As mentioned before, Tesla’s prospects heavily rely on a successful launch of its Model S in mid-2012. Any long delays in production could spell financial demise for the company. Having said that, Tesla has done a great job of advancing its technology—quickly, and on a shoestring budget—to the point where EVs actually look like a feasible alternative to gas-powered cars. The release of the first operational Model S in January 2011 was an important step. Based on current and future industry competition, we expect Tesla to retain its technological competitive advantage for at least the next few years and succeed in making the Model S a fully-functional and well-performing vehicle.
We don’t want to simply provide a list of all of the possible competing EVs, since Automotive News’ “Watts Up” already does a pretty good job of that. Instead, we’ll explain why another one of Tesla’s key assets is that the Model S will occupy a unique position in the EV market when it launches in 2012.
There are a few general parameters that we think consumers will judge electric cars on: performance, range, price, and style. (Safety, too, but there isn’t yet sufficient safety data that would distinguish the EVs from each other). Of course, different consumers are looking for different combinations of those parameters. After reviewing the competition, we think that the Model S—if it works close to expected—exhibits a unique and preferable combination of those decision factors that will prevent close competition. Price, range, and performance attributes suggest that “competitors” like the Chevy Volt, Nissan Leaf, or Fisker Karma appear to target different customer segments altogether.
We examined the future of the EV industry, Tesla’s products, and different key aspects of Tesla’s business model. As stated in the first section of this article, we don’t think that Tesla will operate optimally alone, even if the Model S functions well. However, we have a number of reasons why Tesla is an attractive and likely acquisition target over the next three to five years:
1) Rising oil prices mean EV start-ups will attract the attention of traditional automakers.
The future of Tesla’s EV market has never looked better because of trends in the oil market, and most established automakers understand that. Instead of trying to develop their own EV technology from scratch, many automakers are “partnering” with start-ups like Tesla that have already spent years developing a niche expertise in EV technology. A large part of EVs’ economic appeal depends on rising oil prices, so why will oil prices rise over the long term?
The deep recession of the last two years temporarily ameliorated the “pain at the pump,” but the climbing global demand for oil with a resurging economy has caused oil prices to threaten the fragile recovery.
On another level, unprecedented unrest and violence in the Middle East have shown American consumers exactly why the oil addiction can’t be taken lightly. Even the flattening of oil prices from reduced demand in Japan won’t last very long. Many experts think that the accompanying nuclear crisis and consequent backlash against nuclear power in Japan will ultimately cause the Japanese government to use more oil to produce electricity in the future as a substitute. Moreover, since the “cheapest” oil has been largely tapped out, and demand from China, India, and Brazil continues to burgeon, it’s very likely oil prices will move in one direction—up. That means the cost savings from driving an electric vehicle will also increase, and cause more consumers to switch over to EVs. Less than 1% of total U.S. energy production comes from petroleum, so electricity prices will be largely insulated from volatility in the oil market.
2) Tesla’s brand image and potential synergies make it attractive to luxury automakers entering the EV market.
Tesla has made a name as a top-tier trailblazer, designer, and producer of electric vehicles and technology. When the company first started in 2003, the idea of EVs hitting the mainstream market was only a dream. But that didn’t stop Tesla from successfully developing the Roadster, which hit markets in 2008 with critical acclaim. Tesla’s Roadster destroyed the notion that EVs inherently are less powerful and poorer performing than their gas counterparts.
A luxury automaker like Daimler would sync perfectly with this brand image. Daimler prides itself on cutting-edge technology, class, and style in its cars, very similar to Tesla. Tesla’s culture of innovation would find a welcome home at Daimler, which has sufficient cash flow to fund development without taking on potentially debilitating levels of debt like Tesla currently has to do.
