Tesla Motors Inc (TSLA) – Electric Dream or Shocking Nightmare? – Ford Motor Company (F), General Motors Company (GM)

The margin is an important factor when we consider how Tesla stands up as compared to other domestic manufacturers such as Ford Motor Company (NYSE:F) or General Motors Company (NYSE:GM). The Model S is a luxury vehicle that doesn’t just compete head to head with rival, traditional vehicles – it comes out winning – as evidenced by the recent Motor Trends ‘Car of the Year award. It is important to realise that Tesla could not compete in any other section of the market. Starting at the high-end is a super-smart move as it allows them to maintain high margins and generate the cash needed to complete their development programme and fulfil their goal of launching a high-volume/low-price vehicle, the ‘Gen III’. (See The Secret Tesla Motors Inc(NASDAQ:TSLA) Master Plan (just between you and me) note the date – 2006)

The approach taken by Ford Motor Company (NYSE:F) and GM is somewhat different. Their starting point is their existing low-end models. The Ford Focus Electric has just 76 miles of range at a retail price of $39,200. GM’s Spark EV is likely to have a 70 mile range at a price under $25,000 – a little closer to a sensible price point, but the car is small. GM is making noises about an EV with a 200 mile range, but details are sketchy.

These compact, anaemic vehicles are hardly inspiring. Perhaps that is the point. Traditional manufacturers just cannot get excited about electric cars. And it shows. Because of government directives and incentives, they feel they have to run an EV program, but I get no feeling of real conviction or enthusiasm behind it.

Can Tesla maintain an innovative lead over larger competitors with far greater resources? When it comes to innovation, I‘ll back the guy who just sent a rocket to the international space station over the guys who have spent the last hundred years doing the same thing – especially when that guy has a driving passion for the product and a 24% stake in the company.

So that raises the question, what will it mean for traditional automotive manufacturers if Tesla succeeds and the ‘Gen III’ ultimately becomes a reality? This is a question with big implications that traditional producers such as Ford Motor Company (NYSE:F) and GM don’t seem to have grasped.

Imagine a scenario where you have a choice between 2 cars equivalent in price and appearance. The difference is that one uses expensive fuel, which is only available at specialist outlets and has complicated mechanics that require expensive, regular maintenance. The other conveniently recharges at low cost at your own home, requires very little maintenance, produces no cancerous gases, and has much superior performance and handling. Under this scenario, the car based on the internal combustion engine looks about as relevant and attractive as a PC requiring a floppy disk drive. And conventional manufacturers, whose competitive edge comes from 100 years of experience developing and refining their combustion engines, will find it as useful as Kodak found 100 years of experience in photographic film when the digital camera arrived.

Investors in any conventional automotive manufacturer will need to keep a close eye on the development of electric vehicles. When change comes it tends to come swiftly.

As for Tesla investors, will they be living the dream, or sleepwalking into a nightmare? If Tesla can overcome the perception of “range anxiety,” and avoid any serious production glitches, its execution to date is certainly encouraging.

Risky? Yes. But for me the dream lives on.

The article Tesla – Electric Dream or Shocking Nightmare? originally appeared on Fool.com and is written by Ian Richards.

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