3 Challenges to Tesla's EV domination

After several years as the market leader, pioneer EV manufacturer, Tesla Inc., no longer has the road all to itself, with rival manufacturers seemingly proclaiming the imminent arrival of another ‘Tesla fighter’ on a daily basis.

Image Source: Business Insider

And while no mainstream manufacturer has yet been able to match Tesla’s lineup, German carmakers Daimler, BMW and Volkswagen are closing in: According to PA Consulting Group's ranking of electric automakers, Tesla will retain its No. 1 spot through to 2019, but by 2021, when traditional rivals flood the roads with a variety of models, Elon Musk's company will fall to seventh place.

Based on strategy, battery technology, culture, supplier networks, partnerships and financial performance the consultancy predicts that by then Daimler will have taken over the lead, followed by BMW, the Renault Nissan Mitsubishi alliance and VW.

Image Source: PA Consulting Group

At first glance this prediction seems quite reasonable, but before summarily relegating the little company from Freemont to the annals of history it may be prudent to understand the challenges that face the contenders.

Tesla becomes the first mainstream EV manufacturer

From the early days of the Roadster, Models S and X Elon Musk has always had an unwavering aspiration to take the EV ‘mainstream.’ A year into the rocky life of the Model 3, Tesla realized the dream, when in August 2018 the company outsold several traditional OEMs to officially take its place as a legitimate player in the American car market.

Recording 23,175 sales, Tesla was narrowly beaten by BMW with 23,789, but was comfortably ahead of Audi with 20,907 units and Mercedes-Benz with 20,339. Even Chrysler, Volvo, Jaguar and Mitsubishi trailed the EV manufacturer by a considerable margin.

While Tesla’s sales performance in North America is impressive, in Europe the Model S also outsold the German premium brands' range-topping sedans including the Mercedes S class and BMW 7 series for the first time in 2017. The Model S has outsold German rivals in the upper-sedan category in the U.S in previous years, but never in Europe.

European sales of the Model S jumped 30 percent to 16,132 last year, according to JATO. Mercedes S class sales grew 3 percent to 13,359. BMW 7 series had sales of 11,735, down 13 percent.

Moreover, Tesla is also competing strongly in Europe's large premium SUV market with the Model X. Its sales in the region last year were 12,000, about the same as the Porsche Cayenne and nearly 2,000 more than the BMW X6, according to JATO data.

While sales and market share are traditional measurements of a brand’s performance, evolving electrification is breeding new measurements, such as AlixPartners’ ‘Automotive-Electrification Index’ that seeks to present sales and technical performance in a single metric; the ‘e-range’.

The new index uses publicly available data on vehicle ranges, volume sold and market share to calculate e-range. Plug-in electric vehicles are measured solely by range of battery capacity, biasing the metric toward longer-range full EVs.

Using this measurement Tesla was already No. 1 overall in 2017, with 6.61 million miles sold with others in the top 10 including:
• No. 2: Renault-Nissan Alliance - 3.72 million miles
• No. 5: General Motors - 1.64 million miles
• No. 7. BMW AG - 1.26 million miles
• No. 10. Hyundai Motor Co. - 1.14 million miles

Even though these results reflect Tesla’s current strong performance in technology and sales, traditional manufacturers are all ramping up their investment in electrification, seemingly with one eye on emissions targets and the other on Tesla.
For instance: Volkswagen plans to invest $7 billion to build 27 models for four group brands based on the MEB modular platform.

Starting with the ID model that will begin rolling off the production line at its plant in Zwickau, Germany, late next year Volkswagen intends to build 10 million electric cars as it targets the launch of worldwide mass production towards the end of 2022.

The first Tesla challengers unveiled

The first step in challenging Tesla for the EV crown requires a competitive model lineup, which up until now has been lacking.

The first three contenders are all crossovers, claiming to challenge the three year old Model X equipped with a 75 kWh battery, with a range of about 380km (EPA):

• The Jaguar I-Pace with a 90 kWh battery giving a 480 km range (NEDC)
• Audi’s e-tron fitted with a 95 kWh yielding 500 km over the NEDC
• Mercedes Benz’s recently announced EQC with an expected NEDC range of 450km from a 80kWh battery

In America the timing of this competition is far from ideal for Tesla. With the company having surpassed 200,000 deliveries in July 2018 potential Teslarati will no longer be eligible for the full $7,500 Federal Tax Credit when the competitors enter the market.

The timing’s wrong

In Tesla’s home market the full federal EV tax credit, of up to $7,500, is available until the end of the quarter after the one in which the company hits its 200,000th sale. Thereafter the tax credit is halved after another two quarters to $3,750, then it’s halved again to $1,875 for a couple more quarters, before falling away completely.

This means that the arrival of competitive EVs coincides with the phasing out of Tesla’s incentives, potentially making the newcomers more attractive to consumers looking to experience an EV for the first time.

With the exception of Audi’s e-tron that starts at about 80,000 euros (~ USD $95,000) in Germany, the Model X 75D with a base price of USD 79,500 is likely to face stiff pricing competition from Jaguar’s USD 69,500 I-Pace and Mercedes’ EQC, with an expected price in the region of USD 75,000 – especially once the USD 7,500 tax credit is factored in.

