Tesla Ready For German Competition, And Then Some: Report

Tesla Inc will shrug off what was once thought to be the existential competitive electric car threat from the Germans because of its lead in range, design, engineering and cost, according to a report from Berenberg Bank.

Many experts assumed that as soon as the mainstream competition for luxury electric cars like BMW, Audi, Mercedes, Porsche and Jaguar produced cars for the market, their experience in manufacturing and engineering would make Tesla an easy target.

Not so, said the Hamburg, Germany-based investment bank in the report.

Audi AG E-Tron Photographer: David Paul Morris/Bloomberg

At the Paris Auto Show earlier this month, Audi launched its new E-tron all electric SUV and Mercedes unveiled its EQC. They joined the Jaguar I-Pace as direct competitors to the Tesla Model X. Porsche has also launched an all-electric sports car, the Taycan.

Earlier this year, a report from PA Consulting said Tesla’s lead would quickly be reined in by Mercedes, BMW, and the Renault Alliance. Tesla will only be in 7th place by 2021, also behind Volvo and Toyota, according to the report, which ranked electric automakers according to their strategy, battery technology, culture, supplier networks, partnerships and financial performance.

Opinion has been divided as to whether Tesla can weather this storm and go on to becoming a leading electric automotive player, remain a small, niche player making not very big overall profits, or perhaps drown in the massive debt it has built up during its short but spectacular life.

Berenberg Bank has been a long-time believer in success for Tesla.

Mercedes EQC Photographer: Marlene Awaad/Bloomberg

“Tesla has already demonstrated its ability to outcompete incumbents and their internal combustion engine (ICE) vehicles despite a higher price, as consumers are willing to pay a premium for a better product and not just a different powertrain technology,” Berenberg analyst Alexander Haissl said in the report.

Tesla’s success has perhaps been camouflaged by the noise surrounding the production of the Model 3, and the antics of CEO Elon Musk. According to the European newsletter Automotive Industry Data, in 2018’s 3^rd quarter Tesla outsold British luxury manufacturer Jaguar globally by almost double with 83,500 sales compared with 41,940.

“This is the first time Tesla has outpaced a relatively major premium car manufacturer in terms of global sales,” AID said in its latest publication

Tesla also overtook Porsche in the quarter with its 69,962 sales.

The German and British electric vehicle assault will start in earnest next year, and Berenberg Bank thinks it will have a pricing problem.

“Newly launched electric vehicles (EVs) by traditional (manufacturers) will come to the market at a close to 80% purchase price premium before subsidies compared to their ICE counterparts without offering meaningful incremental benefits to the consumer. Consumers’ willingness to pay such a premium could turn out to be limited, which puts the competitive position of these EVs at risk,” Haissl said.

Jaguar i-Pace Photographer: Krisztian Bocsi/Bloomberg

“The big price premium also raises questions about the manufacturing costs (manufacturers) have for these EVs. The Audi E-tron or the Mercedes EQC are unlikely to compete in the same market segment as the Model X, but rather with the Model Y. However, we expect pricing for the Model Y to be competitive versus ICE vehicles in this segment, which puts it well below other EV offerings. On critical metrics, the Model X is already well ahead of competitors, and by the time the Model Y launches, the gap is materially wider given Tesla’s pace of innovation,” Haissl said.

The Model Y is an SUV version of the Model 3 sedan.

Haissl said the Tesla Model X has an approximately 25% range advantage over its German counterparts and the Jaguar, partly from better aerodynamics.

“With the Model 3, Tesla achieved another major improvement over the Model X; thus we estimate that the efficiency (miles per kWh) gap between the Model Y and traditional electric SUVs could be 50% or more,” Haissl said.

Porsche Taycan Photographer: Alex Kraus/Bloomberg

In an earlier report, Berenberg Bank said investors have underestimated Tesla’s finances, and its technological leadership.

“In our view, the market probably underestimates Tesla’s earnings and cash flow potential, as benefits from better fixed cost absorption, manufacturing efficiency gains and falling costs of batteries and components more than offset declining ASPs (average selling prices) over time. We expect Tesla to become self-sustaining, and consider worries about its balance sheet and cash flow generation to be overblown,” Berenberg said.

“This underestimates the full extent of Tesla’s technological advantage, which manifests in the entire electronic architecture of the vehicle as well as the battery management system. This advantage and superiority should become more visible and important once traditional (manufacturers) launch their next-generation EVs, as it underpins Tesla’s leadership even further,” the bank said.

“Traditional (manufacturers) are likely to struggle to narrow the gap more meaningfully, as it requires a radical rethink of the entire vehicle electronic architecture. The hurdles that traditional (manufacturers) have to overcome are higher and more difficult to solve than Tesla’s initial manufacturing issues,” Haissl said.

The German assault wasn’t helped by news Monday that Audi delayed the launch of its E-tron by a month because of a software problem.

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