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Electric Vehicles

Tesla has great potential - but faces great challenges ahead Add to ...

Nigel Bennett, a self-described “enviro-guy,” owns an oil-spill cleanup and containment company with a global footprint. He drives to work every day in a $100,000 Tesla Model S electric vehicle.

“I’ve had it [the Model S] about a year and every time I get into it, I feel like a kid,” says the co-founder and principal of North Vancouver, B.C.-based Aqua-Guard Spill Response Inc.

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The car is quicker than a Ferrari, consistently delivers 400 kilometres on a full charge and has been almost trouble-free. “And I’ve spent about $91 on energy over the last year,” he adds, after ticking off the cost of filling and servicing his former BMW X5 SUV on an annual basis: $5,500 in fuel and $3,500 in service.

“The BMW feels so archaic now; an internal combustion engine seems so archaic.”

For Bennett, Tesla Motors Inc. isn’t a stock play or pie-in-the-sky startup facing the daunting challenge of taking on the world’s biggest auto makers. Bennett sees Tesla as nothing more than the creator of his sleek four-door hatchback.

Still, Tesla is a pipsqueak on the global automotive stage. Toyota Motor Corp., General Motors Co. and Volkswagen AG each sell about 10 million vehicles a year. Tesla has sold about 30,000 in total, though Tesla founder Elon Musk recently predicted the company should be able to deliver 100,000-plus cars a year by the end of next year.

What Tesla lacks in sales, it makes up for in chutzpah. Eight-year-old Tesla plans to disrupt the auto industry by making mass-production EVs and selling them directly to customers, eliminating traditional dealers and providing personalized service that is Formula One-like in speed and efficiency.

Plenty have bought into Tesla’s vision. Earlier this year, Morgan Stanley suggested that Tesla has a reasonable chance of rocking the trillion-dollar car industry by “flooding the market with fun-to-drive EVs.” The “bull case” for Tesla: $500 a share, or about twice what the company trades at now, making Tesla worth as much as Ford Motor Co. or General Motors today.

Except Ford, GM and Volkswagen – to name three – are all immensely profitable and about 300-plus times bigger in terms of sales. In the second quarter Tesla lost $62-million (U.S.). Ford had a pretax profit of $2.6-billion in the second quarter.

Morgan Stanley’s bullish scenario is based on Tesla bringing a game-changing, industry-shattering, disruptive model to the automotive business. Yet aside from a relative handful of happy owners such as Bennett, Tesla has proved only that it can lose millions as a niche auto maker catering to buyers willing to spend $100,000 on an EV.

As Tesla grows, how will it compete with well-established, immensely profitable, wickedly competitive, technology-rich global car companies with proven business practices and very deep coffers? The Fords, Nissans and Volkswagens of the world are not just going to lie down and let Tesla run them over.

Tesla, meanwhile, is spending huge sums to fund growth, conduct research and development and overcome cost barriers to EVs that suggest mass-producing affordable EVs is extremely unlikely in the near term. Car companies regularly spend $500-million to $1-billion just to bring a new model to market. Tesla will need to find that sort of money to grow its lineup, too.

These questions sent me in search of answers at Tesla headquarters in Palo Alto, Calif. There, I toured a building humming with energy and activity and met with executives who argue that all my objections about the challenges facing Tesla “are going to go away,” said chief spokesman Simon Sproule.

“The company already is grown up, in terms of volume, number of stores, service centres and other measures,” he said of Tesla with its more than 6,000 employees.

The keys to Tesla’s future are a direct-to-customer sales model and advances in battery technology. Already, Tesla has broken ground on a site just outside Reno, Nev., that the company says “could potentially be the location for the gigafactory” or large-scale battery plant. Sproule said that perhaps as early as 2017, Tesla’s third EV, the Model III or third-generation car, will be on sale at a price as low as $35,000, juicing sales.

But will Tesla’s online/shopping-mall-sales model be able to handle a dramatic increase in sales volumes? Will “big” Tesla be able to attract and service customers in a timely and cost-effective fashion? The existing franchise dealer model has proven durable at handling large numbers of new customers and existing owners. Sproule is convinced Tesla’s retail model is critical to the company’s success and it won’t change.

And then I drove away for an afternoon with the Model S. It is, as advertised, a terrific automobile to drive – fast, quiet, comfortable and equipped with the best touch-screen interface in the auto industry. Nice car? Yes, but with so many challenges ahead.

If you have questions about driving or car maintenance, please contact our experts at globedrive@globeandmail.com.

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