Amid Industry Price Cuts, Tesla Proves Its Electric Worth
While plug-in electric vehicles won’t likely take the automotive world by storm in the near future, there’s no denying that the segment has made substantial gains so far this year. Plug-in vehicle sales saw gains in July that nearly doubled those of July 2012, to reach 5,892 units. Nissan’s Leaf EV more than quadrupled its year-ago sales to 1,864 units, while the Chevy Volt remained more or less flat at 1,788 vehicles.
Although they’re making significant headway, EVs have yet to really catch on. In part, this could be due to a couple of factors — the most common complaint is range anxiety, followed by the lack of a viable charging network that can rival the current infrastructure of gas stations.
Further, the price tag on most EVs is astronomical when compared with their gasoline counterparts. To address the slow uptake, manufacturers — with the exception of Tesla (NASDAQ:TSLA) — have resorted to knocking the prices down, sometimes by several thousand dollars.
With Tesla due to report its quarterly results on Wednesday, analysts and observers are unsure as to what the report will bring. Whatever it is, one thing is for certain: the sales Tesla has secured were done without any significant discounts to the price of its Model S sedan, which at base runs nearly $70,000. Why, then, are the other manufacturers cutting their prices so frantically?
First, Tesla’s Model S plays in an entirely different league than the Nissan Leaf, Chevy Volt, or any other production EV. The Model S is a full-blown luxury car that happens to be powered by electricity. Its nearest EV brethren, meanwhile, use a different formula: put an EV powertrain into the cheapest car possible — often a small one — and drop the price as low as it can go to encourage the highest number of buyers.
The one catch to this is that consumers then expect the resulting EV to be a cheap car, which they have not proven to be. This has led to the ensuing price cuts. In the Model S, though, that higher price is disguised under numerous high-tech gizmos, leather, high performance, and luxury car good looks.
With Tesla’s earnings report for the second quarter due after the bell on Wednesday, analysts are expecting the company’s losses to narrow to about -17 cents per share, a considerable improvement over the -89 cents the company booked for the same quarter last year. Analysts are also projecting that the company will have seen growth of 80.9 percent over the past year.
But regardless of what Wednesday’s earnings report will provide, Tesla has only just started. While fellow players in the EV space went straight for the mass market with smaller, quasi-low priced vehicles, Tesla started at the top, with a $100,000-plus electric sports car called the Roadster. Next was the Model S — at base it costs $70,000, below the Roadster, but still falls above the average buyer’s price range.
This has been one of the skeptics’ biggest challenges to the company: the Model S is just too expensive to be a feasible long-term product, and instead is more a toy for the affluent — one that doesn’t warranty the tremendous amount of capital that has been sunk into gearing up the production for the vehicle.
But the Model S is only part two of the Tesla blueprint. From here, Tesla has plans for the Model X, a crossover SUV-type vehicle that will sport all-wheel drive capabilities and boast a price tag of $40,000 to $50,000. Following that, there will be another vehicle that will supposedly run in the $35,000 ballpark. As the price of EV technology deflates, so will the cost of the Tesla, widening the company’s margins from here on out.
What’s more, Tesla has made significant ripples in the auto industry. “There’s no guarantee Tesla can keep growing the way it has, but it’s already invigorated Silicon Valley in a way that Detroit cannot ignore,” BusinessWeek points out. Indeed, General Motors Co. (NYSE:GM) has assigned a special crew solely to study the Fremont, California-based EV manufacturer.
But Tesla now has enormous burden on its shoulders in the form of a $15.86 billion market cap. With its public market valuation so high, the company must live up to investors’ expectations, and in such an unproven industry, a small misstep could lead to substantial losses in market value.
“Most car companies are judged on the results they can deliver in the near term,” The Wall Street Journal reports. “Tesla investors are buying on results that probably won’t exist until sometime in the next decade. And even that is only if it can deliver flawless manufacturing execution, continued annual growth and crack through the consumer concerns about driving range and upfront costs that have restrained demand for all-electric vehicles so far.”
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