Monday, April 18, 2016

Can BMW Fend Off The Charge of the Tesla Model 3? Part 1

Two years ago a wrote I post suggesting that Tesla and BMW would eventually face off.  That's clearly going to happen with the launch of Tesla's Model 3.
We’ve all seen upcoming products being described with buzzwords like “revolutionary” and “disruptive” that later translate into something much less successful after the public actually gets a chance to experience them. I can remember the hype leading up to the launch of Dean Kamen’s Segway back in 2001 when Amazon’s founder Jeff Bezos boldly predicted, “Cities would be built around (it).” 

While the Segway has enjoyed some success, it never really penetrated the market much beyond specialized uses, like transportation for police departments, guided tours, and theme parks. On the other side of the coin we can look at what the evolution of the cellular phone has done for communication, and what the digital camera has done for photography and the film industry. Both products revolutionized their respective industries and left titans in bankruptcy before they even saw it coming. Electric cars have the potential to do the same thing to the auto industry, and we may just be on the precipice of such an event.

For the past few years, many people have wondered which side of history Tesla Motors will be on in ten or twenty years. Will Tesla revolutionize the automobile and lead the charge to electrification, or will they be a forgotten footnote like so many other companies that have tried to do something special and failed? The auto industry is probably the toughest one to penetrate, proven by the fact that the last American automobile manufacturer to succeed was Chrysler Motors, which started in 1924. Since then, every volume auto manufacturer that started in the US has failed, except for Tesla. 
People camped out in lines many hours before the Tesla stores opened for Model 3 reservations on March 31st
It’s worth noting that Tesla has yet to turn a profit, and in fact is losing hundreds of millions of dollars every year. So they haven’t really “made it” just yet, in fact they still have a way to go. However the prospects of that happening just got much better, better than even the most optimistic Tesla analyst had even imagined. One week after opening the reservation process for Telsa’s next offering, the Model 3, Elon Musk and company had received over 325,000 reservations. By the end of the second week, reservations were at about 400,000.

Reservation holders eagerly plunked down a $1,000 (refundable) deposit to be one of the first to own the car Tesla has been talking about since their inception. This is the electric car from Tesla that is supposed to be affordable (under $30,000 after incentives), have a long range (over 200 miles per charge) can recharge quickly (at one of thousands of Supercharger stations) and is also desirable (fun, fast & stylish). Some Tesla stores had people lining up hours before the 10:00 am opening on March 31st, with hundreds of people waiting to reserve a vehicle that they hadn’t yet seen, didn’t know the exact price, or exactly when it would be available. It wasn’t until 8:30 pm that day that Tesla actually revealed the vehicle and since then reservations have continued to come in at an unrelenting pace. 

Tesla has announced the base Model 3 will start at $35,000, and Musk has said he expects the average Model 3 to sell for roughly $42,000 with options. Personally, I expect the average Model 3 sale to be closer to $50,000, because I'm sure most will want Supercharging (likely not included in the base price), plus expensive options like a larger battery, dual motors, and at least a few other optional goodies. Even if we use Elon's prediction of $42,000 per vehicle, if all of the current reservations were to convert into actual deliveries, that would add up to $16,800,000,000 in sales in just about two weeks. Of course that won’t happen, and many reservations for one reason or another won’t convert. Even if only 50% (about what I expect) actually wait it out and order the vehicle, that’s over eight billion dollars in sales in the first couple weeks. The automobile industry has never seen anything like this. It’s more like the hysteria created over the next iPhone than it is about any previous new car offering. 


  






The lines at Short Hills Mall stretched from the Tesla store all the way out into the parking lot!
I arrived at the Mall at Short Hills, in Short Hills, New Jersey at 9:30 am on the day reservations opened and was shocked to see the line stretch across half of the mall, down a corridor and out of the building. I expected a couple dozen people, but there were 200 to 300 there people at that point, a half hour before the reservation process opened up. I met a friend and current Tesla owner Michael Thwaite there, and he had just walked along the line of people waiting, asking them if they currently drive an EV or if they had owned one in the past. The results of his informal survey were that about 90% of the people waiting didn’t currently drive an EV, and the Model 3 will be their first car with a plug. 

So these weren’t hardened EV supporters; the vast majority of people there were new to electric cars, and still they were willing to wait for hours on line for a car they won’t actually get for roughly two years. So does it mean that Tesla has made it? Certainly not, they still have a lot of work in front of them. They still need to get their battery factory, the Gigafactory in Nevada open and churning out millions of battery cells. They still need to retool their Nummi plant in Fremont, California for the high production Model 3 line and then scale up like they never have before. 

