Not All Electric Cars Are Created Equal

By Alexander MacLennan - September 18, 2012 | Tickers: F, GM, TSLA | 0 Comments

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As a new automotive start-up, Tesla Motors (NASDAQ: TSLA) is getting plenty of coverage from a broad range of sources. Most followers of Tesla's stock have already developed a viewpoint on the company's future and that viewpoint is usually pretty dug in and unlikely to change. But both perspectives will often compare Tesla's newest vehicle, the Model S, to a very different vehicle, the Chevrolet Volt.

They Are More Than Electric Cars

The rationale for comparing Tesla's Model S with General Motors' (NYSE: GM) comes down to the fact that both cars are electric and for some this is enough to draw definite conclusions about the Model S being the same for Tesla as the Volt is for GM. But comparing vehicles based only upon fuel source is an inherently flawed method of comparison. Using this method, the sales of a Hummer H2 should be a predictor of Smart Fortwo sales since both use gasoline as their fuel source.

When Tesla designed the Model S it was meant to be the next car in the lineup for a developing automotive company. The car was designed to be a luxury electric with a starting price in the $50,000 range with enough options to double that. Available with up to 402 horsepower, Tesla's Model S was meant to compete with the big boys of automotive performance, cars such as the BMW 5 Series. Having received strongly positive reviews, it appears Tesla hit the nail on the head for performance.

By contrast, the Chevrolet Volt was originally developed as part concept car, part experimentation for the future, and part public relations stunt to help buyers of big SUVs feel more "green". But with the spike in fuel prices shortly before the recession, GM began to take the first steps required to take the Volt to production. During the restructuring, the Volt was developed further and brought to production. With far less power, an included range extending gas engine, and a lower starting price, the Volt was designed to showcase GM technology and provide a way to further develop this technology for future models.

Different Motives

Tesla created the Model S to be profitable. It was not about looking environmentally friendly or developing technology for ten years down the road (although they have done this). The Model S needed to turn a profit and turn a profit quickly. If it did not, there would be no Tesla in ten years and no company to have given a green image. To be profitable, the Model S needed to be upmarket where the margins would be higher and fewer vehicles would be needed to be produced to turn a profit. Tesla has a limited manufacturing capacity and some question whether they can keep up at their expected levels meaning a lower price Volt competitor would need to sell more units than Tesla could even produce to turn a profit.

General Motors is in a very different situation than little Tesla. GM enjoys the luxury of investing in the future and taking losses in the near term. The company is in a similar situation as Toyota was with the Prius in its first years. The Prius lost money at first but is now one of Toyota's best known models and is profitable. Therefore, GM does not need the Volt to be profitable at the moment and can use the technology in future models, ones that could be profitable. But to test this technology, GM wants to use it in a car that is similar to what they would eventually sell to the mainstream. Pricing the car in the $30,000 range relates closer to their target market than does Tesla's $50,000+ Model S.

Then What is Tesla?

In the investing world, comparison is a great way to analyze a company and its stock but only when using the right comparison. Clearly Tesla is not an ordinary auto manufacturer making comparisons more difficult. Based on price segment, lineup, and manufacturing products, Tesla is far more similar to Porsche than GM. Both Tesla and Porsche make high priced, high performance, low volume, prestigious sport oriented vehicles. Tesla is aiming to compete as a full-fledged competitor to Porsche and BMW, not just your eco-friendly alternative to performance.

Some have compared Tesla's business plan to Henry Ford's when he founded the Ford Motor Company (NYSE: F) in the early 1900's. Both companies sought to introduce a new paradigm of transportation and eventually brought it to the masses. While many have criticized Tesla for selling cars only the super-rich can afford, it is worthwhile to note that the Ford Model T began with a starting price more than three times greater in 1908 than it was selling for in the 1920's. Tesla has already made clear its intention to expand down-market with the Model X and the cars it plans after. Today Ford is building an electric car of its own, the Ford Focus Electric, but it is receiving much less media attention and the company is spending less on marketing its electric offering than GM is spending on the Volt. Because of this the Focus Electric is not as often compared to the Model S as the GM Volt is. For the record, I believe a comparison of the Focus Electric and the Model S is even worse than one between the Volt and the Model S considering the Focus Electric is almost entirely based on the well-known gasoline powered compact, the Ford Focus.

To another extent, Tesla is a company that defies current comparisons. A lot of smart money bet Tesla would be dead by now and vultures would be picking the bones. But despite the odds, the company has survived and is ready to launch another model. Is Tesla certain to survive? Absolutely not. I for one have a small speculative stake in Tesla and I hope they succeed, both for my investment and because I am a fan of their products. But whether or not Tesla survives does not change the fact that their product today is significantly different from the other vehicles it is being compared to.

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