For years, Tesla (TSLA 2.01%) skeptics and bears have warned that competition is coming, at which point the electric-vehicle (EV) leader would get crushed by legacy automakers with deeper pockets and more established manufacturing operations. Most traditional automakers have been dragging their feet in the development and launch of competitive EVs, but 2020 seemed to be an inflection point for EV adoption.
It's worth noting that battery pack prices dipped below $100 per kWh for the first time last year, according to Bloomberg New Energy Finance, a critical milestone in the path toward making EVs more cost-competitive with internal combustion engine (ICE) vehicles. A slew of traditional automakers have also unveiled new EVs or laid out long-term strategies to electrify their product portfolios over the past year. In no uncertain terms, EV competition is coming and will intensify, but that's the wrong way to frame the rivalry.
Tesla reported first-quarter earnings results earlier this week, and the company included an incredible metric: 98% of trade-in vehicles are ICE cars. Prominent brands that were being traded in include Toyota, Honda, Ford, and BMW. Just 2% of the vehicles that customers traded in when buying a Tesla were EVs.
This makes sense on a number of levels. Automotive upgrade cycles are fairly long, with most new car buyers keeping a new vehicle for around six years. If someone purchased an EV within the past six years, it's unlikely that they are looking to buy a new car of any brand soon. Due to that lengthy timeline, the auto market tends to move fairly slowly in general. EVs still represent a tiny portion of the broader market, comprising just 3% of cars sold in 2020. There simply aren't as many EVs out there to trade in, and the ones that are in operation are relatively newer.
In terms of Tesla facing increased competition, more compelling EVs is a good thing for EV adoption. The best way to look at competition is categorically. Instead of comparing Tesla EVs with another brand of EV, investors should focus more on how EVs will cannibalize and continue slowly chipping away share of ICE vehicles in the years and decades ahead.
There will undoubtedly be EV shoppers that compare Tesla to other brands, some of which will opt for the other brand for any number of reasons. But there is a far greater number of prospective customers that currently own ICE vehicles and will eventually adopt the newer technology, particularly as EV prices continue to decline due to falling battery costs. Rising adoption will benefit all EV makers.
"As more OEMs join our mission by launching EVs, we believe consumer confidence in EVs continues to increase and more customers are willing to make the switch," Tesla wrote in its letter to shareholders.