Will Tesla be a major auto maker or just a pretender?

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Everything seemed to be going well for the world’s youngest public-listed automobile company until its shares dropped 40 per cent this year, having lost almost $1 billion in 2015, a cash reserves that dwindled from $1.9 billion to $1.2 billion by December 2015, then reporting a fourth quarter net loss of $320.4 million.

Yet at the latest post-earning conference call, Tesla CEO Elon Musk claimed that “Tesla is approximately doubling its cumulative sales every year” and he thought that is “pretty exciting and unusual.” Tesla’s shares subsequently rose by more than 10 per cent after the company forecast of 60 to 80 per cent increase in vehicle sales in 2016 and turning a profit.

Musk bases his optimistic projection on several factors, namely the company’s plans to invest $1.5 billion on cell production at the Giga factory, to open 80 new retail stores, to build 300 new supercharger locations, and finally to set up production for the Model 3 mass market electric vehicle.

So is Tesla going to be a major auto manufacturer in the future?  Here are several reasons to say that it will.

TECHNOLOGY.  Tesla’s revolutionary technology is even used by Daimler (battery packs), Mercedes-Benz (powertrain), Toyota (motor), and its ability to integrate these components into a great product is a major advantage in the crowded market place.

TIMING.  Tesla is so lucky as federal funds were earmarked for its type of products, having secured a $465 million loan from the U.S. Department of Energy, unthinkable in the mid-2000s or indeed today.

MONOPOLY.  Tesla is a rising star in economic terms, as it dominates a market that is only starting to catch public attention, from selling 3,000 expensive Roadsters in 2008, and then selling 20,000 slightly less expensive Model S in 2013.  With China on its horizon, anything is possible.

EXPERTISE.  Tesla has the right team of people who are motivated to deliver revolutionary vehicles to the public.

DISTRIBUTION.  Tesla has built its own dealership complete with after-sales service as a way to have complete control over customer experience which strengthens its brand for the long term.

DURABILITY.  Having pioneered the electric vehicle market, Tesla has the opportunity to stay one step ahead of its future rivals.

SECRETS.  Tesla has successfully tapped into the celebrity market for clean vehicles and its exclusivity is an advantage over other auto manufacturers.  It shares this trait with several others like Ferrari and Lamborghini.

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Now, here are several reasons to say that the company cannot last in its present state.

CAPITAL.  Auto manufacturing is extremely capital-intensive, requiring continuous research and design investment in technological innovation.  Perhaps it was not so in the immediate post-war era, but it certainly is today.  Does an upstart that depended on a half billion dollar loan from a generous government department have the big war chest to stay in the game long after Uncle Sam’s generosity ends?

MARKET.  Tesla started as an exclusive auto maker for the rich but is now by economic logic forced to move down market with the Model 3.  Will this not alienate its original customer base and turn its attention to competing with established auto makers, which it never intended to in the first place?

PRODUCTION.  Conventional economics says at least half-a-million annual vehicle production is necessary to stay in the game, yet the world had seen many brands disappeared because of this shortfall.  Will it not be a challenge to produce 500,000 electric vehicles annually by 2020 (as Tesla insists it will) in view of low gasoline price?  How long can Tesla stay in the game if this projection cannot be met in time?

Tesla started well and if it can overcome these three critical challenges, the company will not be just another brand that disappears after just several years of existence.  Only time will tell if Tesla can survive for a very long time, especially as an independent auto maker.  It will be sad to see it eventually be just another subsidiary of a long-established giant.

Comments welcomed.