How Big Automakers Will Speed Past Tesla

Innovative electric car maker Tesla Inc. (TSLA) is up against stiff competition from the big automakers, Barron's reports. These established rivals are profitable, cash-rich, and able to produce vehicles on a vast scale. By contrast, Tesla is unprofitable, burning through cash at an alarming rate, and struggling to hit production targets that are puny by the standards of Detroit, Germany and Japan. In an ironic twist, prodding by Tesla CEO Elon Musk is partly responsible for established automakers' becoming more efficient and forward-looking in recent years, according to Nicholas Colas, longtime follower of the auto industry and co-founder of newsletter Datatrek, Barron's notes.

Most notable among these established players are, per Barron's, Volkswagen AG (VLKAY), Bayerische Motoren Worke AG (BMW.Germany), Daimler AG (DAIF), Toyota Motor Corp. (TM), General Motors Co. (GM) and Ford Motor Co. (F). These companies' stocks are cheap, trading at only 6 to 11 times estimated 2017 earnings, with dividend yields mainly in the range of 3% to 5%, per Barron's, giving them significant upside potential.

Meanwhile, Tesla stock currently sports a forward P/E ratio of -90, according to Thomson Reuters data reported by Yahoo Finance. Nonetheless, venture capitalist and former tech industry analyst Gene Munster is among those who are very bullish on Tesla. (For more, see also: Why Tesla Will Be No. 1 Big Tech Stock In Next 5 Years.)

Few industries outside technology are sitting on as much cash as the automakers, Barron's says. For example, BMW's net cash, or cash minus debt, is $22 billion, 33% of the company’s market value. Daimler has more than $24 billion of net cash, Volkswagen has over $29 billion, and Toyota has $70 billion, or 35% of its market capitalization. Overall, healthy earnings and strong balance sheets now characterize the once-beleaguered automotive sector.

The big automakers already have the mass production capability to produce large volumes of electric cars efficiently and cheaply, something that Tesla has struggled to do. Their deep pockets, meanwhile, allow them to invest heavily in R&D related to electric and autonomous vehicles, on a scale that also dwarfs Tesla.

Another massive advantage held by the established automakers is their large dealership networks, something not remarked upon by Barron's. Achieving high sales volume not only is a matter of production capacity, but also of having a broad retail and service network, as auto industry observer Bertel Schmitt writes in Forbes. Tesla's limited number of service centers have left angry customers waiting for months to get routine repairs and adjustments, Schmitt indicates.

Moreover, Tesla has chosen to own its dealerships and service centers, rather than franchise them, as the established manufacturers do. This adds considerably to its costs. Schmitt estimates that, to support one million of its vehicles on the road by 2020, Tesla would have to spend at least $28 billion to build and staff an adequate sales and service network, money that it simply does not have. Tesla currently has only 67 service centers in the U.S., 20 of them in California, per their website.

Analysts at Morgan Stanley (MS), per Barron's, project electrics to be 80% to 90% of global vehicular sales in 2050, up from 1% today as battery costs decline and governments push to eliminate internal combustion engines. A major impetus to sales growth will be if the cost of electric-powered vehicles becomes comparable to that of conventional cars and trucks in the 2020s. Morgan Stanley estimates that 30% of the global vehicular fleet will be electric by 2040, up from 0.2% today.

Established automakers are well-positioned to dominate the electric vehicle market, given their productive capacity and technical expertise. Moreover, electrics should prove to be simpler and less capital-intensive to build than gasoline and diesel-powered vehicles, per Barron's. On the other hand, a bearish view is that a surge in ride sharing will cut demand for new cars, restricting profit growth, Barron's notes. (For more, see also: Electric Car Sales Get a Big Jolt.)

However, Morgan Stanley warns that about $2.7 trillion of infrastructure investment will be needed globally by 2040, including 473 million home chargers and 7 million super-charging stations. Also, perhaps the biggest technical impediment to the widespread adoption of electric transport will be its requirement for a massive increase in electric generating and transmitting capacity and reliability. In the U.S. alone, demand for electricity will double as a result of their sales projections, Morgan Stanley cautions.

Big automakers are investing heavily not just in the development of electric vehicles, but also in autonomous cars. While self-driving cars and car sharing can be disruptive, these companies seem determined to ride the wave of the future, Barron's indicates.

Volkswagen plans to spend $84 billion through 2030 on electric vehicle development, ramping up to sell 2 to 3 million electrics by 2025. It also is a leader in developing autonomous cars. Its luxury Audi A8 is the first production automobile to offer Level 3 hands-free driving in select highway conditions, Barron's adds. As described by Seeking Alpha, the Audi Traffic Jam Pilot system does not require the driver to have hands on the wheel or to watch the road while it is in control.

Tesla's Autopilot requires both, while GM's Super Cruise allows hands-off operation, but the driver still must monitor the car's behavior, per Seeking Alpha, making both these competing systems less sophisticated Level 2 alternatives at best. According to Audi, this VW division plans to have its Level 4 Highway Pilot system ready for the general public by 2020 – 21, offering hands-free autonomous driving at posted speeds on limited access highways, with the car able to change lanes and pass other cars independently.

GM is making driverless vehicles a key focus, and is considered by many observers to be second in this regard to the Waymo division of Alphabet Inc. (GOOGL), per Barron's. GM bought Cruise Automation for $1 billion in 2016 to spur self-driving development, running tests in San Francisco and expecting to perfect driverless technology within quarters, not years, per Barron's. Brian Johnson, an auto analyst at Barclays (BCS), expects an autonomous GM ride-sharing service by the 2020s.

New Ford CEO Jim Hackett is committed to electrics and ride sharing, per Barron's. For example, Ford acquired shuttle service Chariot in 2016 and is expanding it in major cities across the U.S., CNBC reports. However, Ford plans to roll out electric/gas hybrids, not full electrics, in the next five years, Barron's indicates. Toyota also has focused on hybrids, notably its Prius model, but is expected to be a leader in next generation hybrids, battery development and self-driving technology, per Barron's.

BMW, meanwhile, is expected to sell 100,000 electrics and hybrids this year, matching Tesla, which may lose $1.5 billion in 2017, Barron's says. In total, BMW produces about two million vehicles annually, Barron's notes, vastly more than Tesla can.