A recent picture of Tesla's Gigafactory under construction outside Reno, Nevada. Photo credit: Above Reno
Many industry insiders will still say they won’t be able to do it, that this will be the challenge that Tesla cannot meet and if they fail to produce a high quality vehicle in large volume it will be their undoing. The funny thing about that is I’ve been hearing this for five years now. I’ve talked with executives from just about every major OEM, and as recent as only a few years ago nobody even gave Tesla a chance. They laughed at the Supercharger network and how Tesla would need to spend hundreds of millions to build and maintain it. Tesla now has over 3,600 Supercharger stations worldwide and expects to have over 7,000 by the end of 2017. This network is unrivaled in the industry. Every other automobile manufacturer is either hoping EV infrastructure matures, or is just mildly getting involved by subsidizing regional infrastructure projects.  However, they aren't willing to commit to own or manage the stations as Tesla does to ensure that the stations are strategically located and operational when customers need them.

The Supercharger network is only one example of something the industry has been saying Tesla can’t do. Another example is the direct sales model. While Tesla has had difficulty in some states because of archaic dealer franchise laws, they are still selling their cars throughout most of the US without issue. This is something many thought wouldn’t be possible. Then there are the sales of the Model S, Tesla’s first volume offering which has been available for a little over three years now. Many people were doubtful it could compete with the large luxury sedans it would be priced against, cars like the Mercedes S Class, the BMW 7-Series, Audi A7 and the Lexus LS. After all, these vehicles have had decades to build a following of brand loyal enthusiasts. How many people would be willing to plunk down $80,000 to $130,000 for a car from a new manufacturer with no company history, dealerships or in many cases service centers within driving distance?

Well, the Model S hasn’t just been competitive in this class, it is dominating it. Comparing 2014 and 2015 US sales in this class, Tesla had a 51% increase from 16,689 vehicles to 25,202. During that same period, sales for every single competitor in this segment were down, while the total for the entire segment remained about the same. The Model S didn’t necessarily bring new buyers to the segment; instead it took sales from the established competition already there.
Every single vehicle in the segment experienced an abrupt sales decline in 2015 while Model S sales increased by 51%
So what does this mean? First, don’t bet against Tesla. Tesla has been beating the odds all along. Despite being told they can’t do it, they just keep plugging along (pun intended), winning awards and accolades, extending their proprietary network of high-speed chargers and building a fervently loyal following. Musk has repeatedly said the Model 3 will compete head on with the BMW 3-Series. The 3-Series has been the benchmark for the entry level, premium sport sedan market for decades. It’s the king of the hill in that segment and BMW’s bread & butter. BMW sells about 100,000 of them per year in the US - and it's the only car in the class to eclipse the 100k mark per year, domestically.  Now think back to the 400,000 Model 3 reservations Tesla accepted in two weeks. Even if half of those reservations cancel, the Model 3 will not only outsell the benchmark of its class it its first year, but it will likely sell more than double its closest competitor in the segment. That's provided Tesla can scale up to meet demand of course, and while it's unlikely that they will have the capacity to make 200,000 Model 3s in the first year, they will be severely cutting into the sales of competing cars in this segment. 

If the Model 3 does to this segment what the Model S did to the competitors in its segment, the shock waves will be felt through the entire industry.  Who's to say Tesla won't do it again in the other segments? The Model 3 looks to be a formidable competitor so the only answer is for the competition to also step it up. The established OEMs must bring exciting, long range and affordable electric vehicles to market or they risk being the next Polaroid or Kodak. No, they aren't too big to fail, and yes, it can happen. It's impossible for the premium brand automakers to disregard Tesla any more; to do so would be corporate suicide. In fact, last week Daimler held their annual shareholders meeting in Berlin, and no less than four times they were asked by concerned shareholders why they didn't have an answer for Tesla.

