How Major Automakers Are Set to Outpace Tesla

Electric vehicle pioneer Tesla Inc. (TSLA) is facing formidable challenges from established automotive giants, according to Barron's analysis. These seasoned competitors boast profitability, substantial cash reserves, and the capacity to manufacture vehicles on an immense scale. In contrast, Tesla continues to operate at a loss, rapidly depleting cash reserves, and grappling with production volumes that are modest compared to industry leaders in Detroit, Germany, and Japan. Interestingly, Tesla CEO Elon Musk’s aggressive push has spurred these traditional automakers to become more innovative and efficient, notes Nicholas Colas, auto industry expert and co-founder of Datatrek newsletter, as reported by Barron's.

Leading the charge among these legacy automakers are Volkswagen AG (VLKAY), Bayerische Motoren Werke AG (BMW.Germany), Daimler AG (DAIF), Toyota Motor Corp. (TM), General Motors Co. (GM), and Ford Motor Co. (F). These companies’ stocks are attractively valued, trading at just 6 to 11 times projected 2017 earnings, with dividend yields ranging between 3% and 5%, highlighting significant growth potential, Barron's reports.

Conversely, Tesla's stock exhibits a forward price-to-earnings ratio of -90, based on Thomson Reuters data cited by Yahoo Finance. Nevertheless, venture capitalist and former tech analyst Gene Munster remains highly optimistic about Tesla's prospects.

Robust Financial Resources

Outside the tech sector, few industries hold as much cash as major automakers, according to Barron's. For instance, BMW's net cash position is $22 billion, representing 33% of its market value. Daimler holds over $24 billion, Volkswagen exceeds $29 billion, and Toyota commands $70 billion, accounting for 35% of its market capitalization. These strong earnings and solid balance sheets mark a turnaround for the previously struggling automotive sector.

These automakers possess the mass production capabilities to manufacture electric vehicles efficiently and affordably—an area where Tesla has faced difficulties. Their substantial financial resources also enable heavy investment in research and development for electric and autonomous vehicles, outpacing Tesla's scale.

Extensive Sales and Service Networks

A significant advantage for traditional automakers lies in their expansive dealership and service infrastructures, a point often overlooked by Barron's. High sales volumes depend not only on production but also on widespread retail and maintenance networks, as auto industry analyst Bertel Schmitt highlights in Forbes. Tesla’s limited service centers have led to customer frustration due to long wait times for routine repairs.

Additionally, Tesla’s strategy of owning its dealerships and service centers, rather than franchising them like established manufacturers, substantially increases operational costs. Schmitt estimates that to support one million Tesla vehicles on the road by 2020, the company would need to invest at least $28 billion in building and staffing an adequate sales and service network—funds Tesla currently lacks. Presently, Tesla operates only 67 service centers in the U.S., with 20 located in California, per its official website.

Promising Growth Projections for Electric Vehicles

Morgan Stanley analysts, as cited by Barron's, forecast that electric vehicles will comprise 80% to 90% of global vehicle sales by 2050, a dramatic rise from the current 1%, driven by declining battery costs and government policies phasing out internal combustion engines. A critical factor for this surge will be achieving price parity between electric and conventional vehicles during the 2020s. Morgan Stanley predicts that by 2040, 30% of the global vehicle fleet will be electric, up from just 0.2% today.

With their production capacity and technical know-how, established automakers are well-positioned to dominate the electric vehicle market. Moreover, electric vehicles are expected to be simpler and less capital-intensive to produce than traditional gasoline and diesel models, Barron's notes. However, a cautious viewpoint suggests that increased ride-sharing could reduce new car demand, limiting profit growth.

Infrastructure and Technical Challenges

Morgan Stanley warns that a global investment of approximately $2.7 trillion will be required by 2040 to build infrastructure, including 473 million home chargers and 7 million supercharging stations. Perhaps the most significant technical challenge to widespread electric vehicle adoption is the need for a substantial expansion in electricity generation and transmission capacity and reliability. In the U.S. alone, electricity demand is projected to double due to electric vehicle growth, Morgan Stanley cautions.

Volkswagen's Autonomous Driving Breakthrough

Major automakers are heavily investing not only in electric vehicles but also in autonomous driving technologies. While self-driving cars and car-sharing services could disrupt the industry, these companies are poised to capitalize on future trends, according to Barron's.

Volkswagen plans to invest $84 billion through 2030 in electric vehicle development, targeting sales of 2 to 3 million electric vehicles by 2025. The company is also a leader in autonomous vehicle technology. Its luxury Audi A8 is the first production car to offer Level 3 hands-free driving under certain highway conditions, Barron's adds. Seeking Alpha describes the Audi Traffic Jam Pilot system as allowing drivers to remove their hands from the wheel and divert their attention while the system controls the vehicle.

In comparison, Tesla’s Autopilot requires drivers to keep hands on the wheel and eyes on the road, while GM’s Super Cruise permits hands-free driving but still requires driver monitoring, making both systems Level 2 at best. Audi aims to launch its Level 4 Highway Pilot system by 2020–21, enabling fully autonomous, hands-free driving at posted speeds on limited-access highways, including lane changes and passing maneuvers.

Other Competitors Accelerate Innovation

General Motors is prioritizing driverless vehicles and is widely regarded as a close competitor to Alphabet Inc.’s Waymo division in this space, Barron's notes. GM acquired Cruise Automation for $1 billion in 2016 and is conducting tests in San Francisco, with expectations to perfect autonomous technology within months rather than years. Barclays auto analyst Brian Johnson anticipates an autonomous GM ride-sharing service launching in the 2020s.

New Ford CEO Jim Hackett is committed to electric vehicles and ride-sharing initiatives. Ford acquired shuttle service Chariot in 2016 and is expanding operations across major U.S. cities, CNBC reports. However, Ford plans to introduce electric/gasoline hybrids rather than fully electric vehicles in the next five years, Barron's indicates. Toyota continues to emphasize hybrids, notably the Prius, and is expected to lead in next-generation hybrid technology, battery innovation, and autonomous driving.

BMW is projected to sell 100,000 electric and hybrid vehicles this year, matching Tesla’s sales, despite Tesla potentially incurring a $1.5 billion loss in 2017, Barron's reports. BMW’s total annual production is around two million vehicles, vastly exceeding Tesla’s output capacity.

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