How Far Behind Tesla Is Big Auto? How Long Till It Catches Up?

June 23, 20177 years ago Zachary Shahan 0 Comments

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It may seem absurd to put Tesla ahead of Big Auto, but by many standards, Tesla seems to be far ahead. You don’t have to take my word for it — Tesla [TSLA] is now the most valuable US car company, recently surpassing GM and Ford in market cap, and there’s a reason or 10 why the investment community on the whole sees Tesla as a more valuable company despite drastically lower annual production/sales output.

This article isn’t about proving that Tesla’s ahead, though. It’s actually a genuine, open-minded search for how long it’ll take Big Auto to catch up to Tesla … if it ever can. One widely held assumption is that large automakers can turn on a dime and crush Tesla at its own game “once the time is right.” That’s not true.

To use a brief metaphor for Tesla vs Big Auto: Tesla is like a small but quick dog in a race with giraffes. It is off to a sizable lead, but if the giraffes put in a concerted effort to catch up, they could conceivably get ahead of the dog before the finish line. (Disclosure: I have no idea how fast giraffes can run and if this metaphor makes any sense.) If the giraffes are too slow to get running, they lose. If they start running but are clumsy and careless, they could even fall and crash. Will Tesla become the #1 automaker? It depends a bit on the inherent qualities/advantages of this dog as well as the actions and potential of the giraffes, but I wouldn’t be the first one to notice that the giraffes seem complacently content nibbling on the leaves in the trees above their heads.

It’s in the Batteries, Baby

Aside from basic vision and self-interest, Big Auto’s biggest weaknesses seem to be its battery supply and battery capabilities. Tesla naysayers think that large automakers can catch up on the batteries tomorrow if they decide to, but I think that’s massively off the mark.

First of all, dealing with supply, it’s obvious yet often ignored that it takes years even for the likes of Panasonic, LG Chem, Samsung, and SK Innovation to dramatically increase their battery production capabilities. Also, before doing so, they need assurance/commitment that automakers and others will provide the necessary demand to make an increase in capacity worthwhile. As automakers slow-walk their commitment to EVs, actual market availability of competitive models, and overall mass production plans, battery producers wait to put large investments into ramping up their own production capacity. No other battery producers (outside of China, at least) are planning production increases by 2020 that match Panasonic’s and Tesla’s because these other battery producers don’t have assurances from automakers that the they will buy the batteries.

Of course, there’s a bit of a chicken and egg situation here too — a big one. Large increases in production capacity bring down costs, which then makes electric cars more competitive, which grows demand for batteries, which ramps up production capacity even further (probably exponentially). With Tesla and Panasonic taking a leap of faith, they reportedly have the cheapest EV batteries on the market … by far. That makes Tesla’s electric cars more competitive, which grows demand, which gives Tesla and Panasonic more assurance that they can ramp up production even further (start working on a few more gigafactories), which further sticks Tesla in the lead in this critical exponential growth phase of the industry.

How does Big Auto catch up on the supply and inherent cost issue? Well, I think any automaker trying to compete would need to commit to buying a high number of EV batteries from a partner supplier, and even beyond that, I think such an automaker would need to convince the battery maker that it would genuinely have that much demand for its electric vehicles — something like Tesla’s demand for the Model 3. That’s quite hard to do given several challenges Big Auto faces in this new market. And it also explains why Carlos Ghosn is all but begging policymakers to require that automakers build electric cars en masse (which would be an easy way for Nissan and Renault to show battery producers that demand was going to be there).

Tesla can say it’s going to have demand for a few hundred thousand electric cars a year. Other automakers? If I were a battery producer, I’d probably want to see some proof that an automaker would really have the demand before I committed to growing battery production capacity a few times over.

