Fans of Tesla Motors Inc (NASDAQ:TSLA) may remember the title of this article from Automobile’s article 2013 Automobile of the Year: Tesla Model S. Said by Tesla CEO Elon Musk, this phrase was said in context of ramping up production and successfully delivering Model S sedans to customers. The entire quote from the article was, “There have been car company start-ups before. The real challenge is to ramp up production. Then we’re a real car company.” As Tesla Motors Inc (NASDAQ:TSLA) continues to build Model S’ we can examine whether or not Tesla Motors Inc (NASDAQ:TSLA) has become a “real car company.”
More than the Roadster
When Tesla Motors Inc (NASDAQ:TSLA) began manufacturing the Tesla Roadster for the 2008 model year, electric car enthusiasts were overjoyed by a high performing electric car coming to market. Similarly, those who saw electric cars as compromises on wheels were blown away by the $100,000 two seat carbon fiber car. But the Roadster was not entirely Tesla Motors Inc (NASDAQ:TSLA)’s doing–in fact, the body of the car was sourced from Lotus, and the car resembled the Lotus Elise in appearance. Still, the little electric racer did its job; people now knew the name Tesla Motors Inc (NASDAQ:TSLA).
From there, the automaker set out on plans to build a world class electric car from the ground up. Buying the former NUMMI factory from Toyota Motor Corporation (ADR) (NYSE:TM) gave Tesla more than enough factory space for its creation’s assembly. All they had to do now was build it.
From reviews to production
After receiving nearly universally positive reviews, it was clear that Tesla had developed an amazing car that was a thrill to drive. But great products do not always mean great profits. Tesla began to tool up the Fremont facility for production and a few Model S’ began to roll off the line. A positive sign, but not enough to be a “real car company” just yet.
In efforts to meet delivery targets, the Tesla factory was working hard, with some employees working 70 hour weeks. Higher overtime pay, as well as inefficient supply chains (such as the shipping of tires by air from the Czech Republic), were reflected in disappointing Q4 2012 earnings at Tesla, which drove shares down sharply after their release.
Shortly thereafter, Tesla confirmed it had increased production to 500 Model S’ per week. Then the big news for the stock came–Tesla confirmed it would announce Q1 2013 profitability on both a GAAP and non-GAAP basis, emphasizing the beating of delivery targets by 250 units. Just as poor earnings had driven the stock down, the expectation of positive earnings caused the stock to close up nearly 16 percent on the day.
Tesla today
Based on Tesla’s figures, they are producing at least 500 Model S’ per week. I said at least, because there is another factor in the mix. As an electric car with no gas engine, the Model S has a storage space underneath the hood that the company has called a frunk. However, reports are showing that Tesla is ordering 650 frunkliners per week. Assuming only one frunkliner per car, this would mean the automaker would need to be producing 650 Model S’ per week to not be accumulating frunkliners in its facilities (and Tesla does not want unused parts laying around).
Even ignoring the frunkliner situation (which I have no additional inside information on), we can still assume Tesla to be producing 500 Model S’ per week. At this rate, the automaker should meet its stated goal of 20,000 Model S’ per year. So is this what Musk meant by a “real car company?” Let’s take a look at what defines a real car company.
From high price to mass market
A monster automotive giant like Toyota Motor Corporation (ADR) (NYSE:TM) produces millions of cars per year, and 20,000 units here or there is really not a huge difference to the company. Despite having a somewhat cozy relationship with Tesla, Toyota is not really financially tied to the activities of Tesla. Toyota is in the position where it can benefit from the the research advances of Tesla through existing partnerships while easily being able to write off any potential Tesla losses stemming from things such as undelivered parts or a drop in value in the Tesla equity stake the company owns. When it was purchased, the Tesla equity stake was worth approximately $50 million, but even though it is worth more today due to Tesla’s continuing success, it still represents a small fraction of Toyota’s annual research and development budget.
While Toyota will be sourcing some Tesla parts for its all-electric offerings, the automaker’s current profit center in the green car realm comes from its Prius line. Now the number one car by sales volume in California, Toyota is taking the opportunity to expand the Prius line-up by adding a larger Prius V, a smaller Prius C, and a plug-in hybrid electric (PHEV) Prius. All of this gives Toyota a much larger reach than Tesla should expect to have within the next few years. And with a solid track record of multi-billion dollar earnings, Toyota is not the example we should expect Tesla to live up to at this stage in the company’s development.
To get a feel for where Tesla wants to go, we can take a look at German automaker BMW AG. Musk practically declared war on the BMW 3 Series in his announcement of Tesla’s own Gen III sports sedan due for production in 2016 or 2017. Despite Musk’s aggressive stance, Tesla is still tiny compared to BMW. With a market cap of approximately $55 billion, BMW is about ten times Tesla’s size in market value and has a far more extensive line of offerings across multiple vehicle segments. While BMW probably does not see Tesla as much of a threat for the time being, Tesla has set its sights on BMW and is aiming at the company with its Model S and Gen III cars.
While the 3 Series is one of the best known BMWs, the automaker has diversified itself well beyond a sole offering. BMW has set itself up as a monster automaker for the high-end market, similar in types of products offered as Toyota in the mid-priced market. Like fellow German automakers Mercedes-Benz and Volkswagen, BMW is moving ahead with clean diesel models as a solution to high fuel prices. The diesel version of the 3 Series has significantly improved fuel economy over the conventionally powered model, but suffers from a perception of diesels as dirty producers of terrible fumes. As more clean diesel vehicles hit the roads, this perception should begin to change, and BMW could recognize greater sales among its diesel offerings in North America. Clean diesel could be used to counter the fuel saving aspects of Tesla’s vehicles, but most Tesla buyers are buying for performance or environmental reasons, so any clean diesel models from BMW will need to compete effectively on these levels as well.
Still growing
The most pressing issue for Tesla is not external competition, but internal execution. In this respect, Tesla is nowhere near the size of BMW or Toyota in terms of cars produced, but is meeting its targets largely as it has expected. However, a car company does not have to produce millions of units to be considered real. Exotic automakers like Ferrari and Bugatti produce a small select number of cars per year, but few would argue they are not car companies. And unlike these ultra high end automakers, Tesla is gearing up for future expansion for a greatly increased production of the Model X and Gen III sports sedan.
With positive earnings, manufacturing in line with 20,000 unit per year estimates, and a solid fan base that includes many Tesla owners, I believe that Tesla has become a “real car company.” However, there are still many steps and challenges ahead to become a true competitor to the world’s automotive giants.
The article “Then We’re A Real Car Company” originally appeared on Fool.com and is written by Alexander MacLennan.
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