer.
I had an interesting chat with an acquaintance a few weeks ago. He mentioned his interest in Tesla (NASDAQ:TSLA) and how he would have liked to buy shares back when it went public in 2010. He did not, which is a shame because as we know, it would have made for a great investment back then. But what I found interesting about his reasoning behind his desire to invest in Tesla was that it was not entirely out of the desire to make money on it. He told me that he would have liked to buy some shares, because he would have liked to be part of it, because he believes in what the company is doing.
He is a tech enthusiast and I believe that it is that aspect of it that attracted him to the Tesla story. Tech enthusiasts love technological progress and revolutionary products. Environmentalists also love to see such progress as Tesla is promising. The thought of a company challenging the supremacy of the gas guzzler producers is very appealing indeed. It gives hope to the believers in human ingenuity as a way of solving our environmental and sustainability issues. It would also be a vindication of the government policies of support for the EV industry for which the environmental movement lobbied for. Tesla's own sales growth forecasts suggest that it is ready to become a major car manufacturer, with 500,000 yearly unit sales by 2020 and perhaps in the million unit yearly sales range by 2025.
But far from becoming a formidable competitor for the internal combustion engine, Tesla is so far not even in position to claim top spot in the global EV market. In fact, it is in fifth spot for this year so far.
I do believe Tesla will claim the top spot in the EV market eventually. In fact, it may even happen this year if the release of the model X will go smoothly. But, at the moment, it did not yet reach that objective and it is facing competition from companies which are best known for their conventional gasoline-powered technology. But even when it will reach the objective of becoming the top EV seller on this planet, it will still have to contend with the dominant technology, which in my opinion is too easily dismissed as yesterday's innovation by tech enthusiasts as well as environmentalists.
Range was always seen as an issue when evaluating the viability of EV's as an alternative to the ICE. One of the things that got people exited about Tesla, aside from the fact that it is a pure EV company, while the other car manufacturers are seen as simply going through the motions of satisfying various pressures to embrace EV's, has been Tesla's range. The model S has almost 300 miles maximum range per charge that drivers can rely on to get them around. That is as much as many ICE cars get on a tank of gas. Even the model 3, which is supposed to have mass appeal, due to its projected base price of $35,000, will still have a 200 mile range. Furthermore, Tesla is increasing the presence of its fast-charge stations in order to facilitate long-distance mobility for its cars.
It is beyond any doubt that EV range is an undisputed factor in meeting the challenge of taking on ICE domination on the roads, together with an extensive charging network, which needs to provide for fast charging. Tesla is meeting that prerequisite. It is however falling way short on challenging ICE technology on price. The model 3, which is scheduled to hit the market in 2017 will have a base price of $35,000, which on the surface seems reasonable. The average sale price of a car in the US last year was about $31,000. But, the real sale price of that model 3 will average more like $40,000 at the least once options will be included. Furthermore, it will be a compact car, which on average sells for significantly less, in the $20,000 range on average. Car buyers seem to be inclined to pay over $30,000 for SUV's and Trucks, as well as smaller luxury cars, but it remains to be seen whether they will go in large numbers for a $35,000 base price EV compact.
The model 3 battery will cost at least $10,000, assuming a price per kWh of $200, and a range of 200 miles, which suggests it will have a 50 kWh battery. So the battery alone will cost almost as much as many small conventional cars available in the US, EU and Chinese markets. In fact, one can purchase a decent-made Dacia Logan in Europe for about $10,000 these days. I have been ridiculed in the past for bringing up Tesla and Renault's Dacia subsidiary in the same article, but this is the reality of the price difference between ICE's and EV's. The ICE can allow car manufacturers the option of introducing decent cars on the market for sale in the $10,000 range. EV makers, cannot hope to provide a car with a decent 200 mile range for under $30,000 at the moment, and I think they will struggle to do so in the near to medium future as well.
I don't believe that many people are able to grasp the significance of the barrier that this price difference poses to EV's. I am not suggesting by any means that EV makers need to be able to provide a 200 mile range, $10,000 car in order to compete. But, the cheapest EV's with a decent range now cost about two to three times more than the cheapest decent cars available on the main car markets. If the age of the EV is to be ushered in, then the price gap needs to be reduced significantly and I do not foresee that this will be achieved within the next decade, which means that the EV will remain a relatively small niece product, which will continue to rely on significant government support to stay afloat.
As for Tesla's goal of becoming a mainstream carmaker in the next decade, the odds of making it seem very slim. The model 3 may enjoy significantly more success than the model S, or the upcoming model X, but looking at the global EV market and the ICE competition, there is not much to go on as evidence of competitiveness. While I think Tesla is a great company, with a potentially bright future, I also continue to believe that it is currently priced as if the breakthrough to over a million unit sales per year by 2025 has already happened. In other words, there is plenty of room for disappointment, therefore downside for the stock, with little room for upside in case that Tesla does meet its goals on time. The breakthrough into the mainstream car market may eventually happen, but it may take two or more decades for EV's to stand toe to toe with the ICE, with Tesla perhaps leading the way.