Tesla Inc (NASDAQ:TSLA) was hit with a bombshell on Wednesday morning. Volvo, the European carmaker famed for its soccer-mom aesthetic, says that it’s going to go full EV/hybrid by 2019. The move is the first by a major carmaker to commit to electric vehicles. That doesn’t mean this is going to be a bad thing for Tesla, however. If anything there’s more upside than downside.
The Volvo project will make the firm the second pure new energy carmaker in the Western World. There are a number of very small, boutique firms also out there, of course, and many larger EV concerns are currently growing in China. None of those businesses directly compete with Tesla, however, and that’s likely the immediate effect that comes to the minds of most traders.
Volvo goes all electric
On Wednesday Volvo, which is currently a division of Chinese firm Geely, said that every single model it sells in 2019 will have an electric motor on board. The firm added that it would make all of its manufacturing facilities carbon neutral by 2025.
Volvo reckons its strategy is going to pay off. The firm says that it expects to sell more than 1 million cars with electric motors by 2025. The replacement of ICE-pure cars is only the start, of course. The Swedish company sees this as just a transition to a fully EV world.
There’s an important distinction to note here in the terminology used by Volvo. The firm is saying that it hopes to have a 100 percent electrified fleet in 2019. This is very far from the 100 percent electric fleet that Tesla Inc offers. That difference is more stark than it seems.
Electrified refers to hybrid cars. That means that, if you buy a Volvo, you’ll still have to burn gasoline. That’s a dynamic on which Tesla still has almost the entire market beaten, but Elon Musk’s firm doesn’t even need to win outright to gain from the Volvo move.
Competition and cooperation
In our profile of the most inspiring business stories to help you celebrate Independence Day, we took a look at the Boston Beer Company (NYSE:SAM). That firm has spent years trying to make its direct competitors stronger. As long as you’re classified as a microbrewery, there’s a good chance that the Sam Adam’s brewer will give you access to equipment, process design and even small loans.
Why would a business ever try to help its competition? The answer is that Boston Beer Company (NYSE:SAM) faces an even bigger foe in macrobreweries. The firm’s head believes that cooperation in the face of that strong force is better at driving demand in its niche of the market.
Tesla Motors could learn a thing or two from Boston Beer Company (NYSE:SAM) . Like the breweries, it’s faced with an industry of giants all making similar products. Its offering may be more expensive, but it’s also more in line with the taste of at least some customers. That’s a point of value, and one that it shares with other electric vehicle makers.
The question is whether or not it’s useful for Tesla Inc (NASDAQ:TSLA) to really help the competition.
Consumers are afraid of Tesla
Range anxiety is one of the novel feelings brought on by driving an electric car. It’s the fear that the battery is going to run out of juice long before the next charge point. In reality, as statistics show, a very small minority of trips are anywhere near the range of a Model S. Consumers just don’t really trust it however.
This is where cooperation beats competition. The more pure EV makers on the market, the more cars likely to be sold, and the more buyers are likely to become familiar with them. This process should help to take questions like: “don’t batteries explode?”, and “what happens if I run out of power?” off of the table.
Building a network
There are a lot off positive externalities for a company like Tesla Inc from the expansion of EVs, just as there were for firms like HTC and Lenovo with the rise of the smartphone. Product familiarity building demand, as described above, is just one of these.
Tesla can also take advantage of a common component market. This will likely get bigger and more efficient as demands for EV components grow. Think here of metals like lithium.
Labor for design and development of EVs is in short supply right now, but as the market moves more toward electric drive trains many more engineers will be qualified and trained. This should allow the firm to both grow and cut its massive design and engineering costs.
Keeping a leading brand on a much bigger market is essentially the key to long term success at Tesla Inc (NASDAQ:TSLA). There’s no way it’s going to be able to supply the entire market itself, however. Instead the firm’s ideal will be to have a range of EV options with the Tesla always sitting at the premium level in every category.
Now is not the time to short Tesla Inc
On Twitter this morning, right after the release of the Volvo news, some of those shorting Tesla appeared to be overjoyed. Mark B. Spiegel, a prominent, dramatic Tesla bear. Simply declared this morning’s announcement to be the end of the road for the Menlo Park firm.
— Mark B. Spiegel (@markbspiegel) July 5, 2017
Now is a very dangerous time to short Tesla stock. The firm’s future may be a bit out of focus right now, but it’s at least as likely to jump in value as it is drop significantly. Volvo isn’t going to put its new range of EVs on the market for the next 2 years. At the very least it seems clear that the firm is serious about its electric future.
Other would-be Tesla Inc competitors, like GM, BMW, and Audi, have yet to show willingness to build a real mass market EV and try to sell it. GM has come the closest with the Bolt, but it’s only going to produce that car in limited numbers.
Perhaps the reason that the competition has been so lackluster is because other car makers haven’t taken the step that Volvo took this morning. Unless you commit to becoming a pure EV firm, selling the cars involves bad-mouthing your other products. That’s a very hard balance to strike.
Tesla Inc skipped it entirely, and not Volvo is leaving it behind. That leaves the rest of the industry, including Detroit and Germany’s greatest, way behind Menlo Park. As the market grows, it looks like Tesla will continue to lead it as a result of that gas-powered paralysis. The Volvo move is just the icing on the cake for helping Tesla achieve its goals.