The importance of the impact of the tax incentive on the initial purchase price cannot be ignored, as recently reported by the Vancouver based Angus Reid Institute (ARI) — a not-for-profit public opinion research foundation.

The institute’s research found that 59 percent of consumers surveyed believe that price is one of the most important considerations when purchasing a new car. Additionally, 56 percent of respondents said that the government should do more to incentivize car buyers to choose electric vehicles. In addition to that, 75 percent agree with the statement “I’m less inclined to buy an electric vehicle because they’re too expensive.”

Although the research was based in Canada there is no reason to believe that American consumers would have a vastly different opinion.

Of course the federal tax credit is not the only EV incentive available to potential buyers, according to the National Conference of State Legislatures, 45 states and the District of Columbia also offer incentives for electric cars.

Additionally, the entry of these traditional OEMs into the EV sector brings with it another challenge: An established sales and service network, which Tesla is struggling with at the moment.

Sales and service build the brand

Tesla “feels” big because it has a $50 Billion equity value and massive media presence. But Tesla has sold fewer than 500,000 cars. It has little experience in repair, used sales, recycling, scrap and waste. It is not near scale or profit on any of these other parts of the business.

In contrast, Ford also has a total equity value around $50 billion, but sell and service about 6.5 million vehicles per year; worldwide.

As Tesla ramps up its Fremont factory to escape what Elon Musk called “production hell” with the Model 3, some customers are enduring their own state of suffering trying to get Teslas serviced.

Parts shortages, long repair delays and problems getting through on customer help lines have led to scenes of strife at Tesla’s service centers.

The after sales limitations are rife in other markets as well: In Norway, the third largest market for Tesla after the U.S. and China, some customers told Norwegian media they have been waiting months on body parts for their damaged Teslas.

Musk addressed the Norway problem on Twitter on July 5, saying “Norwegians are right to be upset with Tesla. We are having trouble expanding our service facilities in Oslo especially. Can solve quickly with Tesla mobile service vans, but awaiting government permission to do so.”

And it’s not only in after sales service that Tesla faces a challenge: Even though Tesla owns and operates the sales outlets, customer-experience seems to lag behind the traditional manufacturers, who through years of experience have mostly managed to provide customers a uniform user experience that meets expectations.
According to Monterey-based market research company, Pied Piper, one in four Tesla retail stores are among the best in the auto industry at treating prospective buyers with respect and turning them into paying customers.

“What we are measuring is how successfully a dealership helps a shopper become a buyer,” said Fran O’Hagan, the firm’s chief executive. Unfortunately for Tesla many of their outlets are also the worst at doing those things — in such numbers that Tesla stores as a whole scored at the bottom of 35 auto brands on the company’s recently released Prospect Satisfaction Index.

While most dealerships that sell a particular brand don’t vary much from one to another, Tesla’s retail stores “are hugely variable, more so than 9 brands out of 10.”
Which O’Hagan finds surprising, given how Tesla sells cars. Traditional auto dealerships are franchises that are not owned by the auto manufacturers. Tesla on the other hand, owns its own dealerships, and should therefore be better placed to provide a consistently high level of customer service. Disturbingly for Tesla the dealers that scored the highest in the survey included two of its direct challengers - Audi and Mercedes-Benz. While not one of the challenges mentioned above are insurmountable, in the fiercely competitive, fast paced automotive environment, manufacturers need to check all the boxes, all the time to maintain the edge.

Throw in an overworked, volatile CEO with a propensity for late night tweets into the mix and Tesla’s challenges to its EV crown take on a whole new dimension, opening up an opportunity for the more conservative competition.

Sources:
• Russ Mitchell; LA Times; Survey finds big gap in quality of sales approach at Tesla from store to store; July 2018; http://www.latimes.com/business/autos/la-fi-hy-tesla-retail-rank-20180726-story.html#
• Leonard Kehnscherper; Bloomberg/ Autonews; German EVs will catch Tesla in coming years study finds; July 2018; http://www.autonews.com/article/20180712/OEM05/307129942/german-evs-will-catch-tesla-in-coming-years-study-finds
• Sean O'Kane; The Verge; Tesla signs deal in China to build 2nd global auto plant; July 2018; https://www.theverge.com/2018/7/10/17553094/tesla-china-gigafactory-cars-deal-agreement
• Anna Ringstrom; Reuters; Volkswagen group plans to build 10 million e-cars in first wave; September 2018; https://www.reuters.com/article/us-volkswagen-electric/volkswagen-group-plans-to-build-10-million-e-cars-in-first-wave-idUSKCN1LX1KZ
• Nick Gibbs; Automotive News Europe; Planned SOP for eTRONS Audi will start EV output in Germany in 2020; March 2018; http://europe.autonews.com/article/20180315/ANE/180319823/audi-will-start-ev-output-in-germany-in-2020
• Shiraz Ahmed; Autonews; China takes lead in EV deployment, according to new measure; September 2017; http://www.autonews.com/article/20170906/MOBILITY/170909850/china-takes-lead-in-ev-deployment-according-to-new-measure
• Brad Bennett; Mobile Syrup; Canadians not willing to pay the high price for electric cars: Angus Reid; September 2018; https://mobilesyrup.com/2018/09/21/canadians-high-price-electric-cars-angus-reid/