'Tesla-topianism' is all wrong

Photo: Justin Sullivan/ Getty Images.

Tesla will unveil its much-anticipated Model 3 mass-market vehicle in Los Angeles at the end of March.

Buzz before the event has pushed Tesla stock back up above $230 per share, from a crater of around $140. That’s a 40% upswing in only a month.

It’s also set off a new round of what I’ll call “Tesla-topianism.”

This is the notion that the arrival of a $30,000 all-electric car in a market currently dominated by gas-burning vehicles is going to be the disruptive-innovation earthquake we’ve all been waiting for.

The Model 3 means it’s RIP for the internal combustion engine. So long, ICE! But hey, that century was a nice run.

The mistake remains the same

Bernstein’s Michael W. Parker and Mark C. Newman published a research note last week in which they enthusiastically encapsulate this bullish EV sentiment. (I’m quoting it at some length because it’s both informative and entertaining):

For car manufacturers, it is still possible to dismiss the electric vehicle as simply a rich person’s toy. This misinterpretation of “new” as being “niche” and “impractical” has real pedigree. Blackberry and Nokia viewed the iPhone in these terms in 2007: why would anyone pay $600 for a phone with only one button? But with a mid-priced addition to Tesla’s product mix, the company will no longer be competing just with the BMW 5-series and Audi A6. It will be competing with the Honda Accord and Toyota Camry.

We didn’t think so. Our expectation is that the auto industry is going to have a common response to the launch of a modestly priced, attractive, electric vehicle in the first quarter of 2017: accelerate whatever they are doing in the EV space immediately.

It is very likely that the prestige, engineering and visceral thrill of German motoring has dissuaded many people from buying a Tesla Model S over the last few years. But if you agree with that statement, do you also agree with this statement: “It is very likely that the prestige, engineering and visceral thrill of Japanese motoring will dissuade many people from buying a Tesla Model 3 over the next few years”?

This is where the analysis of Tesla future competitive prospects tends to go wrong. The basic idea is actually correct: that Tesla is aiming to transform the mobility landscape and accelerate the switch from fossil fuels to sustainable electric power. CEO Elon Musk has said as much.

But viewing Tesla’s current vehicles as luxury market competitors doesn’t work. There’s demand for luxury cars, and there’s demand for Teslas. And the two flavours of demand aren’t the same.

Tesla was able to sell just over 50,000 vehicles last year because there are that many buyers out there who think a long-range electric car with a lot of luxury appointments and excellent performance is something they want to put in their garage.

There could be many more of this type of buyer, but EVs — even Teslas — are still difficult to own, mainly given that they take a long time to recharge (gassing up, by contrast, takes just a few minutes, and gas stations are almost everywhere). And that means there’s probably a ceiling on this first wave of Tesla owners.

Why people buy Japanese cars

Enter the Model 3, which is supposed to bash through this ceiling. Hence Parker and Newman’s suggestion that no one will buy a Japanese car in the face of the overwhelming challenge from the Model 3.

The problem here is that demand for Japanese cars, especially in the US, defines a huge chunk of the mass market and has for decades, just as demand for German luxury brands like Mercedes and BMW defines the luxury segment.

Demand for Honda Accords and Toyota Camrys is demand for reliable, affordable, fuel-efficient products. It has nothing to do with demand for alternatives to gas-buring engines. You buy a Toyota Corolla because you want a way to get around that won’t let you down. You buy a Tesla because, to a degree, you want to change the world.

Anyone shopping for, say, a Honda, Toyota, Nissan, Mazda, Subaru or for that matter a Kia or a Hyundai, is unlikely to have Tesla on their radar. Once the Model 3 has been around for five or 10 years, that could change. But in the short term, given the miserable sales that traditional automakers have seen with EVs, it’s going to be up to Tesla to prove that the market exists.

2015 Toyota Camry XSEToyotaA Toyota Camry.

A tough virus to get rid of

Yes, General Motors is said to be trying to beat the Model 3 to market with the Bolt EV, due to arrive in late 2016 (the Model 3 won’t hit the road until late 2017). But GM is simply doing the Bolt now because it can — the automaker is fully recovered from its 2009 bailout and bankruptcy, is printing money on big pickup trucks and SUVs, and has a CEO in Mary Barra who thinks it’s worth it to invest in the technologies and mobility services of tomorrow without betting the farm on them.

Tesla-topianism has been a tough virus to eradicate. Every time you think Tesla watchers, particularly in the finance industry, have figured out that the automaker is becoming a real car company (not a go-go growth tech company), those Tesla watchers crank up some new narrative that has Tesla doing something monumentally awesome that alters reality as we know it (that’s why the Apple analogies come fast and furious).

But then you look at the facts. For example, Toyota sold over nine million vehicles worldwide in 2015.

Tesla and Musk could move humanity forward in terms of eventually retiring the gas-buring engine. But against staggering numbers like that, it will be impossible for Tesla to have a meaningful impact, if it survives, for decades. And adding one new car to the portfolio isn’t going to speed things up.

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