Analysis: Tesla's prospects in the US and Chinese markets

Gasgoo.com (Shanghai) - Recent successive bankruptcy declarations made by A123 Systems, Fisker Automotive and Coda Automotive have led many to doubt about the immediate future of specialized electric vehicle manufacturers. However, one EV manufacturer, Tesla Motors, has posted impressive performance results. Sales of the California-based manufacturer's flagship vehicle, the Model S, during the first quarter of the year totaled 4,700 units. Sales of the Model S have already exceeded those of EV offerings from GM and Nissan, as well as surpassing sales of similarly priced Mercedes-Benz, BMW and Audi luxury cars. Tesla earned a profit over the course of the quarter, with its stock price rising over $100.

What prospects does Tesla's performance hint at for the future of the global electric vehicle industry? Will it be able to build on strong results posted in the first quarter of the year? Can EV enterprises operating in China learn from its successes? In order to answer these questions and better understand the matter at hand, Gasgoo.com (Chinese) conducted a week-long, three question survey on the issue, collecting opinions from 1,035 individuals in the automotive industry.

In the first question of the survey, participants were asked what factor has primarily contributed to Tesla's astounding financial performance this year. 28 percent of participants answered that the manufacturer's decision to specifically target a very unique market segment—high-class electric vehicles–was key in ensuring strong sales results. 21 percent cited Tesla's breakthrough in core EV technology, while another 21 percent believe that its success comes from speculation. 17 percent cited subsidies from the American government and income from emission trading policies as the primary causes behind its performance. The remaining 13 percent of respondents selected various other reasons.

Due to the high manufacturing costs associated with producing electric vehicles and the batteries that power t hem, many automobile enterprises prefer to develop smaller EVs in order to minimize costs. The majority of automobile manufacturers only supply subcompact and compact EVs, such as the Nissan Leaf, Mitsubishi i-Miev, Ford Focus EV, BMW Mini-E and BYD F3DM. By contrast, Tesla has settled on manufacturing and selling premium electric sports cars.

Tesla's choice to develop sports cars has given it many advantages. First of all, a major benefit to EVs is their relatively simple construction which allows for high torque and fast high speeds, comparable to several offerings from Ferrari or Porsche. Secondly, Tesla's models have been marketed successfully at premium level buyers, who generally prefer high performance over everyday usability. As a result, many of the issues with limited infrastructure catering to EVs are minimized, as a large amount of Tesla's customers will not drive their vehicles everyday. A majority of those owners also own their own private garages where they can install their own charging posts.

However, if only the above factors were crucial for Tesla's success, then fellow American EV manufacturer Fisker, which also makes premium electric vehicles, should also have prospered. In reality, Fisker was forced to file for bankruptcy protection while scouring for potential investors. Clearly, Tesla has some other advantages as well.

One of those is the manufacturer's core technology. Unlike Fisker, which purchased its batteries from other suppliers, Tesla's batteries and drive systems are extensively researched and tested in-house. During research and development phase for its models, Tesla tested over 300 different high-quality batteries before deciding upon the Panasonic 18650 sealed battery pack, which the manufacturer determined was the best performing and most stable battery on the market. Tesla boasts very talented design and managerial teams, with co-founder Marc Tarpenning himself an engineer by trade.

That expertise is clearly demonstrated in the manufacturer's vehicles. There have been numerous cases of batteries in both GM's Volt and Fisker's models, which were supplied by A123 Systems, as well as those in BYD and Zotye vehicles, spontaneously combusting. Tesla models, meanwhile, have been praised for the quality of their components, with no such incidents being reported. This fact has helped improve Tesla's brand image, allowing it to gain consumer trust and attract million of dollars of investment from Toyota and Daimler.

Tesla has also gained support from the US government, which provides subsidies of up to $7,500 on individual EV purchases. Thilo Koslowski, an automotive analyst with Gartner, points out that Tesla is eligible for an additional $35,000 in income on every vehicle sale it makes via the emissions trading scheme.

Next, survey participants were asked to predict how long Tesla can maintain its current sales levels for. The majority of respondents, 65 percent, were relatively pessimistic, saying that sales would die down before long. However, another 24 percent predicted that Tesla would be able to sustain the growth for over a year. Eight percent and three percent of participants answered half a year and one year, respectively.

Whether or not Tesla is able to sustain its current sales volume depends heavily on how it maintains its competitive advantage. As discussed earlier, Tesla relies on its technological advances to sell its vehicles to a very specific target audience. Its top selling Model S is priced between $62,000 and $87,000 and can be equipped with a choice of either a 60 kwh or 85 kwh battery. Although the government subsidy does little to reduce the Model S' high price tag, it is still well within limits for its target audience. Following its debut in June 2008, Thomas Hanks, George Clooney, Arnold Schwarzenegger, Larry Page and Sergey Brin all put in their orders for the car. At that time, the Tesla S carried a higher price tag of $110,000.

The Model S' zero emissions, high performance, advanced technology and sporty design have all managed to attract this type of premium consumer. However, despite the advances Tesla has made, there are still concerns voiced by many from inside and outside the industry. Although the Model S boasts a continuous driving time of 300 km on a single charge, that time was recorded with an average driving speed of 55 mph. Furthermore, although Tesla's vehicles have not yet encountered any severe technical problems, EVs are still a relatively immature technology, with several consumers still concerned about their safety and reliability.

Given Tesla's decision to target consumers looking for luxury and sports vehicles, the manufacturer is naturally paying attention to the rapidly expanding market for premium cars in China. According to a statement made by its Asia-Pacific branch, CEO Elon Musk will personally oversee the manufacturer's Chinese program.

In the final question, participants were asked how they felt Tesla would perform in China. 41 percent of respondents were relatively pessimistic, saying the manufacturer would not perform well in the country, while 42 percent were undecided. Only 17 percent believe that Tesla will perform well.

In the past two years, Audi and BMW posted growth rates of 30 percent to 40 percent for the Chinese market. Those figures have decreased to single digits this year. Meanwhile, niche luxury manufacturers Ferrari and Bugatti have seen their sales fall over 30 percent in the country. Increasingly fierce competition has put a lot of pressure on manufacturers in the luxury automobile market. Newcomers like Tesla have already missed the prime time to enter the market.

However, that is not to say there are no opportunities for the manufacturer to succeed. The number of individuals in China owning assets of at least ten million yuan has tripled from 2006 to 2011, and reached one million last year. There is still a large market for Tesla's vehicles in the country.

However, a severe limiting factor is the limited infrastructure for EVs in China. Presently only a few key cities possess the necessary equipment for EVs. Furthermore, China lacks comprehensive automobile financing services offered in foreign markets. Finally, it remains to be seen whether or not Tesla's models will be eligible for official government subsidies. How Tesla faces these challenges will play a crucial role in determining whether or not it can succeed in China.