However, before we crown Tesla the new champion of the auto industry, we need to realize the other OEMs haven't exactly been sitting on their hands for the past half a decade. They have all, to some degree or another, been working on electric vehicle programs, and they all have the resources to get up to speed quickly. BMW is probably positioned better than any other premium brand, as they have poured billions into the sub brand BMW i, which already has the BMW i3 & BMW i8. But as good as the i3 is today, it won't be good enough to compete head to head with the Model 3 in 2018 unless BMW were to triple the current range and also reduce the current cost, neither of which is likely to happen.
An artist's rendering of the rumored BMW i5
So is BMW the walking dead without an answer for the Model 3? No, not even close, but they do have a lot of work to do. Now that Musk has showed his hand they know where they need to be in 2 to 3 years. In part two of this post I'll lay out my plan for BMW, which will ensure they aren't left behind and wondering, "How'd that happen?" I'll discuss my recommendations for BMW's entire plug in strategy, from the next generation i3 to the iPerformance PHEV line. However the real weapon will be the rumored (upcoming) i5. If BMW has any chance of retaining many the customers who plan to turn in their 3-Series for the Model 3 when it's available, the i5 will be what keeps them from defecting to Tesla, and in part two I'll design the car they need to bring to market sometime in 2018 to keep them relevant in this segment.

Now realize in the time it took you to read this article Tesla has likely accepted about 100 more Model 3 reservations. Sometimes I wonder if the legacy OEMs really understand what's happening here.

20 comments:

  1. Great article! I thought you were probably working on a Tesla post :-)

    First, congratulations on blowing past a million page views, Tom! It’s total affirmation of your leading role in educating, informing, and encouraging not only the i3 fraternity, but also the EV community at large (including consumers, dealers, manufacturers, and policy-makers), to a degree and with a patient finesse that nobody else can touch. Well done, indeed!

    Second, I'm a long term Tesla stockholder, having first bought shares when they were selling for $30, so I've had the faith. While I didn't join the long lines on March 31, I did drive down to my local Tesla store the next morning and to give them my deposit for a dual-motor Model 3. I could have done it online, but it has been a long time coming, and I wanted to make it more of an event.

    Looking forward to seeing what you do with the elusive i5!

    -Chris

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    1. Thanks for the kind words, Chris. And thanks for noticing the pageviews - pretty cool indeed.

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    2. I loved this article but the i3 is no lightweight... I drive it far more than a gasoline car as I recently exceeded the 30k mark after a mere year.

      http://practicalbev.blogspot.com/

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  2. Just make an electric version of the next three series, including Touring. Then they have a winner.

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  3. Well written, as always Tom.
    I don't think consumers' reactions to Tesla should be entirely attributed to how innovative Tesla models are. It's the opposite - that the current established OEM/dealership model is so broken and antiquated, that there is so much hype for Tesla.

    BMW is definitely ahead of the others... but where is the i5, i7, or a more 'mainstream' i3?
    I love the i3, and almost leased one. But the antiquated way it is being sold in Canada (0 discounting, old school sales tactics) kept me away.

    The existing OEMs may just be dinosaurs that don't react fast enough.

    On the other hand, Tesla will be out of cash (i.e., bankrupt in less than 12 months)... look at their cash balance vs. burn...
    And they would have gone under in 2008/9, had it not been for $400M from the US Govt.

    They have a lot of work to do to appeal to the masses. The Model S is a niche product for the wealthy, who can accept substandard interiors and quality issues, because it's so novel and not their only car. Note that the new Model X has already been recalled...

    The Model 3 has to be bullet-proof, and the cost has to be what Elon claims it will be...
    And many of the reservations may just vaporize..
    and don't forget that "cult" cars can quickly die off in sales volume once the hype wears off (e.g., Saturns, or most sports cars).

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    1. Wow, what a comment from someone who has obviously never driven a Tesla . . . .

      First, unlike Ford, Nissan and others, Tesla has paid off its DoE loans in full and almost a decade early. Second, I've driven an i3 twice now, but pleased to have sold off our last BMW 335i and walked away from BMW, despite being a BMW CCA Life Member.

      Their arrogance and yet stunning incompetence in making reliable and desirable cars has reached new highs. The kicker for us was our chronic stream of 328i, 328d, and 528i loaners while BMWs were in for never-ending repairs. We wondered what kind of people were actually buying that junk? Slow, clumsy, and remarkably rough, with terrible interiors and UI's, it's as if BMW is trading on its long history versus actually making compelling products. Let's not even start on the i3 . . . .

      We're now on our FIFTH Tesla Model S and we're never looking back. Good bye BMW!

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  4. A Model 3 hatchback would be awesome, and I'd personally much prefer a 2-door coupe Model 3. BMW is a ripoff. They've always been a ripoff. (I know; I had one/ Service? Total ripoff.)

