The Big Question Facing Tesla Motors

It's an impressive milestone, and the company deserves big props: Tesla Motors (Nasdaq: TSLA  ) delivered the first examples of its Model S sedan to customers this week, a bit ahead of the schedule announced months ago by CEO Elon Musk.

This is a big achievement. From the massive production investments needed to the arcane morass of regulatory hurdles that need to be met around the world, the business of making cars is one of the hardest for a newcomer -- even a smart, well-financed newcomer -- to enter. That Tesla has come this far (and that it has thousands of orders in hand) is most impressive.

But there's still a big question looming over the company, and it's one that makes me very leery of Tesla as an investment.

What happens next?
Here's the big question: After the 10,000 or so true believers who have put down deposits on a Model S get their cars, who will step up to buy? Or more to the point, how many will?

So far, electric cars haven't exactly taken the world by storm. Despite great marketing, a mass-market price, and a global brand name known for quality, Nissan sold fewer than 10,000 examples of its all-electric Leaf last year. General Motors' (NYSE: GM  ) Chevy Volt was acclaimed by critics and came with range comparable to an ordinary gas-powered car, thanks to its gas-fueled on-board generator, but couldn't even break 8,000 sold.

The Model S is a different proposition from those two cars, but that's both a plus and a minus. On the one hand, the EPA says that a Model S equipped with Tesla's top-of-the-line 85-kWh battery pack has a range of 265 miles, far beyond any other mass-market electric car. (For comparison, the Leaf's EPA-rated range is 73 miles, and Ford's (NYSE: F  ) Focus Electric gets 76.)

On the other hand, there's a pretty simple equation in the electric car business: Range costs money. In the Model S's case, you'll pay big. Pricing for the 85-kWh variant of the Model S starts at $69,900 (after a $7,500 federal tax credit), nearly double what you'd pay for a Leaf. That's comparable to a loaded BMW 5-Series or Mercedes-Benz E-Class, and that's before you start adding options to the Model S, which can drive the price up to within spitting distance of six figures.

An expensive proposition for an unproven car
To be fair, the Model S is -- at least on paper -- plausible competitor for an E-Class or a Lexus LS. It's big and roomy, beautifully styled, and comes with a well-trimmed interior loaded with high-tech touches centered around a huge 17-inch NVIDIA (Nasdaq: NVDA  ) powered touchscreen.

But will it sell, once the early adopter types have their cars? Tesla plans to deliver about 5,300 cars this year and hopes to deliver 20,000 more next year and 35,000 more in 2014. That would require about 15,000 new sales by the end of next year, for starters. Is that doable?

Musk and his team clearly think so, and many analysts are bullish on his chances. I'm still skeptical. Even if a substantial market exists for the car beyond its fan base -- a big if -- the car itself is unproven, as is Tesla itself. How well will the Model S hold up in the real world, in Phoenix summers and Minnesota winters? Will it deliver reliability good enough to persuade people who now own a Lexus or a Mercedes to take a chance on a new brand?

It might. But I'm not ready to bet on it.

Building a great car is a lot harder than it looks
Here's the thing that a lot of Tesla fans fail to appreciate: It's really hard to make a car that can compete with the global giants, especially with Mercedes or BMW or Lexus. Just ask General Motors, a company with huge teams of experienced engineers and vast global resources, and a famous luxury brand, Cadillac, that is only now starting to get close to that level. For that matter, just ask Toyota (NYSE: TM  ) , which spent a fortune establishing Lexus as a credible competitor on that level two decades ago.

I think a lot of the bullish analysts -- and investors -- are looking at Tesla as a tech company, not as an automaker. As a tech firm, Tesla looks great. It's got the best range in the business (for the moment), great buzz, money in the bank, and a clear route to profitability.

But as an automaker, Tesla's got a lot to prove. And should it prove successful, there will be some giant competitors looming. If there turns out to be a market for a $70,000 electric car, you can bet that BMW and Ford and Nissan and other big names will enter it in a hurry, and their engineering resources and economies of scale (not to mention their dealer networks) dwarf anything Tesla will be able to muster.

That's why, even as I admire Tesla's achievements to date, I'm not high on its chances of long-term success. But while Tesla Motors is a recommendation of the Fool's Rule Breakers newsletter service, there's a different multibagger that has the growth-stock service's attention these days. Find out what that stock is with a free report.

Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of General Motors, Ford Motor, and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (8)

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  • Report this Comment On June 22, 2012, at 2:31 PM, Hawmps wrote:

    """If there turns out to be a market for a $70,000 electric car, you can bet that BMW and Ford and Nissan and other big names will enter it in a hurry...""" and they will be buying their drive train components from Tesla.

  • Report this Comment On June 22, 2012, at 3:54 PM, krludovici wrote:

    The writer overlooks the fact that, in a separate endeavor, Elon Musk has successfully built a rocket that recently flawlessly completed a round-trip to the space station, delivering and returning cargo. THAT'S a pretty exacting task too, so maybe he knows a little bit about getting tough jobs done!

  • Report this Comment On June 22, 2012, at 5:25 PM, zaijien wrote:

    The writer makes some sense. Tesla seems to be popular for other reasons than its ability to survive and prosper as a car maker. Reasons could be cool technology, or the CEO's capacity to attract attention for non Tesla related matters. Hard core believers should pay attention to some of the points mentioned in this article: upcoming competition from the best manufacturers when they see a market, Tesla still being a small and inexperienced firm, having good but few successes, competing technology (eg natural gas if prices stay low), and the fact that people are not likely to prefer Tesla to Mercedes anytime soon. Buying Tesla now is taking on much risk. I like the company and wish we had electric cars, energy independence and all that, but that's not relevant. The author makes some very good points and investors may find themselves sorry for investing for the wrong reasons!

  • Report this Comment On June 24, 2012, at 12:57 AM, jstack6 wrote:

    Tesla is making a great car compared to any type or fuel. As OIL keeps going up and pollution grows this is the best choice. Others like Nissan and Ford are not in the same class.

    No gas, no OIL, no transmission , maint cost almost zero and electric is 8 times less per mile than gas. Wise investors buy wise choices.This is it.

  • Report this Comment On June 25, 2012, at 11:14 AM, TMFMarlowe wrote:

    @krludovici: The writer is familiar with Elon Musk's resume. Aside from the fact that he's a smart guy who appears to be able to listen to good advice, it has no bearing on the present problem.

    @jstack6: Don't fool yourself. Nissan and Ford and others will be in "the same class" in a hurry if there turns out to be a sizable market for $70k luxury electric cars.

    John Rosevear

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