Higher margins could improve further
Tesla competes with other US automakers including General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F). Both Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) operate within the range of 3% to 5% net profit margin. This is in contrast to Tesla as its products are considered luxurious; therefore they are aimed at more affluent customers. This means Tesla can eventually generate higher net profit margins compared to Ford and General Motors.
Analysts expect around 5.16% margins for Tesla by 2014. These margins could improve as the company improves its production. Tesla already has plans to improve its production facilities by investing $200 million.
Not all is well
One headwind Tesla is going to face before its products are adopted by the mass market is battery cost. Despite the cash infusion from the recent debt and equity offerings, battery costs are likely to remain an inhibitor to mass market adoption. Investors must keep an eye on further evidence of battery cost reductions before giving a high probability of mass market adoption. Given the lack of evidence, Barclays PLC (ADR) (NYSE:BCS) continues to assume a 5% chance of mass market adoption.
However, the probability assumption is not shared by Tesla bulls. They assume a 0% chance of a failure, a 70% chance that Tesla will successfully enter the mass market, and a 25% chance that it only gets as far as the third generation product.
Competition
While Tesla is aiming at affluent customers, General Motor is launching the new Chevrolet Spark Electric 2014 model that is aimed at the mass market. The car costs around $20,000, which is very cheap and offers an 82 mile range. Though the design is a bit repulsive, it has won the award for cheapest electric car of the year. So, it’s evident that General Motors is targeting customers that can’t afford luxury, which might cause its profit margins to decrease further.
The Ford Focus Electric gives a range of 76 miles, far less than the 208 miles offered by Tesla’s Model S. Therefore, Tesla appears to be ahead of the competition. However, Ford hopes to improve the range and efficiency of its electric cars. Besides, it’s working to increase the technicians’ capabilities working with electric cars. This will help make long distance travel more viable. However, by the time things improve at Ford, Tesla will have picked up fast.
Conclusion
Despite the presence of automaker giants like Ford and General Motors, Tesla is winning the electric car race by far. Its products offer both better efficiency and range. The recent capital injections will help the company in its future developments. Therefore, I am bullish on Tesla Motors.
Tesla’s plan to disrupt the global auto business has yielded spectacular results. But giant competitors are already moving to disrupt Tesla. Will the company be able to fend them off?
The article What Puts Tesla Ahead of Other Automaker Giants? originally appeared on Fool.com.
Adnan Khan has no position in any stocks mentioned. The Motley Fool recommends Ford, General Motors, and Tesla Motors . The Motley Fool owns shares of Ford and Tesla Motors. Adnan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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