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  5. Tom, I hope that some cool heads at BMW are reading your blog as well.

    The day of convenient and affordable sustainable transport is fast approaching and everyone is ready to embrace it!

    It is up to BMW if they'll be a part of it

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  6. A very thoughtful and well-written piece, Mr. Moloughney. An i3 owner who follows your blog sent me a link. The key message you deliver is that BMW has a major advantage in its large size, but needs to respond strongly to Tesla's plans to invade the 3-Series space. I agree and am betting that BMW will do that...even trying to one-up Tesla. BMW has time...but they must not squander that time.

    I would add that while Tesla is a clear threat to all others, the COMBINATION of Tesla and BMW offering viable EV solutions in the 3-Series size range it a threat many times greater to all other players in the space. This is the reaction Tesla is hoping for. While wishing for competition seems implausible, that is the genuine wish of Tesla. Tesla is a company on a mission, the mission to move more driving needs into environmentally-friendly vehicles.

    Which brings me to my final point. The majority of Tesla owners I have met (I am one, too) believe that they are part of theTesla mission. They may say it in different ways, but they know they bought a $50,000 car while contributing another $50,000 or so to Tesla's mission so the company can grow...and invest in new designs, a charging infrastructure and new factories to drive down the cost of energy storage. Tesla and Musk have given us the hope that the transition to clean transport can finally begin. It is a true leap of faith that here in early 2016 shows the possibility of success.

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  7. Three cheers for Tesla. The more good EVs on the road, the better. Now we wait and see. Not many will walk away with just a $35,000 price tag. Further, let us see how Tesla lives up to its anticipated delivery dates. They haven't been good about this in the past. I am cheering for BMW to match Tesla and to exceed Tesla in the next iterations of its electric vehicles. The game is on. Tesla, always living close to the edge when it comes to the company's finances, is banking on the Model 3 to be its Model T, putting millions of these on the road and making it a rich company--that is, Elon rich. Again, we will see. Hey, maybe Elon will put a Model 3 on the moon with one of his rockets. Now that will be a first.

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  8. Thanks Tom for all your great writeups!

    Two years ago, I didn't buy the i3 for two main reasons:

    1. the sales guy
    2. the doors design

    Now I spent 1000 because:
    1. supporting EV and most important - direct sale
    2. auto pilote

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    1. Sure, while you are waiting to get yours (2020 may be) I will have saved enough money with my i3 on gas to buy almost 2 Model 3.

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  9. Tom, did you get your deposit down on the first machines or are they going to lend you a prototype for testing purposes?! All the best Lukas

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    1. I did plunk $1k down on day 1, Lukas. I figure I have about two years to see what the i5 turns out to be. I'll also be watching everybody else. ;)

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  10. Tom, Nice piece. I posted this entry which you probably read, but I will reference again here: http://bmwiforum.bmwusa.com/thread/681/infrastructure-why-model-3-dominate

    The charging network is the achilles heel of every other manufacturer who wants to compete with Tesla. The whole point of a car with 200+ miles range is the ability to travel away from home since very few people drive more than 150 miles per day and return home each night. Once you are away from home, you need a high speed charger, at least 60-100kW. Driving more than 300 miles in a 200+ mile car can't include a 4hr stop at a J1772 6kW charging station. Most of the existing CCS and CHAdeMO charging stations offer 1-2 chargers and are horrendously unreliable.

    Every other manufacturer is just hoping that someone will build out a high speed charging network. It is folly to commit $B's to design cars and modify factories, while ignoring the charging network. That is the chicken/egg problem that Tesla took head on and addressed from day one. It is now their most strategic competitive advantage.

    And then comes the battery factory which harkens back to when car manufacturers made their own steel. There is not enough battery supply in the world to enable all the other manufacturers to build the cars they are talking about.

    I believe we will see some exciting cars from the other manufacturers by the end of the decade, but not in volume, and not with a charging network.

    This year the Model X will put in a dent in the high end SUV sales that drive a lot of profit for the other manufacturers. And then, as Musk has already said, they will build a pickup, which will really put dent in the profits of GM, Ford and Toyota. It's a match made in heaven as EV's have lots of torque and most trucks don't expect to be driven 200+ miles / day.

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  11. I was in that line, I was as surprised as you to see the length of it.

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  12. I was in that line, I was as surprised as you to see the length of it.

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