It turns out that cleaning up traditional cars is an expensive proposition.
At its investor day last week, auto- parts maker Delphi Automotive DLPH 0.6752608962553714% Delphi Automotive PLC U.S.: NYSE USD98.4 0.66 0.6752608962553714% /Date(1506718946625-0500)/ Volume (Delayed 15m) : 2261935 AFTER HOURS USD98.4 % Volume (Delayed 15m) : 77267 P/E Ratio 20.847457627118644 Market Cap 26081331417.2644 Dividend Yield 1.1788617886178863% Rev. per Employee 102494 More quote details and news » (ticker: DLPH) estimated it would cost $3,000 to $4,000 per car to achieve the reductions in carbon dioxide mandated by governments around the world. Cowen analyst Jeffrey Osborne notes that on average, global regulators are seeking to reduce automotive CO 2 emissions 30% to 40% by 2025.
The end result is likely to be more-expensive gasoline cars, one more boon for the electric-vehicle market.
Electric vehicles currently sell for about $8,000 more than gas guzzlers, but Osborne believes they will be cheaper than traditional cars by the early to mid-2020s. “That’s driven by two colliding powers, which is that battery costs are falling, and internal combustion engines have to become cleaner,” he tells Barron’s.
That could mean that Tesla’s TSLA 0.4416961130742049% Tesla Inc. U.S.: Nasdaq USD341.1 1.5 0.4416961130742049% /Date(1506718800284-0500)/ Volume (Delayed 15m) : 5054486 AFTER HOURS USD340.8 -0.3 -0.08795074758135445% Volume (Delayed 15m) : 52596 P/E Ratio N/A Market Cap 56674823980.0232 Dividend Yield N/A Rev. per Employee 566241 More quote details and news » (TSLA) new, cheaper Model 3 ultimately looks even less expensive than its $35,000 price tag, since the traditional gas alternatives are likely to rise in cost. The company is the global leader in electric-vehicle sales, with an estimated 11% market share, and Osborne sees that rising in the next two years, given that the Model 3 is about half the price of Tesla’s signature Model S.
But he also cautions that the increasing affordability of electric vehicles isn’t all good news for Tesla, as there’s now more incentive for rivals to take the space seriously.
“We see the competitive tides shifting in 2019 and beyond as European [car makers], roiled by the diesel scandal and loss of share to Tesla in the high-margin luxury segment, step on the gas and accelerate the pace of electric-vehicle introductions,” Osborne wrote in his update to clients last week.
TESLA HAS GOTTEN USEd to having the luxury electric-vehicle market largely to itself, helped by the fact that BMW, BMW.XE 1.6702203269367448% Bayerische Motoren Werke AG Germany: Xetra EUR85.83 1.41 1.6702203269367448% /Date(1506724521000-0500)/ Volume (Delayed 15m) : 1990981 P/E Ratio 7.392764857881137 Market Cap 54929211489.3863 Dividend Yield 4.077828265175347% Rev. per Employee 782039 More quote details and news » General Motors, GM -0.4928536224741252% General Motors Co. U.S.: NYSE USD40.38 -0.2 -0.4928536224741252% /Date(1506718821760-0500)/ Volume (Delayed 15m) : 8649450 AFTER HOURS USD40.39 0.01 0.024764735017335313% Volume (Delayed 15m) : 269918 P/E Ratio 6.416449501048751 Market Cap 59133503625.2588 Dividend Yield 3.7642397226349678% Rev. per Employee 733009 More quote details and news » and Nissan NSANY -2.1586345381526106% Nissan Motor Co. Ltd. ADR U.S.: OTC USD19.49 -0.43 -2.1586345381526106% /Date(1506723600000-0500)/ Volume (Delayed 15m) : 512611 P/E Ratio 6.385139562311624 Market Cap 41770908703.6189 Dividend Yield 3.0202052334530527% Rev. per Employee 778862 More quote details and news » have imbued their electric cars with eccentricities that have undermined sales.
A turning point could be coming. Audi NSU.XE 0.3900709219858156% Audi AG Germany: Xetra EUR707.75 2.75 0.3900709219858156% /Date(1506724574000-0500)/ Volume (Delayed 15m) : 46 P/E Ratio 12.685965226743145 Market Cap 30401000000 Dividend Yield 0.28258565877781705% Rev. per Employee 670706 More quote details and news » is planning three new electric cars over the next three years. Eventually traditional car makers will start electrifying their existing fleets, much like they did when they added hybrid options. That means more-attractive vehicles to challenge the Model 3.
Although Tesla cars are spiffy, Osborne argues that “a significant amount of the purchase price of a Tesla comes through vanity,” whereas luxury rivals “have spent years perfecting the interior of their vehicles.” Tesla cut the cost of the Model 3 by creating a no-frills interior. That’s an opening for the traditional car makers, who know something about bells and whistles.
A version of this article ran online on Sept. 26 on Barron’s Next.