Can Ford Motors Mount A Credible Challenge For Tesla?

  • Ford Motor Company has announced that it will invest $4.5 billion in EV initiatives over the next 5-year period.
  • Other traditional automakers have been ramping up their EV investments.
  • How is this likely to impact Tesla?

Ford Motor (NYSE:F) has announced it will invest $4.5B in electrified vehicle initiatives before the year 2020. The second largest automaker in the U.S. plans to add a total of 13 new EVs to its existing portfolio and grow its electric-powered mix, including plug-in hybrids, by 40% by the turn of the decade. There is little question that heavy investments in the EV space by the largest automakers can be unsettling for Tesla (NASDAQ:TSLA), widely considered to be the world’s most popular EV manufacturer. But just how credible is this challenge?

Battered EV Sales

The Ford announcement appears quite strange coming in the wake of recent revelations of how badly EV sales have been battered in an environment of low gas prices. Low gas prices have not only been causing EV manufacturers to sell much less, but have also been encouraging EV owners to upgrade to more fuel-efficient SUVs. And, surprisingly, Tesla has remained largely unscathed in all the maelstrom. EV U.S. market share in the light vehicle category has fallen to just 2.2% in the current year, the lowest level since 2011 and sharply down from its 2013 peak of 3.7%. Meanwhile, the popularity of SUVs is near an all-time high with a third of new light vehicle sales falling under this category.

Prevailing low gas prices have largely been to blame for this unfortunate trend. According to the U.S. Energy Information Administration, the average price of gasoline clocked in at $2.260 in November this year compared to $2.997 in November of 2014, a 25% drop. EV sales appear to have a strong positive correlation with gas prices. EV sales in the country, excluding Tesla’s, are down 20% through the month of November. Low-to-mid end EV manufacturers have been hardest hit. Ford’s Fusion, C-Max, and Lincoln MKZ EV hybrid deliveries tumbled 25% to 59,301 units through November. General Motors Volt plug-in hybrid recorded a 23% units sales decline; Nissan Motor’s battery-powered Leaf sales fell 41% while Toyota Motor’s Prius models reported a 12% sales decline.

Edmunds revealed in April that 22% of hybrid EV owners who have been trading in their vehicles this year have been opting for a new SUV, close to twice the number recorded last year. The number of people who opted to keep their alternative fuel vehicles during the annual upgrade cycle fell to just 45%, the first time it dipped below the 50% mark.

 

Tesla-31
Source: Market Watch

Meanwhile Tesla has reported unit sales growth of more than 40% over the period, with Tesla’s November sales of 3,200 vehicles representing a huge 167% Y/Y jump compared to sales in November of last year.

General Motors (NYSE:GM) and Ford have over the years invested billions of dollars over the years in EV, HEV, and PHEV programs. Ford has designed quite a few successful EVs while GM has been stronger in PHEVs. But EV sales remain a tiny part of these companies, and do not seem to have affected Tesla sales in any tangible way.

Granted, Tesla has always confined itself to selling vehicles to the high-end segment of the market and has never been tested in the mass market. But so far Tesla’s concept of designing a stylish EV with a price to match seems to have been phenomenally successful at establishing itself as a leading niche player whose sales rival those by much cheaper EV makers.

The announcement by Ford was most likely spurred by the EPA requirement that requires all auto makers to have a fleet average 54.5 miles per gallon for their vehicles by 2025, and also partly be the fact that Tesla intends to launch its first mass-produced car, Model 3, in March of 2016 and sell it for just $35,000, or about half what base Model S costs.

There is good reason to be optimistic that Tesla can extend its success with high-end EVs to the mid-and-lower end segments as well. For one, the company has managed to establish an incredibly high consumer loyalty rating of 99/100, by far the highest by any automaker. And Tesla recently demonstrated that is quite capable of making stylish products without breaking the bank.

Tesla recently announced that base Model X will cost 80k, just 10k more than base Model S despite being much snazzier. Tesla will get chance to lower its production costs significantly and pass on the benefits to the consumer in the form of lower-priced products without sacrificing on quality when its giant Nevada battery Gigafactory finally starts cranking out EV batteries in about a year’s time.

So while Ford and other leading automakers might ramp up their EV efforts, they are likely to have little or no effect on Tesla’s long-term growth prospects.

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