The rapid rise of electric vehicles has been good to Tesla (NASDAQ:TSLA) shareholders during the last year. While companies like Nissan stake out the lower-end market, Elon Musk seems to have sewn up the luxury segment.

But that's changing. BMW's (NASDAQOTH:BAMXF) electric city car, called the i3, has been gaining traction. The company received more than 8,000 pre-orders for the car before it hit European showrooms in November, and by mid-January, when U.S. dealers began taking orders, this number had risen to 11,000 -- more than the company expected to sell during all of 2014.  


i3. Source: BMW.

The hatchback might not seem like a direct competitor to Musk's super sedan, but it's likely just the first jab in what's poised to be an all-out war for the luxury electric-car market. This year, BMW will launch the i8, a hybrid electric supercar that, with a $135,000 price tag and top-shelf performance, takes direct aim at the Model S. Longer term, BMW plans to launch a full i-series lineup of electric cars, in the first credible threat to Tesla's burgeoning EV dynasty. 

Home-field advantage
Right now, Tesla is the de facto electric luxury brand, but I'm betting this will change. BMW is the first brand with legitimate luxury cachet to enter the electric market. Both companies target drivers who are younger, more affluent, more educated, and more liberal than average. BMW has owned this market for a long time, and research shows that its ample brand power should translate well to the EV market.

In fact, a global survey by Deloitte found that, of people who would buy an electric vehicle, 7% would be most likely to buy one made by BMW. That's nearly triple BMW's 2012 market share in the U.S., suggesting that electric-vehicle owners are disproportionately likely to buy BMWs. Drill down on the luxury part of the market, and it becomes clear that the majority of Tesla owners (and potential buyers) should also be interested in a BMW-branded electric vehicle.  

BMW has owned the high-performance luxury segment for decades. Tesla is just visiting. Don't deceive yourself about who has home-field advantage in this fight.

The sleeping giant
In April, BMW added production capacity for the i3 line, boosting its 70 vehicles per week to 100 in response to wait times that had ballooned to six months. Though still far less than the 600 cars per week Tesla manages -- or the 1,000 Tesla targets -- it's worth noting that BMW added capacity simply by deciding to do so. There wasn't any fanfare or lofty targets, BMW just hit the "on" switch. This demonstrates the scale advantage that a stalwart like BMW has over an upstart like Tesla. BMW's MINI brand produced nearly 304,000 cars in 2013, or about 5,800 a week. That's nearly six times Tesla's target production rate. The company's core BMW brand produced roughly 32,800 cars per week -- more than Tesla managed during all of last year. 

In terms of production, BMW can crush Tesla any time it feels like doing so. No, BMW likely won't throw the full weight of its manufacturing base behind the i-series anytime soon, but the massive capacity does give BMW an enormous advantage. First, it helps BMW cut costs through economies of scale. Second, it helps the company meet demand more efficiently. As wait lists continue to grow, potential car buyers, faced with largely comparable electric cars, will likely settle for whatever is most readily available. That'll be a BMW. And once the Model S stops being the de facto electric vehicle, Tesla will struggle to charge a premium.

Advanced weaponry
Though Tesla had first crack at the electric vehicle market, BMW knows the efficient sports-car market too well to discount. The boys from Bavaria cut their teeth during the height of European fuel shortages, and they built their brand on performance, luxury, and efficiency back when Musk was still in diapers. Though the company's expertise in diesel likely won't translate, its skill with lightweight construction will.

The i3 and i8 both heavily use a material called carbon fiber reinforced plastic, or CFRP. BMW began toying with the technology as a way to improve the performance and fuel economy of their conventional models. Now, the company is the global leader in using the technology for vehicle production. CFRP is substantially lighter than the aluminum Tesla uses in the model S, and it should help BMW match the range Tesla gets from its advanced batteries, but with lower cost and better performance.

The Foolish bottom line
Tesla might be the leader in luxury electric vehicles, but only a (small-f) fool would assume it has the market sewn up. Industry juggernauts like BMW have taken notice and are entering the fray. Granted, Tesla doesn't need to beat BMW to be a spectacular investment. Selling 100,000 electric vehicles in five years will mean a lot more to a new entrant like Tesla than a stalwart like BMW. If you're trying to play the electric car market in general, the best bet might be to invest in both companies and let the market sort out winners from losers.

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Frank Thomas owns shares of BMW. The Motley Fool recommends BMW and Tesla Motors. The Motley Fool owns shares of 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.

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