By: Jeremy Office Ph.D., CFP, CIMA, MBA
Special to the Boca and Delray newspapers
Tesla has dominated the headlines with their highly anticipated release of the new Model 3. The amount of hype generated for a new car was unprecedented. Because of the hype surrounding the Model 3, it got us thinking: Is Tesla on the verge of a pivotal change in the auto industry or is it just a fad? Where do they go from here? From an entrepreneurial perspective, we are fascinated by the “buzz” Tesla has created for its product.
Tesla has yet to deliver a Model 3 vehicle and is not expected to for another 18 months (at least), but there have been nearly 400,000 people who have pre-ordered the vehicle to date. Although a customer can cancel their pre-order at any time and receive a full refund, Elon Musk and Tesla have ultimately been given a $400-million-dollar interest free loan by its customers. In one of business history’s most brilliant moves, Elon Musk essentially just held the largest Kickstarter campaign in history. But what makes customers wait in line for a product that they won’t receive for over a year?
One of the first areas we look into when making an investment is the management team. Elon Musk has a successful track record of building disruptive companies that change industries. He has cultivated a following of customers that believe in his mission to create a better future. We have seen similar types of customers with Apple, buying into the culture Steve Jobs fostered within his mission statement of “To make a contribution to the world by making tools for the mind that advance humankind.”
But you need more than a cult following to become a successful business. The product has to embody what the company strives to be known for. When Apple came to market, their products were viewed as contrary to the rest of the market. The perception of being just a high end piece of hardware changed with the iPhone. The iPhone was viewed as more than just a phone, it was a symbol of what could be in the mobile industry. This is the type of approach Tesla has undertaken as it is viewed as much more than just a car. It is viewed as a car of the future, with its sleek designs, environmental consciousness, safety rating, and advanced technology that set it apart from the rest of the industry. Tesla embodies what could be in the auto industry.
It is this vision of the future that has Tesla planning to sell 500,000 electric vehicles by 2020, an ambitious figure, but realistic considering the huge interest in the Model 3 vehicle. The huge demand has also led to doubts that Tesla may not be able to meet production. In 2015 it is reported that there were only 50,000 deliveries of Tesla vehicles and estimated 80,000 – 90,000 units in 2016. In the first quarter, Tesla only delivered 14,820 units; this was short of the 16,000 units expected. This type of shortfall raises the question of whether or not Tesla can make the transition from niche automaker to mass-market company; from producing 50,000 units a year in 2015 to 500,000 units a year in 2020. Getting production up to scale continues to be one of Tesla’s biggest hurdles. A part of that hurdle is completing its Gigafactory by 2020 which will be the second largest plant in the world behind Boeing. Building the battery packs at the Gigafactory is essential to Tesla successfully meeting production demands.
So is all this hype regarding Tesla worth it? Tesla as a company is still not profitable and a lot is riding on how well the Model 3 does. The announcement of the Model 3 comes 18 months before the expected delivery of its first vehicles. This leaves plenty of room for its rivals to act. GM amongst others is due to release the Chevy Bolt in 2017, with many considering it to be a direct rival of the Tesla Model 3. With a 200-mile range, cheaper price and its release expected to be a full year before the Model 3, the Chevy Bolt can be a desirable substitute for the Model 3. After tax rebates the Chevy Bolt can be purchased at a price of $30,000 that’s $13,000 lower than the average Tesla Model 3 car. According to Elon Musk, the average Tesla Model 3 vehicle will cost the customer $43,000, which will bring Tesla approximately $17 billion in revenue from the Model 3 alone going off current reservations.
Even with that being said, the success of Tesla is still uncertain. Electric vehicles have still not been adopted by the masses. In our opinion, Tesla may not even look like the same company 5 years from now. We believe they will pivot and morph into something greater than a car manufacturer. The application of the batteries from the Gigafactory alone could change the trajectory of Tesla. In our view, Tesla cars are just a portion of the bigger picture Elon Musk has envisioned for electric transportation and consumption. With Elon Musk at the helm, we look forward to what Tesla becomes over the next months and years. We could be on the verge of a major disruption and point in history.
Jeremy Office, Ph.D., CFP, CIMA, MBA, is Principal of Maclendon Wealth Management in Delray Beach and specializes in portfolio construction, strategic asset and liability management, and long-term planning relating to financial matters as well as real estate, income tax, insurance and estate planning. He is also Managing Partner of SJO Worldwide, a venture capital company. www.maclendon.com; 855.MAC.WEALTH
By: Jeremy Office Ph.D., CFP, CIMA, MBA