NEW YORK (TheStreet) -- The Street's Anton Wahlman recently wrote How the New York Hedge Funds Lost Their Shirts on Tesla, and within the article Wahlman predicts that in a decade half of the cars sold will be electric.
Wahlman's article attempts to explain why bright minds on Wall Street shorted
to the point that short interest rose to nearly one out of two shares. Wahlman is partially correct, but his analysis carries a fundamental flaw as significant as the one he exposes.
In a moment, I will detail the misstep, but let me explain why I read his article first.
I read Wahlman's articles for the same reason you should: he is sharp, does his research and if you don't follow him, you're missing out. But if you hate money, taking the time to click on his follow button isn't worth it.
As impressive as Wahlman is, and I do think he is an extraordinary talent, he's human like the rest of us and doesn't always get it right. In the case of his analysis of the electric car market share potential, I think his article wrote out a check that the industry can't cash.
Here is the fatal flaw -- "
...Tesla will eventually end up with significant premium electric car competition. One decade from now, at least 50% of all new cars sold will be electric -- possibly 70%. Almost per definition, the other car makers..."
I'm the first to admit our world can change dramatically in 10 years. If anyone understands how technology will change our lives it's me. Last week I wrote (
) about self-driving semi-trucks in "
. Transportation will change more rapidly than since model Ts began rolling off the assembly line displacing horses.
No one knows if electric vehicles will ever reach 50% (much less 70%) of vehicles sold, but if we assume that eventually it will, we can't use sales in Silicon Valley as a predictor of consumer auto trends any more than you can use New York City. In fact, I would argue that Silicon Valley is worse of a predictor than the Big Apple.
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Silicon Valley is unique and likely the singularly best location in the entire U.S. to promote Tesla cars. Imagine the potential for Tesla to sell cars is a dining room table. To prevent the table from collapsing, the legs require strength. We know from
what happens when the legs are not as strong as needed.
Tesla's table isn't using Redwood for support. Consider the conditions in Silicon Valley compared to the rest of the country, and Wahlman's bull case falls apart almost as fast as the table falls down. Tesla, and electric cars in general sell well in Silicon Valley Rich because in that one of few locations the legs consist of rich of over-the-top electric car subsidies that can't survive a significant increase in marketshare, perfect weather, higher than average income and a political mindset.
If you remove any of the legs, the table crashes on your floor. The first leg fails quickly. The massive California subsidies won't scale. The massive Federal subsidies won't scale. It's a lot of fun to have other people pay for the stuff you buy, but don't expect the gravy train to last forever. Absent government subsidies, it's difficult making an economic case for electric cars.
The next leg falls from cold weather. An electric motor may operate fine in cold weather conditions, but motorists enjoy driving in a warm vehicle and will use a real world maximum distances. If you know what running an electric heater costs in the winter time, you know running an electric heater in your car is going to drain the battery quickly. For the same reasons as cold weather, cooling systems operated during hot weather will shorten the effective range.
By definition, not everyone can have higher than average income. Electric cars are more play toys of the rich than they are for average Joe six-pack. Middle income America isn't going to spend an extra $10K on a car with greater limitations compared to one powered with an engine. You don't even need to find Joe to ask him, this is common sense.
The final leg to fall once you leave Silicon Valley is not everyone wants to hug a tree. In fact, I will argue that electric vehicles will not gain a significant market share until the economics of buying one outweigh buying a vehicle with an engine. I'm sure electric cars are fun to drive, and enthusiasts will buy them.
You needn't look any further than the
to realize performance can drive some sales. In 2011, 13,164 Corvettes were sold, making it the top selling luxury sports car bought; however, that's miles away from a 50% market share.
Batteries are the weak link in the electric car story. New technology does hold promise for greater capacity, but the amount of energy stored based on size and weight needs to increase by several magnitudes. Otherwise, the fear of becoming stranded will persist.
Even when the battery problem is solved, the infrastructure needs to be built to support it. If you're driving and want to stay at a hotel, will you be able to plug in? I'm sure once locations figure out that charging cars can become a profit center, greater availability will happen, but not overnight.
Electric cars require more planning than gas engine cars. If your gas tank is on one-eighth, it doesn't stop you from getting in and going. In contrast, an electric vehicle with one-eighth battery left might alter your plans depending on the distance to your destination.
Electric cars are fashionable and fast, but they are not 50% of the market share within 10 years.
At the time of publication the author had no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.