The Reasons Why Tesla Creates Electric Vehicles While The Accompanying Demand Does not Exist

Despite Tesla Motors building the largest battery factory, and possibly one of the biggest factories in the world, recent electric vehicle sales numbers are falling. It appears the U.S. interest in electric cars has stalled. So why would Tesla, a company that designs, manufactures, and sells high-performance electric vehicles and powertrain components, build capacity to manufacture and supply half a million car batteries a year when the accompanying demand does not exist?

According to Edmunds.com senior analyst Jessica Caldwell, “This was a market that was supposed to grow, relatively rapidly, as people embraced these new technologies… that hasn’t happened.” This is mainly due to a drop in demand for traditional hybrids, which make up the largest segment of the electric car market. Pure electric vehicles and plug-in hybrid segments have noticed substantial gains, 35% and 44%, respectively; however, demand for these segments make up only a tiny fraction of the market. The “stall” is happening entirely in the category of traditional hybrid vehicles, which is shown in the below figure in darker blue.

Despite the success of the Toyota Prius and intensified efforts of hybrid vehicle manufacturers introducing new models, which would indicate sales are doing well, the slowdown in demand of traditional hybrid vehicles is occurring during a year when overall car sales have been booming. One reason for a decline in demand of traditional electric vehicles may be stable gas prices and auto manufacturers creating better fuel-efficiency gas powered vehicles. However, Tesla’s stock has soared, with more of its vehicles on the road and a surge in its Supercharger stations. Traditional hybrid vehicles have gasoline engines, which are supplemented by fuel-saving battery drive systems. These batteries are found in traditional hybrid vehicles, such as the Toyota Prius. These batteries are not the high-efficiency lithium ion batteries that Elon Musk, co-founder of Tesla, is planning on taking over the market with. Although, the category of U.S. plug-ins is still small compared to traditional hybrids, the rise in this category of electric vehicles has been exponential, which is shown in the chart below. The light purple indicates monthly sales, while the dark purple indicates cumulative sales since December 2010.

The market for plug-in vehicles is on the rise, and Musk has created the largest battery factory to prepare to be a first entrant into the pure electric vehicle market. Plug-in SUVs are only beginning to hit the market, which could cause demand to exponentially increase as SUVs are very popular with the traditional U.S. consumer. While plug-ins currently average about 1.5 percent of cars sold in the U.S., Musk is banking on exponential growth in this industry. However, several market forces would need to increase demand. The largest obstacles the plug-in market is facing is availability of charging stations, range these cars can be driven without having to be plugged in, time it takes to recharge the vehicles, and the cost premium suppliers of these vehicles demand. According to the U.S. Department of Energy, by the end of 2014, there will be more than 5,000 electric charging stations in the U.S. During the first half of 2014, more electric charging stations were opened than from 1970 to 2011 combined. Drivers need to be assured that the plug-ins will get significant range in case of an emergency situation or even traffic in their daily commutes. Consumers also need to know that their vehicles can be recharged within a reasonable timeframe. Tesla Supercharger stations can recharge a plug-in up to 170 miles in only 30 minutes. This compares to home charging, which only gets 58 miles in an hour of charge (Randall, 2014). Interestingly, Musk, in a move to expand adoption of battery-powered autos, has stated that Tesla patents will be “open source” and available at no charge to Tesla’s competitors. He has stated that Tesla will not sue those who use the patents in “good faith.” He feels that too few automakers offer “serious” electric vehicles and is determined to do something about that. However, is this true kindness on the part of Musk or a way to capitalize on his investment in his new battery factory by selling electric vehicle batteries to Tesla’s competitors?

Tesla currently owns its own sales and service networks and has collaborated with several other major carmakers of electric vehicles, such as Toyota, Daimler, and BMW. Tesla may not face a serious threat from competition until its competition develops a fast charging electric car battery cheaply, such as Tesla is attempting to do with its new factory that allows for mass production. If the electric car market proves to be as lucrative as Tesla is betting on, Tesla’s competition could potentially be the entire auto industry. However, competition will most likely not surface until Tesla proves it is targeting a market that is rapidly growing and really worth competing for.

In conclusion, could Musks’ reason for open sourcing Tesla’s patents be to encourage other automakers to produce more plug-ins and purchase Tesla’s battery packs through a vertical supply chain relationship? Does Musk recognize the need to create more demand in the pure electric vehicle and plug-in market to be able to profit from the $5 billion battery factory? Only time will tell. However, it appears that Musk is betting on exponential growth in the pure electric vehicle and plug-in market and wants Tesla to be a first entrant to capitalize on consumer’s growing demand for this small segment of the overall electric car market.