Aside from the simple economics of production capacity and supply, there’s the matter of battery chemistry. Tesla has world-leading battery experts on its team who have been slaving away to determine the optimal battery chemistry for electric cars. Surely, battery producers like Samsung, LG Chem, and SK Innovation have their own battery experts who are trying to optimize their battery cells and battery packs for EVs, but don’t discount the importance of the fact that they themselves are not automakers. Perhaps these other battery leaders can match what Tesla and Panasonic are doing together, but that’s inherently a steep challenge for a battery producer that isn’t also an automaker or isn’t working very closely with an automaker.

How do Big Auto and Big Battery catch up on battery cell chemistry and battery pack optimization? Good question. I’m not sure, but I think working together closely and employing a nimble, innovative startup-like approach to the development of batteries would be wise moves. Trying to nab people like Jeff Dahn before Tesla does also seems a tad sensible as well.

Big Batteries Need Superchargers

The other giant step Tesla has taken that Big Auto hasn’t concerns superfast charging stations. Certain automakers are now partnering in some fashion to get super-fast charging rolling, and EVgo and ChargePoint are headed in that direction, but Tesla has a vast superfast charging network today that is conveniently laid out along common travel routes … and that network took years to build. The Big Auto logic for waiting so long after it became clear that Tesla’s Supercharger network was massively appreciated and loved escapes me. The only thing I can think is they were hoping Tesla would just collapse and go bankrupt.

Even if large automakers are now seriously working to help develop a vast superfast charging network (something we’ve seen only slim evidence of), it takes years to find the right locations, secure the permitting, and build the stations. Years.

In the meantime, many EV buyers are choosing Tesla models over other EV models they might have chosen instead simply for the convenience/practicality of long-distance travel. That means quicker growth for Tesla, a quicker battery production growth curve, falling battery/EV costs, and a widening gap between Big Auto and Tesla.

And, again, even if automakers have caught on to the importance of superfast charging, it’s not clear if the solution they are heading toward will adequately compete with Tesla’s proprietary, branded, reliable, well integrated system of Superchargers. Tesla took an ecosystem approach that is clearly working well. Whether another approach can compete is still up in the air. What if automakers go down an uncompetitive avenue for a few years? How long will it then take them to catch up?

Survey results from our new EV report. Responses came from over 2,000 EV drivers across 26 European countries, 49 of 50 US states, and 9 Canadian provinces. Responses were segmented according to region — North America vs Europe — and type of electric car — plug-in hybrid vs Tesla vs non-Tesla fully electric car.

And Then There’s The Sales Staff

Another dramatic departure Tesla took away from Big Auto was in the sales approach. People hate going to auto dealers, and even if they haggle a bit, they often feel like they got ripped off and engaged in a black-market activity of sorts. The dealership model of car sales is turning out to be pretty crappy, and that is especially true for electric cars.

Tesla decided to make its stores cool, hip, fun, and relaxed. It implemented a hardcore no-pressure approach to sales that’s focused on making people feel good, not getting them to sign a piece of paper. It removed any potential for haggling or changing prices, so no one feels they have to do that to get a good deal and no one wastes time on such a game. As a result, Tesla has become the coolest kid in the mall and Tesla stores have become places where people will actually go just to hang out. Needless to say, a sales approach that people love is an advantage over a sales approach that people hate.

Big Auto would do well to change its approach to selling people cars, particularly electric cars, but when will it do so? We haven’t seen any strong signs that large automakers will drop the high-pressure, low-information, pushy, haggling approach to car sales any time soon, which just keeps funneling more buyers into Tesla stores.

There are other matters as well — over-the-air software updates, navigation screens, autonomous driving capability, solar power, and energy storage systems, to name a few things.

Even ignoring those remaining matters, it’s hard to see Big Auto catching up in the next 5 years. Furthermore, the longer it delays leaving the starting block, the more challenging it’ll be to get rolling.

I don’t personally think it’s surprising or confusing that Ron Baron thinks Tesla’s stock [TSLA] could hit $1000/share by 2020. I’m not giving investment advice, but yeah, it’s hard to see when any large automakers will catch up to Tesla.