- Bloomberg surveyed 5,000 Tesla Model 3 owners and concluded that BMW has something to worry about.
- BMW has nothing to worry about.
- The dynamics of BMW’s and Tesla’s businesses allow both automakers to thrive.
- But ultimately, Tesla’s cost of doing business could become a disadvantage, if the company can’t continue to produce revenue growth and start to generate steady profits.
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Bloomberg has conducted a survey of Tesla Model 3 owners and has been publishing the results in tranches.
The latest is called “Market Evolution,” which sounds impressive and cryptic, but is really just about how the Bloomberg demo – 95% male, 30-50 years old, financially well-off – is swapping its BMWs for Teslas. Crunching the trade-in numbers, Bloomberg concluded that BMW tops a “vulnerability index” relative to Tesla; that the other German carmaker, Mercedes-Benz, doesn’t, falling at the bottom of the index.
“One explanation is that the two brands, while both competing in the same price segments, target different definitions of ‘luxury,'” Bloomberg’s Tom Randall, Dean Halford and Cedric Sam opined.
“Mercedes is built for comfort and class, while BMW is defined by its driving performance. Comfort and class are hard to measure; for performance, you take the car to the track.”
Yeesh. The percentage of BMWs that ever get anywhere near a track is minuscule. The truth is that BMW owners and leasers skew smack into that male, 35-50 demo, while Mercedes’ customers are older.
Mushy-headed reasoning and a survey of owners who can afford just about anything
The mushy-headed reasoning doesn’t end there. The Model 3 isn’t a cheap car – Bloomberg notes an average price of more than $US50,000. That’s not even entry-level luxury, it’s mid-luxury, and a strong indication that the current crop of Model 3 owners isn’t terribly price-sensitive. On a five-year loan, that’s a $US900 monthly payment – roughly $US400 more than what the average American is shelling out (and that’s average – most owners want a number that’s significantly lower).
The bottom line is that Model 3 owners can pretty much buy or lease whatever they want. OK, maybe not Ferraris and Bentleys. But they can choose between a modest monthly payment on a Mazda or a steeper one on a Model 3, absorbing the Tesla premium without stressing their household finances.
Let’s move on to the larger question of whether BMW has a Tesla problem.
The answer is that BMW doesn’t have a Tesla problem. BMW’s average transaction price in the US is well north of $US50,000, and the carmaker sells a variety of models in multiple segments. The overall business globally generates one of the highest profit margins in the industry for a carmaker at its volumes, about 10% annually.
Like many automakers, BMW has seen customers shift away from sedans like the 3-, 5-, and 7-Series to SUVs such as the X5 and X7, but that’s a positive development for the bottom line, as premium SUVs have higher margins.
In the US, BMW has also nurtured a stable market share since 2013 of about 2%, selling between 300-350,000 vehicles every year. It operates one factory in the US (in South Carolina, since 1994) with a capacity of nearly 500,000 vehicles annually, all of the SUVs.
The upshot here is that BMW’s business has been designed to fit with its markets and to generate a predictable profit on predictable investment.
Tesla’s numerous business challenges
Tesla, meanwhile, has pushed toward the same level of sales – 250,000 units in 2018, perhaps 350,000 in 2019 – but hasn’t come anywhere near an annual profit. It’s not actually clear that its car business can convert an entirely speculative gross margin that’s usually stated as being between 20-30% into a net margin. Beyond that, Tesla is effectively selling one new car, the Model 3; the higher-ticket Model S and Model X don’t look as though they’re going to be revamped.
Objectively, with BMW you have a very good business, and with Tesla, you have a pretty bad one. Tesla’s saving grace has been that there is an appetite for all-electric cars in the US and elsewhere, so revenue generation had been drastically improving for the company quarter-to-quarter.
But in order to sell more Model 3s, Tesla has had to ding revenue by cutting prices. That’s caused revenue growth to flatline in 2019. And with eroding deliveries in the segments filled by the ageing Model S and Model X, Tesla isn’t getting it back on its more expensive offerings.
Tesla has achieved what few thought was possible: create a new car brand – and power it with electricity! But few thought it was possible for a reason: the economics of volume manufacturing are extremely challenging. If Tesla didn’t have access to optimistic investors seeking financial growth – the stock is up over 1,000% since its 2010 IPO – the company would have run out of money years ago.
Tesla is obviously emerging as a luxury competitor and could encourage BMW, Mercedes, Lexus, and Audi to increase their electrification efforts. But it isn’t evident that the electric market could be steadily profitable, and because it’s still small – only about 2% of global sales – even Tesla’s popularity is unlikely to convince BMW and others that they need to undertake the truly massive spending they’d need to fight for tenths of points of share.
The same old Tesla mistakes
Again and again, Tesla observers make this fundamental error. Meanwhile, in the industry, Tesla has been welcomed as a competitor, for two reasons.
First, Tesla investors are funding all the risk. BMW, for one, doesn’t have to spend anything to create new EV buyers. It’s often argued that Tesla spends nothing on advertising and therefore has some sort of leg up on the incumbents, but this overlooks that Tesla has lost $US6 billion to simply exist. Had Tesla’s investors not been willing to shoulder this, then Bloomberg wouldn’t have any Model 3 owners to survey.
Second, Tesla’s success indicates that there could be growth in EVs (outside of China and a part of Europe, I’m sceptical). If Tesla doubles sales, then the market could also double, and if that’s sustainable, then eventually big carmakers could see some competitive logic. All boats rise.
The important thing to remember about the auto industry is that there are no winners and losers – there are only winners. If you lose, you disappear. Otherwise, the business is defined by competition, up to a point. Nobody is willing to compete themselves out of business.
Except, perhaps, for Tesla. If I’m BMW, I could easily look at the Bloomberg survey and conclude that with the Model 3, Tesla is solving my sedan problem in the US. Sedans are increasingly unpopular. And yet, BMW has a stalwart franchise in the 3-Series. Still, I might prefer to sell people X3 and X5 SUVs. Tesla provides me with my excuse.
Think about that the next time you see a headline that reads “Model 3 Success Hits BMW the Hardest.”
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