Elon Musk has often been compared to the Marvel comic character Tony Stark but for me he is more like a cross between Victor Frankenstein and Steve Jobs. Or perhaps he’s most like Nikola Tesla*, the man he named his company after… which is appropriate. Like Nikola Tesla, Musk is obsessive, difficult to work with, highly intelligent, wealthy, visionary and almost irrationally ambitious. He is also prone to exaggeration and inclined to make ill-judged (some might say arrogant and stupid) public statements. His negative traits have come to the fore in the second and third quarters of 2018, creating unnecessary distractions which, ironically, are overshadowing what could be a breakthrough period for him and the company he founded. Investors should always pay attention to the negative traits of any CEO they are backing and this is especially important with Tesla, considering how tied the founder-CEO is to the brand. So this begs the question, is the Model 3 more akin to the Frankenstein Monster or the iPhone?
Demand S-Curve for Electric Cars
Regular readers will know that I have been very positive on the coming adoption of electric vehicles for about two years. I believe that the broad launch of the Tesla Model 3 (the first mass market fully electric premium car costing $30-$40k) will be the catalyst for widespread global adoption of electric cars. I expect new electric car sales will shoot up from around 3% of all cars sold today to >15% within 5 years.
Mid sized premium sedans – US market share
Tesla reported their second quarter 2018 results on the 8th August and whilst analysts and the media focused on Elon Musk, near-term profitability and the Model 3 production rate (important questions for Tesla shareholders), my focus was on the Model 3 demand curve. The subsequent conference call included some interesting comments. I’ve appended some quotes from the call at the bottom of the article but the key insights for me were the following:
1. Market Share: The Model 3 is taking a huge amount of market share. Very quickly.
2. Aspirational and climate conscious consumption: The top 5 non-Tesla cars people are trading in for a Model 3 are the Toyota Prius, BMW 3 Series, Honda Accord, Honda Civic and Nissan Leaf. Mostly lower priced cars than were expected, suggesting consumers are willing to pay more than they normally would for a car due to the Tesla brand and personal concerns about the environment. In short, the addressable market is bigger than was previously assumed.
3. Viral growth: Tesla customers are their best salespeople. Local demand is surging in locations where Model 3’s are being delivered. Previously unaware consumers are having their ‘Ah ha!’ moment when their neighbours take them out for a drive.
4. Critical acclaim: Despite the negative press around Musk, the Model 3 is getting fantastic reviews from fans and cynics alike.
Conclusion.. Maybe we do need 3’s
Whilst Musk may seem more Professor Frankenstein at the moment, it appears the Model 3 has more in common with the iPhone in terms of product-market fit. Model 3’s are certainly not monsters. Tesla have designed a fantastic product that customers really want and the planet really needs. We are not Tesla shareholders, nor Elon Musk acolytes. They have serious production and financing challenges ahead. But as sustainable investors, we aim to benefit from burgeoning EV demand by investing in companies that can capture value from the growth ahead. We are focused on niche, high quality suppliers to all of the EV manufacturers (including Tesla) as car buyers rush to go green. Maybe where we’re going we do need 3’s after-all – Exponential Growth.. as easy as 1,2,4
* Nikola Tesla was a genius. He invented the world changing AC induction motor which makes long distance high-voltage power distribution possible. But he also built Wardenclyffe Tower in an attempt to transmit electricity wirelessly across the Atlantic Ocean and also thought he could use the tower to communicate with aliens.
Quotes regarding Model 3 demand from the recent Tesla Q218 Conference call:
“The result you’re seeing is that the Model 3 market share has surpassed all competitor premium, mid-sized sedans combined. So Model 3 market share is now a majority. July was a majority of all premium sedans. That trend is, we think, likely to continue.” Elon Musk
“We’re also getting great feedback on the Model 3 from our customers, and we’re now delivering the performance dual-motor and all-wheel drive versions. And the Model 3 reviews are outstanding, [we] really couldn’t ask for better reviews from some of the toughest critics in the world.” Elon Musk
“…the thing that we’re recognizing is that the more Model 3s we deliver to the field, it’s actually causing viral growth of our sales. So we deliver our Model 3 to somebody, they love it, they tell all their friends, they are actually — really, our customers are our primary sales force. They love their car and take their friends for a drive, and that’s the thing that fundamentally drives our sales.” Elon Musk
“This is very interesting. So we looked at what people who are buying Model 3 cars in the United States are trading in. What we found is throughout this year, from January to July, the top 5 non-Tesla cars people are trading in to get into a Model 3, they are Toyota Prius, BMW 3 Series, Honda Accord, Honda Civic and Nissan Leaf.” Robin Ren (Head of Sales)
“Yes, they are surprising because they are not the traditional premium sedans. They are actually — many of them are mainstream midsized sedans.” Elon Musk
About the author
Craig Bonthron is an investment manager in the Equities team, responsible for co-managing global equities portfolios. He joined us in 2014 from SWIP, where he was investment director in global equities. In addition Craig also had analysis responsibilities for the tech, energy and utility sectors. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors, a member of the global environmental equity team. Craig has a 1st Class honours degree in Building Surveying, an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 17 years’ industry experience (as at 30 June 2018).