Aside from the close strategic fit, there are enormous synergies that a luxury automaker like Daimler could realise if it acquired Tesla. Many more potential synergies exist; these are just a few of the tangible ones:
One synergy is access to Tesla’s unparalleled assortment of intellectual property in electric powertrain technology and car design. Tesla currently has 35 patents and 280 pending patent applications. By acquiring Tesla, a traditional automaker won’t have to spend a lot of time and money developing the technology itself. This IP also has the potential to produce large amounts of revenue, but only if the Model S and future models can be launched in a timely manner and through wide distribution and service channels that characterise large, established automakers.
That brings up the next synergy, which are the distribution channels. As said before, Tesla currently faces a huge problem with its inadequate distribution strategy for the Model S that likely will result in significantly lower sales than otherwise may be achieved. Since Tesla’s management knows that constructing a large network of brick-and-mortar stores is beyond their financial resources, they’ve instead adopted a strategy of building a small number of company-owned stores and then utilising online sales (but there are legal restrictions on online car sales in many states). An acquisition by a large automaker would give Tesla access to a worldwide network of established dealerships and service centres; the largest incremental cost only would be building “bump-ons” to the dealerships to house the separate Tesla brand. Also, customers might feel more comfortable with a company that operates a regular service network, instead of solely relying on “mobile service” that doesn’t seem feasible with a planned level of car sales in the tens of thousands per year.
The last main synergy comes from established automakers’ expertise and efficiency in high volume car-manufacturing. With such high fixed costs in the auto industry, sales volume is critical to achieving profitability, but Tesla doesn’t have any experience with large scale manufacturing or volume sales.
It has tried to avoid this issue by saying that it specifically structured its business model to be able to achieve profitability with relatively low sales volumes, but that’s very tough to believe given industry precedents.
A manufacturing expert like Daimler or Toyota could use its extensive manufacturing experience to streamline and perfect high-volume production of the Model S, and also help Tesla secure much more favourable procurement contracts from suppliers.
3) Provisions in the Tesla-Daimler partnership suggest Tesla is already viewed as a potential target.
The agreement between Daimler and Tesla interestingly includes many “anti-takeover” provisions that would make an acquisition from a third party much more difficult. For example, Blackstar (an affiliate of Daimler) has a right of notice on any acquisition proposal that Tesla receives from any company except Daimler, and Blackstar then has a right to submit a competing acquisition proposal.
On the other side, Tesla’s CEO Elon Musk, who is also Tesla’s largest shareholder, agreed to not sell any shares of his stock to any auto manufacturer except for Daimler. He also agreed that he won’t vote any of his shares in favour of a liquidation transaction to any automobile equipment manufacturer, other than Daimler, without affiliate Blackstar’s consent.
So, it appears that there’s much more to the Daimler-Tesla partnership than a simple a transfer of capital and electric powertrain products. Tesla has done a good job in its contracts with Daimler and Toyota to specifically protect its intellectual and technological property from being transferred, meaning that Tesla isn’t giving away its competitive advantages. These provisions indicate that Daimler may be closely examining an acquisition of Tesla in the future, likely on the condition that Tesla can prove the Model S is fully functional and ready for production. Otherwise, it doesn’t make much sense for Daimler to have established the restrictive anti-takeover provisions that essentially give it “priority” access for an acquisition. Tesla and Daimler spokespeople declined to comment about the reasons for establishing those provisions in the agreement, so the true strategic intentions are unknown at this time.
After researching and analysing auto industry conditions and Tesla’s financial situation, we think it’s unlikely that Tesla will financially succeed on its own even if the Model S works as predicted. However, the direction of the EV market, Tesla’s cutting edge technology, positive brand image, and potentially enormous synergies make it a likely acquisition for a luxury automaker seeking to enter the growing EV market.
Disclaimer: The conclusions in this article reflect the opinions of the authors only, and not those of any of the mentioned companies’ management or employees.
Disclosure: The authors do not own shares of Tesla, Daimler, or Toyota, nor do they plan to purchase shares of those companies within the next month.
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