Tesla Motors Inc (NASDAQ:TSLA) is a disruptive company on the verge of changing the automobile industry. A disruptive innovation creates a new market and disrupts an existing market. We’ve seen disruptive innovations come from, now, big companies such as Apple Inc. (NASDAQ:AAPL) with music and apps, Amazon.com, Inc. (NASDAQ:AMZN) with home shopping, and Netflix, Inc. (NASDAQ:NFLX) with watching movies. Now we are seeing this happen with Tesla and their battery electric vehicles (BEVs). Does Tesla have what it takes to flourish in this new market? We will explore both the positives and the negatives Tesla will face going forward.
In 2008, the company launched its first model, the Tesla Motors Inc (NASDAQ:TSLA) Roadster, becoming the only highway capable electric car. The Tesla Roadster was built on the Lotus platform and that deal has since been discontinued, but the innovation didn’t stop for Tesla. In 2012, Tesla released the Model S which has been the flagship for battery electric vehicles.
The positives behind Tesla
The more exciting news for Tesla Motors Inc (NASDAQ:TSLA) is the release of the Model X in 2014. Tesla has a production target between 10,000 – 15,000 cars a year. Right now cost projections have the Model X starting at $50,000, like the Model S, with the high side being $100,000. Gross profit margins are targeted at 20% on debut and rising to 25%.
The Gen III is going to be Tesla Motors Inc (NASDAQ:TSLA)’s next model debut in 2016. This should be the “economy” model at a more affordable price. Projections have the cost of the Gen III at $30,000 – 60,000. The Gen III will be a great addition to the market if it does remain affordable. Right now the Models S and projected Model X top $80,000 – $100,000 for a bigger battery and some add-ons. The Gen III release should be highly anticipated by consumers and investors. An affordable Tesla will allow it to steal the market share away from Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM). GM has just cut the price of the Volt by knocking off $5,000 from the sticker. Ford has already done the same taking $4,000 of its Focus’ sticker price. Tesla already has the technology to create a more efficient electric car. Currently the GM Volt only gets 38 miles on a charge without using gas. Currently, the 60 kWh battery, Tesla’s smallest, is capable of 200 miles on a single charge.
When the Tesla Motors Inc (NASDAQ:TSLA) Roadster first debuted battery costs were at $680 per kWh. During the Roadster’s life battery cost had already dropped to $480 per kWh. Further R&D and technology advances will continue to drop battery price and increase profit margins.
Economies of scale will come into play as Tesla Motors Inc (NASDAQ:TSLA)’s production increases. Economies of scale allow for fixed cost and production to be utilized over a greater quantity of products thus driving down overall cost. Tesla has already spent money in 2010 and 2011 expanding their plant and automation. Their factory space is already large enough to handle the increased production from the new line of cars going to debut. Currently Tesla is using 126 acres of their factory out of 370 acres. At not even half the space utilized Tesla will be able to scale up production on the Model S, Model X, and Gen III without production constraints.
Elon Musk has already laid out a plan to build charging stations across the United States. This has been the major complaint of an electric-only car. Tesla Motors Inc (NASDAQ:TSLA) may be a bit ahead of their time here, but they are fixing that with charging stations and replaceable battery packs. In the summer of 2013 they will have 27 charging stations set up. By 2014 charging stations should cover 80% of the United States population.
The negatives behind Tesla
Currently Tesla Motors Inc (NASDAQ:TSLA) is a non-union company. With the smaller production size the employees have not yet unionized. Being in a pro-union state California, it is likely we will see unions form. This will drive up labor cost and bring up employment problems in the future. This shouldn’t be a major concern but unions can cause problems throughout companies, as we recently saw with Hostess. There is no guarantee that Tesla workers will form into unions, but the probability is high and should be a consideration.
Tesla Motors Inc (NASDAQ:TSLA) will need to develop dealerships. Right now Tesla works out of showrooms with online orders. This works in a lot of places, but some states have banned Tesla from selling their cars. They have already tried to get the laws repealed but are coming up short. If they wish to sell to these markets they will be forced to open dealerships. Dealerships will disrupt the current Tesla model and eat into margins.
If Tesla Motors Inc (NASDAQ:TSLA) hopes to ramp up sales then they will have to rely on marketing. Elon Musk has already expressed his hate for marketing. While I expect some money to be spent in marketing I don’t see it being a major expense.
Conclusion
Tesla Motors Inc (NASDAQ:TSLA) has produced some beautiful and stunning cars, that goes with no question. Elon Musk has had a reputation of building great companies with PayPal.com, SpaceX, and Tesla. Tesla is the market leader when it comes to BEVs and it looks to remain that way for years to come. Consumers are already catching on to no longer having to stop at gas stations. The trend in BEVs should continue to grow as more drivers make the switch from gas to electric. Overall Tesla is a great company and should have a long future ahead of it. Right now Tesla stock carries a lot of emotion which is causing the stock to be very volatile. However, I see it outperforming in the years to come.
Adam Beaty has no position in any stocks mentioned. The Motley Fool recommends Tesla Motors (NASDAQ:TSLA) . The Motley Fool owns shares of Tesla Motors.
The article Can Tesla Go the Distance? originally appeared on Fool.com.
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