Tesla’s electric cars are leaving industry giants in the dust – a revolution is imminent

The speed of change has taken the legacy manufacturers by surprise, who, despite their expertise in other areas, know little about the technology it takes to transform the driving experience entirely, says Hamish McRae

Tesla’s Model 3 (AP/David Zalubowski)

It has been a wild ride for Tesla’s share price. Last week it opened below $700 (£543), shot to a peak of over $960 on Tuesday afternoon, was back below $700 by Thursday morning – and settled after hours on Friday at around $746.

These are heady valuations. At that peak, its market capitalisation was greater than BMW and VW combined, and even after the shading back of the share price, Tesla is worth far more than established manufacturers such as Ford or General Motors. Yet last year, it made fewer than 400,000 cars, while General Motors made 7.7 million. What’s going on?

There are at least three stories embedded here. One is that there is something of a bubble mentality sweeping over US stock markets and this is an example of that. A second is that the switch to electric vehicles is happening far faster and on a global scale than most people expected even three months ago. And the third is that Tesla has a huge lead over other car companies that will be hard to peg back. Let’s leave the first aside, for no one knows what will happen to US equities, and focus on the second and third.

The speed of change has taken the legacy manufacturers by surprise. All have some plan for switching to electrics, and most are producing their first stabs at the product. You can buy an electric Chevrolet, BMW, Jaguar, Porsche, and so on. The Nissan Leaf is long-established, with the first version launched in 2010. But until the past few months, electric sales have remained a niche market.

There are several reasons why this has now changed. One is Greta Thunberg. Her genius and that of the people around her has given huge political impetus to all projects that will help decarbonise the world economy. To be dismissive, buying an electric car could be seen as a form of virtue signalling, for any form of car uses energy both to build and to drive around. But I think that is unfair because cutting tailpipe emissions is a laudable environmental goal, and as electricity generation switches to renewable sources, there are benefits to carbon emissions too.

A second reason is regulation. All over the world restrictions are mounting on the use of private cars in cities. In most cases, electric vehicles are exempt. Anyone buying a car now has to consider whether it will be allowed in cities in another 10 years’ time and if there is any doubt there is a case to switch now. Five years ago such restrictions were almost unknown.

Third, cost is coming down. Estimates vary but it is plausible that electric cars will actually be cheaper to buy and run than the comparable petrol or diesel models within three or four years. Meanwhile, range is rising, and overall running costs remain much lower.

As a result of these shifts, we are moving to a world where the limiting factor is supply, not demand. This is where Tesla’s huge lead matters.

For industry experts, one of the stunning things that has happened is that a brand-new company successfully challenged the hegemony of the giants. It had zero experience of making cars; they had a century or more. But there is another way of doing the maths. Tesla launched its first car, the little lotus-based roadster, in 2008 and had been working on the project since 2003. Other manufacturers, Chevrolet and Nissan apart, really only got going with electrics when they saw that the Tesla S, launched in 2012, was eating into their markets. So Tesla has coming up to 20 years’ experience, whereas they have fewer than 10.

Worse, much of the experience of legacy manufacturers is no longer needed. They know a huge amount about internal combustion engines and the complex drive-trains they need to connect the power to the wheels. They don’t know much about batteries, or about online software updates, or about the way communications technologies can transform the driving experience.

Result: dominance by one manufacturer and actually one model. Last year the Tesla 3 outsold all the other electric cars in the US put together.

There have been other occasions when a single model has transformed the fate of a company, with the best example being the BMW 1500, the precursor of the BMW 5-series, the success of which (and the investment from the Quandt family) saved it from going under in the early 1960s. But the success of the Tesla 3 model is astounding.

So, will this be a company worth more than BMW in another 10 years’ time? I think not. But if you wanted to choose a moment when the scale of the Tesla revolution really took the world by surprise, last week was not a bad time to pick.