Tesla’s stock jumped by 5 percent on Monday on news that the assembly lines of the Model 3 were ratcheting up production, despite a several-day outage at the end of February.
The higher production volume will be welcomed by investors who have grown concerned with the rate of cash burn at the electric car company. Elon Musk’s aggressive promises, which have repeatedly outpaced the company’s performance, started to wear thin last year. The hiccups continue, but Wall Street is hopeful that the worst of the delays are in the past.
“We expect that Tesla will successfully overcome bottlenecks and ramp Model 3 production throughout 2018. The boost to cash flow and sentiment provides a selling opportunity before facing further headwinds,” Adam Jonas of Morgan Stanley wrote in a note.
The investment bank was referring to stiffer competition that is coming down the pike from Amazon, which could derail Tesla’s dreams of dominating the market for EVs, autonomous transport and shared mobility. “Amazon has a vested interest in taking the marginal cost of transportation to its lowest possible level,” Jonas wrote. “[W]e point out the scale that large e-commerce players can bring, which could lead to surprisingly deflationary long-term trends in some of Tesla’s core initiatives.”
“To summarize, for the past seven years, Tesla has nearly monopolized Auto 2.0,” Jonas wrote. “In our opinion, the next seven years may be a far more volatile and crowded narrative.”
Indeed, the market for EVs will continue to heat up over the next several years as more and more automakers churn out newer models and fight for market share. Tesla won’t be the only game in town.
Still, EVs only makeup a tiny percentage of the auto market thus far, and despite strong growth rates, will continue to account for a fraction of the transportation sector. According to Barclays, fuel efficiency in conventional vehicles using the internal combustion engine will have a much greater impact on oil demand over the next 5 to 10 years than the penetration of EVs.
Between 2016 and 2025, improvements in fuel efficiency will erase an estimated 2.6 million barrels per day (mb/d) of oil demand while EVs will only cut demand by 1 mb/d, Barclays says. Making an SUV more fuel efficient cuts into oil demand more than switching from a really fuel efficient vehicle to an EV.
That isn’t to say that the transition to EVs is not happening or is not significant. It will just take some time. The market share for EVs is expected to increase 20-fold but still only reach about 4.3 percent by 2025.
But there are several factors working in the favor of EVs. For instance, government policies continue to support EV sales, although policy support will start to phase out in the U.S., where federal tax credits of $7,500 expire after individual automakers hit cumulative sales figures of 200,000.
More important than federal subsidies, at least in the long run, will be ongoing declines in the cost of batteries. The weighted average price of battery packs has declined by more than two-thirds in just the last five years. Barclays predicts another 40-percent decline in battery costs by 2020 and 55 percent by 2025. In 2012, battery prices exceeded $600 per kilowatt-hour. That figure has fallen to just $156 today and could decline by half to $70 by 2030.
On top of that, the proliferation of EV models from a growing number of automakers will offer choice and competition, pushing prices down. Just to sample a few examples, BMW will offer 12 battery-electric vehicles by 2025; GM will have 20 by 2023; Ford will have 13 by 2023; Honda rolls out 2 this year; and a half dozen other automakers have similar plans. Volvo says every model launched in 2019 and beyond will be electrified.
Barclays also says that shared driving, “transport-as-a-service,” will help lower costs and could upend the traditional calculus for people when deciding to purchase a car.
There are still plenty of hurdles to wide-scale EV adoption. EVs will remain more expensive than a gasoline or diesel vehicle, at least for a few more years. Moreover, at this point, consumer acceptance and awareness of driving an EV is still limited. Range anxiety continues to turn off potential buyers.
In short, the future is clearly electric. But it’s going to be a gradual process.