Why Tesla is charging ahead of the EV pack

Tesla's stock surged past $100 and kept going overnight on the back of a remarkable three months of news. So why is it succeeding where others have failed and will it continue to do so?

In a remarkable three month period, Tesla Motors has gathered seemingly unstoppable momentum and while there are roadblocks ahead, it is now undoubtedly the pin-up for the clean tech sector.

During this period the Elon Musk-led group has announced its first ever quarterly profit and surpassed sales expectations. It has received the highest ever rating from Consumer Reports – for any vehicle type. It has drummed up enough interest to raise $1 billion from investors, helping to pay off a US Department of Energy loan in full, with interest and nine years ahead of time. Most crucially it has made believers out of the fence-sitters.

Investors have responded with giddiness, sending the company’s stock from $35 in March to a record high of $110.33 overnight. The plentiful short sellers have been burned, badly.

Figure 1. Tesla share price (year-to-date)

Source: Yahoo Finance

Tesla is now valued at almost $13 billion, about triple where it was at the start of the year. The electric car maker, which will manufacture a little over 20,000 cars this year, is now valued at around a quarter of General Motors, which produces close to 10 million. Were it listed in Australia, its current valuation would have it knocking on the door of entry into the ASX20. Not bad for a “loser” company, as presidential contender Mitt Romney famously labelled it last year.

Even the two negative stories it has encountered this year have been at worst neutralised, and arguably turned into positives. Firstly, there was a critical New York Times review of its flagship Model S vehicle, which the company countered effectively by showing the flaws with the analysis. Then there were pockets of criticism over its innovative leasing option, which it tackled by admitting to one or two flaws and addressing them.

Yes, it’s been a good year.

Staggering when you factor in the troubles of electric car groups to gain a foothold as the likes of Fisker, Coda and Better Place declare, or near, bankruptcy. Battery maker A123 Systems also sought court protection, before being reincarnated with the new name of B456 Systems last week.

Tesla’s triumphs where others have failed have the swelling Musk fan club cheering and the many doubters questioning their scepticism.

There are a number of reasons why it has separated from the pack:

-- Leadership. Founder Elon Musk knows what he is doing having achieved success with numerous other start-ups, most famously as co-founder of PayPal. He has a personality that captures media attention and this has meant Tesla has long received more publicity than its size would normally merit. Not only that, he backs up his confident words with money, always stumping up cash – and plenty of it – when Tesla looks to raise capital.

-- Strategy consistency. At its heart Tesla has always had a sound plan, which it has stuck to without rushing to meet the demands of investors hungry for weekly developments. In 2006, Musk divulged, “the strategy of Tesla is to enter at the high end of the market, where customers are prepared to pay a premium, and then drive down market as fast as possible to higher unit volume and lower prices with each successive model. In keeping with a fast growing technology company, all free cash flow is plowed back into R&D to drive down the costs and bring the follow on products to market as fast as possible.” So far, so good.

-- Steady development. Tesla is building out a network of fast-charging stations to improve convenience, but it has not tried to do this too fast. It has largely put attention into US states where adoption is likely to be highest and branch out from there, California in particular has plenty of charging stations and is Tesla's key market. You can’t build an electric car empire in a day.

-- Customer engagement. Tesla owners don’t just like the car, they love it, with Musk’s enthusiasm trickling through to the owners of his cars. Tesla has also fostered a community within its ownership group. As just an example of the community development, its forum about the Model S includes around 100,000 posts. Not only that but it cuts out the middlemen (car dealers), which allows it to have control over the customer relationship.

-- Quality in production. In the Model S, Tesla has built an amazing car, not just an amazing electric car. The awards speak for themselves.

Many young companies are at risk of complacency after turning their first profit, the start of a steady spiral back down to Earth. That or they look to cash in on the first takeover offer that comes along, eyes left dazzling by the prospect of a quick buck.

Tesla seems unlikely to fall into either trap.

The company’s long-term plan has always been clear – to create in Musk’s words “a compelling, mass market electric car.” First step was the sporty Roadster, then the luxury Model S. Both of those have launched with the next car – the Model X (SUV) – to grace American roads in 2014. Like the first two cars, it looks impressive, but it won’t decide the company’s future.

Car number four – the yet to be named mass market vehicle – will be the gamechanger.

As Musk explained to Bloomberg earlier this month, there are currently two compromised choices for electric car consumers and it means they don’t have a wide enough appeal.

He says the Model S is “compelling but it’s too expensive for most people and (then) you’ve got the Nissan leaf, which is cheap but it’s not great.”

It’s hard not to focus on the positives as things rush forward at a pace that even Musk didn’t foresee, but until the company completes the vision of an affordable, mass-market car that people love, it has not truly succeeded.

And there are challenges to reaching that goal in the form of car dealer backlash, brand value risks and technological development.

On the first score, there is growing unease in the US amongst auto dealers about the Tesla strategy to bypass them. The National Automobile Dealers Association is one of the more powerful lobbying groups in the country and has already coerced a number of Republicans to be publicly sympathetic to their complaints. The fight is just heating up with battlefronts already surfacing in a couple of states.

Tesla also has to assess the risk to brand value of going down market. At the moment the Model S would fit into the luxury car category, attracting affluent consumers. When it offers a mass market car around $30,000 cheaper than its current cheapest cars, will it damage the allure of the brand? Then again, would the company care as long as the mass market car is successful?

The final risk is a combination of technology and over-confidence.

Cost has always been the barrier to a compelling, mass market EV and Tesla still has a lot of work to do to achieve the goal. It will take several years to reach it and the company must also be careful not to rush into mass production at the expense of quality.

Provided it remains patient however, the next great car manufacturer could be evolving right before our eyes.

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