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

Interesting | April 18th, 2016 by 100
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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 …

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.

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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 1928. Since then, every volume auto manufacturer that started in the US has failed, except for Tesla.

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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.

READ ALSO: Tesla Model 3 Unveil

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!

The lines at Short Hills Mall stretched from the Tesla store all the way out into the parking lot!

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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.

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.

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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 are 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.

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.

[Source: bmwi3blogspot]

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