Tesla Shouldn’t Laugh At the i3

Sam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On Tesla’s (NASDAQ: TSLA) recent earnings call, CEO Elon Musk openly laughed at BMW’s (NASDAQOTH: BAMXF) new electric car, the i3.

To be fair, the i3 is hardly comparable to Tesla’s Model S -- the former is a mid-priced electric car, the later is a high-performance luxury vehicle.

But Tesla benefits from the introduction of more plug-in hybrids, and should vigorously applaud BMW’s decision to produce a plug-in electric vehicle. The more electric cars on the road, the more palatable Tesla’s cars will be to a mass-market audience.

The Model S vs the i3

Some have argued that BMW’s i3 is a competitive threat to Tesla’s Model S. Citron Research’s Andrew Left tweeted that he was shorting Tesla last month. He wrote that the company’s investors were not respecting “real competition,” and referenced the i3.

But it’s ridiculous to compare to the two cars. Claiming the i3 is legitimate competition to the Model S is roughly the same as arguing that Ford’s Mustang is a threat to Maserati’s GranTurismo.

The most popular version of the Model S is about twice as expensive as the i3 -- and there’s a reason for it. It gets more than twice the range, is larger, and is far more sporty. The i3 is a compact hatchback that gets less than 100 miles per charge.

The sort of people buying the Model S -- those willing to shell out six figures for a car -- are not going to be swayed by the i3’s price tag.

That isn't to say that i3 won’t be a success for BMW. General Motors’ Chevy Volt -- which is a more fair comparison -- has seen its sales take off in recent months. The Volt’s June sales were up over 50% from the prior year.

Network effects in the fuel market

Tesla should be welcoming the introduction of the i3 with open arms, because -- as with many markets -- the market for fuel is heavily dependent on network effects.

There are many alternatives to gasoline-powered cars; the problem is that none of these alternatives have well-established supply lines. If I drive my gasoline-powered car across country, I can confidently expect to find refueling stations carrying gasoline every few miles.

The same can't be said for biofuel or natural gas-powered vehicles. This fact -- referred to as range anxiety -- is the biggest challenge Tesla faces. Would-be buyers may avoid the car for fear that, one day, they'll find themselves stranded on the side of the road, battery pack completely drained.

This is likely why, when critics have attacked the range problems of Tesla’s cars, Musk has responded so harshly -- Tesla sued the show Top Gear for libel, and Musk verbally sparred with a New York Times’ reviewer.

Fast charging networks and range anxiety

Rolling out a fast charging network would do much to solve the problem of range anxiety, and that’s precisely what Tesla intends to do. By the end of 2015 -- if everything goes according to plan -- there will be a supercharger “within range” of 98% of the US population.

But “within range” doesn’t mean a supercharger on every street corner. Some states will get only a single supercharger (most small towns have at least two gas stations). Tesla’s supercharging network will make it possible to take a Model S cross country by end of 2015, but it won't be convenient.

Of course, that’s just two years, which is still a relatively short period of time. But if Tesla wants to achieve mass market adoption, it will take more than one supercharger every 200 miles.

That’s where the competition comes in. BMW has yet to unveil plans for a supercharging network of its own, but if it truly wanted to support the i3, it’s incentivized to do so.

Nissan (NASDAQOTH: NSANY.PK) is doing it. The Japanese automaker plans to turn its network of established dealerships into supercharging stations.

That should certainly help support the Leaf, which might be more important to Nissan than investors think. Sales of the Leaf surged in July, jumping over 300% from the prior year. In fact, in select markets -- San Francisco, Seattle and Portland -- the Leaf was Nissan’s best-selling model.

Charging standards need to change

But there’s a big problem: different automakers have chosen different charging standards.

Nissan, for example, uses the CHAdeMO system, while Tesla has its own proprietary charger.

The long-term consequences of this divergence seem fairly self-evident. Imagine, for example, having to buy different types of gas for cars depending on the manufacturer -- it would be a nightmare; the ubiquitous gasoline-powered engine we know today probably wouldn't exist.

If electric cars are going to take off, companies will have to agree to a common standard. I assume that they will eventually -- but that’s just an assumption. Investors interested in the long-term electric car story should keep a close eye on the development of fast charging standards.

Investing in Tesla

For the time being, gasoline is the world’s dominant automotive fuel. A well-established supply chain -- gas stations at every street corner -- makes it difficult to consider running a car on anything else.

If Tesla aims to make electric vehicles palatable to the masses, it needs a network of superchargers. The company has plans for its own network, but if it’s going to rival gasoline, a supercharger every 200 miles just isn't going to cut it.

As more automakers produce fully-electric vehicles, their incentive for supporting such a network of supercharging increases. Nissan is doing it for the Leaf, and it’s reasonable to expect similar initiatives from other automakers that decide to go fully-electric.

Musk, then, shouldn't laugh at the competition -- for the time being, every new electric car helps Tesla’s long-term vision.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

Sam Mattera owns Put options on Tesla Motors. The Motley Fool recommends Tesla Motors . The Motley Fool owns shares of Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus