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Foreign Automakers Eye America, but Can They Pull a Tesla?

By Daniel Miller – Oct 25, 2016 at 10:10AM

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Even as sales plateau in the U.S. new-vehicle market, the business remains so profitable that a long list of foreign manufacturers are considering joining the competition.

There are a lot of arguments that can be made against Tesla Motors (NASDAQ: TSLA). You can argue the company is overhyped and highly overvalued as it continues to burn through cash. You can argue that its potential acquisition of SolarCity is misguided or poorly timed. You can even argue that despite its success, the company remains largely unproven as it nears the launch of its first mass-market vehicle.

Producing a unique vehicle is much easier said than done, especially in the U.S. market. Image source: Tesla Motors.

But you can't argue how impressive Tesla's entrance to the U.S. market was. The U.S. market is ultra-competitive, and Tesla was a rare example of an automaker that managed to break into it, make a name for itself, build a fanatic customer base, and produce a well-received handful of vehicles. The list of automakers that have attempted to wedge themselves into the U.S. market and failed is a long one, but the fact that so many are still eyeballing it, when sales appear to be plateauing here, is a major concern for investors.

America or bust

America is no longer the largest market for new vehicle sales in the world. China took that role in 2009, and hasn't looked back. Sales there could outpace the U.S. market by nearly 10 million units this year. However, the U.S. is still far more profitable for automakers. Consider that General Motors (GM -0.29%) sells more vehicles in China than it does in the U.S., but GM's North America region generated $3.6 billion of the company's total $3.9 billion EBIT-adjusted profit during the second-quarter.

Further, vehicles sold here in the States are packed with technology and premium options that drive price tags higher – compared to the cheaper, bare-bones vehicles found in many overseas markets. According to J.D. Power, average transaction prices in the U.S. are an enticing $30,665.

For that reason, the list of automakers looking to break into the U.S. is as long as ever. Peugeot, a well-known French brand that gave up on its U.S. ambitions in the early 1990s, is preparing a full-scale return. Another well-known European brand, Skoda, a subsidiary of Volkswagen Group, plans to decide whether or not to enter the U.S. market as soon as next year.

SsangYong Motor Co., a successful South Korean automaker that specializes in crossovers and off-road vehicles, plans to enter the U.S. in 2020 with completely new products. And, while the assertion is unconfirmed for now, Reuters reported that China's Geely Automobile is preparing to introduce a middle-market brand here named Lynk & Co.

"People around the world look at the sales volumes going on here, and they look at the fortunes being made here, and they look at what the outlook is in other parts of the world -- and they want to be here," said Charlie Hughes, owner of the brand-consulting firm Brand Rules in a article in Automotive News.

Can they pull a Tesla?

Making a name for yourself in the U.S. is no easy task, and Tesla accomplished the feat simply because it produced something unique that nobody else could at the time: a luxury-like, sports-like, electric car. For new automakers to enter the U.S. market and be successful, they'll need unique products. If they can supply those -- and they will undoubtedly try -- the concern for investors will be a potential incentive war to maintain market share.

"America is very, very competitive, so we need to build a good brand," SsangYong Motor CEO Choi Johng-sik told Automotive News. "That's why we're now preparing completely new products."

If multiple new brands roll out unique vehicles and begin to take some market share, it would heat up competition further, and could force some automakers to ramp up incentives in their efforts to maintain market share -- and that means tighter margins, something no investor wants to hear.

With sales in the U.S. plateauing, but with the market still offering a high sales volume at enticing prices and profits, you can be sure more auto brands will test their chances here. That's a great thing for consumers, but a major concern for auto investors – so stay tuned, the next few years will be increasingly competitive, and interesting. On the bright side, the chances of a foreign automaker being able to pull a Tesla are slim, in my opinion.

Daniel Miller owns shares of General Motors. The Motley Fool owns shares of and recommends SolarCity and Tesla Motors. The Motley Fool recommends General Motors. 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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