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Does Tesla's Win at Mercedes-Benz Matter?

Last week, Mercedes-Benz introduced the Mercedes B-Class Electric Drive, a fully electric car which is to be powered by a drivetrain made by Tesla Motors (NASDAQ: TSLA  ) . This is not the first time that Tesla and Mercedes' parent company, Daimler (NASDAQOTH: DDAIF  ) , have partnered up: The first two generations of Daimler's Smart fortwo Electric Drive used a Tesla drivetrain. Furthermore, Daimler has a 4.3% stake in Tesla.

The Mercedes-Benz B-Class. Photo courtesy of Mercedes-Benz.

However, thus far Tesla had not managed to win a contract to build engines for a mass production vehicle (excluding its own recently introduced Model S sedan). The first and second generations of the Smart Electric Drive were essentially test runs: total sales for the second generation have been estimated at just 2000 units. On the other hand, Daimler's new, third-generation Smart Electric Drive (of which Daimler expects to sell approximately 10,000 units this year) does not use Tesla technology. Similarly, Toyota Motor's (NYSE: TM  ) RAV4 EV (which uses a Tesla drivetrain) has failed to live up to its very modest sales goals. The sales pace has recently dropped off to approximately 30 per month, forcing Toyota to drop its prices to create more interest.

The Mercedes B-Class is meant to be a mass production car; as such, it appears at first glance to be a major win for Tesla. Selling electric drivetrains to other car manufacturers allows Tesla to diversify its revenue and avoid taking on all the risk of marketing electric cars. However, I do not have high hopes for the B-Class Electric Drive, from a sales perspective. The car addresses a very small market, and Mercedes is unlikely to sell enough of the cars to make a major impact on Tesla's (or Daimler's) bottom line.

Not much of a market
The B-Class Electric Drive will be able to travel only 115 miles between charges. That's slightly better than the Smart fortwo Electric Drive's range, but still considerably worse than the top of the line Tesla Model S, which boasts a range of up to 300 miles in ideal conditions (and 200-250 miles in more normal driving conditions).

Tesla's network of "Supercharger" stations along major travel routes makes the 200-300 mile range of the Model S sufficient for occasional long-distance travel. By contrast, the B-Class Electric Drive will be a pure city car. While Mercedes has not yet announced pricing, the car is certain to be significantly more expensive than the Smart Electric Drive, which will start at just $25,000 before potential tax credits.

I doubt that many people will be willing to pay up for the Mercedes experience given its short range: the B-Class Electric Drive will not get much use beyond commuting and local errands.  Consumers who want a luxury electric car are more likely to go "all-in" and buy the more expensive Model S due to its superior range. As a result, I expect the B-Class Electric Drive to sell even fewer units annually than the planned 10,000 for the Smart Electric Drive. While the income from these drivetrain sales will be a nice complement to revenue from the Model S for Tesla, it will not be all that significant for the company's finances.

Tesla's fate depends upon the continuing popularity of its Model S sedan and the upcoming Model X crossover. Mainstream automakers have not introduced credible competitors in the EV market yet, so Tesla cannot rely on drivetrain sales to other manufacturers to achieve profitability. On the other hand, the Model S has been incredibly successful thus far: On Monday, Tesla announced that deliveries had exceeded its goal for Q1. Tesla thus has an opportunity to become a dominant player in the EV market, which is why I like the company's long-term chances.

Near-faultless execution has led Tesla Motors to the brink of success, but the road ahead remains a hard one. Despite progress, a looming question remains: Will Tesla be able to fend off its big-name competitors? The Motley Fool answers this question and more in our most in-depth Tesla research available for smart investors like you. Thousands have already claimed their own premium ticker coverage, and you can gain instant access to your own by clicking here now.

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