“The competition is coming!”

It’s the phrase that’s been repeated in most conversations about Tesla’s market position in the EV manufacturer space since they debuted the Model S in 2012. Flash forward almost 10 years and Tesla has gone from producing just a few thousand Model S’s to ramping the Model 3 beginning in 2017, to ramping the Model Y beginning in early 2020. Their trajectory has risen like a SpaceX rocket, while other US auto manufacturers have only been able to deliver promises for the future.

Take 2021 US production numbers, for example. According to insideevs.com, Tesla has produced more than 430,000 battery-electric vehicles in the last twelve months. Factoring in ramping at the Fremont plant, that puts them on track for approximately 450,000 BEV’s produced in 2021. That’s more than twice as many vehicles as the rest of the companies selling BEV’s in the US combined.

In this multi-segment post, I’ll be looking first at the legacy US auto manufacturers before continuing to other potential competitors to Tesla’s BEV dominance.

GM faces a seemingly insurmountable battle

The nearest competitor to Tesla’s Model 3 and Model Y, regarding production numbers, is GM’s Chevy Bolt, which has been produced at about 20,000 units-per-year in recent years. Almost 25,000 Bolts have been produced so far in 2021, but they have all been recalled and production halted. In fact, all Bolts ever made were recalled recently due to battery fire issues.

Even assuming GM resolves the battery issues and gets back to full production in 2022, there’s no reason to expect more than about 30,000-40,000 units produced. Additionally, as far back as 2019, GM admitted that the Chevy Bolt was a loss-maker for the company, so their best-case-scenario results in a deeper money pit. Now GM has announced they will not restart production of the Bolt until at least February and sales are on-hold indefinitely.

The truth is that BEV’s being sold in the $35,000 and under price-range do not yet have the potential of profitability, which is why Tesla has been working from high-priced vehicles down to the more affordable. Independent analysis in 2019 found that GM was losing between $5,000-$8,000 per Bolt, and with the battery recalls adding an additional loss of at least $100-million, the total loss for GM on five years of Bolt production exceeds half-a-billion dollars. Not great for a company with a net debt of $90-billion dollars and a promise to spend an additional $30 billion more on developing EV technology.

Ford’s situation is only slightly less dire

The story is much the same for other US-based auto manufacturers, although there is probably a bit more hope for Ford, who this year released the Mustang Mach-E and will soon be selling the electric version of their flagship F-150 (Ford F-150 Lightning). The Mustang and F-150 name-recognition should help with sales, but it will take years to reach volume production (production estimates for the Lightning are 80,000 vehicles in 2023) and during that time those vehicles will also likely be sold at a net-loss.

As a further concern, the downside to using the iconic monikers for EV transition is that Ford’s electric vehicle sales are likely to cannabalize their remaining profit-centers in the ICE vehicle market. How many people will forgo purchase of an inferior gas-powered product for an additional year or two in favor of the new F-150 Lightning? With Ford’s net debt well in excess of $100-billion and the credit markets looking primed for tightening, it’s hard to see them being able to fund rapid expansion of their EV business in the coming years. It’s a catch-22 and all of Tesla’s legacy auto competitors, foreign and domestic, are facing the same dilemma.

On the other hand, Tesla’s vehicles are now sold quite profitably, with their automotive gross profit margin reaching 30.5% in Q3 of 2021. While some still point to EV regulatory credits as the reason for Tesla’s profitability, the truth is that regulatory credits are almost a non-factor at this point. In Q3, Tesla generated $3.9 billion in automotive gross profits, with only $279 million of that coming from regulatory credits.

The impact of legacy business structures

Assuming GM and Ford survive the financial crunch and can produce a compelling lineup of BEVs, there are still two very large legacy-related obstacles in the way.

First, Tesla’s blinding production speed is the result of its new systems. Tesla divides the factory into cells, which allows constant iteration without a noticeable slow-down in production speed. This, as well as other innovations like the Gigapress allow Tesla to produce cars at three times the speed of it’s competitors, according the Volkswagen’s internal production comparison reports.

Ford and GM still use the assembly-line production format popularized by Henry Ford more than 100 years ago. To compete, legacy auto will have to dramatically rework their existing factories or build new ones. Both options require time they don’t have, money they don’t have, and significant culture changes they seem unwilling to make.

Second, legacy auto manufacturers are encumbered by a selling structure that includes middlemen in the form of car dealerships. Already, the limited supply of Ford Mach-E’s and first shipments of F-150 Lightnings are being marked up by dealers, sometimes by as much as $30,000 above MSRP for the first deliveries. This is upsetting to potential customers and doesn’t improve the bottom line for the manufacturer.

Even assuming a more streamlined Manufacturer-Dealer-Customer experience can be negotiated, the fact is that the dealer structure retards profit margins in a way that will never allow Ford or GM to compete with Tesla on price-point. Legacy auto still needs the middleman to sell their ICE vehicles so it’s unlikely that’s going away any time soon and contracts between manufacturer and dealer may make the transition to direct-sales in the future very costly.

US Legacy Auto Summary

To keep it simple, legacy auto faces a series of uphill battles. Debt obligations, new expenditures, and cultural shifts are just some of the many obstacles that stand in the way of Ford and GM persisting into the electrified future of transportation.

In the second segment, I’ll take a look at US-based startups that are hoping to challenge Tesla for the BEV market.