The big three automakers of Detroit, Ford Motor Company (NYSE:F), General Motors Company (NYSE:GM) and Chrysler have ruled the U.S. auto industry for almost a century. They developed cars that people would love. But serial entrepreneur Elon Musk is defying all the rules. His company Tesla Motors Inc (NASDAQ:TSLA). ’s Model S electric car has garnered rave reviews from critics as well as users. Moreover, the California-based company operates its own distributor network instead of selling cars through dealers.
The Big Three are surprised to see that an automaker can really earn profits by selling electric cars. General Motors Company (NYSE:GM)’ Chevy Volt was a dud, and so was Nissan LEAF. But Tesla Motors Inc (NASDAQ:TSLA) showed other companies that consumers will stand in the queue to buy your product (electric cars in this case), if your product has right features.
Tesla’s Model S has a driving range of 265 miles, far better than any other electric car in the market. Ford Motor Company (NYSE:F) is working to improve the range of its Focus Electric, but it still goes less than 80 miles on a single charge. It gives Tesla Motors Inc (NASDAQ:TSLA) a big advantage as frequent charging was one of the biggest problems for electric car owners.
As Tesla continues to report solid growth, raise forecasts and pay the Department of Energy loans ahead of time, the stock is touching new highs. Tesla Motors Inc (NASDAQ:TSLA) shares are up about 165% so far this year. The company has started showing signs of long-term potential after almost a decade of losses and criticism. I believe it’s high time other automakers may consider acquiring Tesla.
Critics of Tesla may argue that no automaker would pay over $10 billion to buy a highly overvalued company. But I think there are two things that will entice other automakers to make an offer. First, the future belongs to energy efficient vehicles that do little or no harm to the environment. Tesla Motors Inc (NASDAQ:TSLA) only manufactures electric cars. So far, 11 states including California have passed tough environmental protection regulations. The regulation requires that at least 15% of an automaker’s the total sales should be zero-emission vehicles by 2025. More states are expected to enact such regulations in the near future.
The second reason I believe Tesla may become a takeover target is that it is uniquely positioned in the luxury automobile market. In fact, Tesla’s CEO recently said that there have been occasional merger discussions, but he didn’t name specific companies.
If Tesla Motors Inc (NASDAQ:TSLA) meets its 25% gross margin forecasts for the current year, it will be the highest margin rate in the auto industry. In 2012, Ford had a gross margin of 11.05%, while the figure was just 6.69% for General Motors Company (NYSE:GM).
Let’s assume that gross margins for Ford Motor Company (NYSE:F) and General Motors remain at the same level in FY14, and Tesla achieves its 25% gross margin forecast. Ford estimates its 2014 revenues at $142.75 billion, GM expects its revenues to reach $164.9 billion, while those of Tesla Motors Inc (NASDAQ:TSLA) are expected to be $2.45 billion in FY14. At 11.05%, Ford’s gross profit would be $15.77 billion, at 6.69% margin rate General Motors Company (NYSE:GM)’ gross profit will be $11 billion, while it will be $612 million for Tesla at 25% margin rate.
But the likelihood of Ford or General Motors placing a bid for Tesla is very low. Currently, Ford Motor Company (NYSE:F) is entirely focused on its restructuring plan under “One Ford” strategy. Acquiring Tesla Motors Inc (NASDAQ:TSLA) wouldn’t fit into Ford’s restructuring plans. On the other hand, General Motors Company (NYSE:GM) is bringing its own lineup of electric vehicles, and recently unveiled Cadillac ELR coupe.