By comparison, the automotive gross margin inched up from 15% to 17%. Thus, the company's total gross margin expansion, from 22% to 30%, was primarily a result of the development-services division. However, Tesla's core mission is to build cars, not outsource its product-design and expertise to industry laggards, and it's remaining loyal to this tenet. Having just purchased a $42 million manufacturing facility in Fremont, California from United Motors Manufacturing, Tesla's production timeline for the Model S is intact. At peak capacity, when utilized by United, the facility was assembling 400,000 vehicles annually. Tesla's strategy, commencing with a premium model, though seemingly contradictory to mass-market appeal, is a tech-industry tactic. Silicon Valley-based Tesla likens its Roadster to a first-mover product, and initial buyers are "innovators." Sleek design and limited production are likely to garner brand cachet. Thus, Tesla is employing a step-down marketing technique. The Model S, at roughly half the price of the Roadster and with greater production potential, will appeal to a broader demographic of "early adopters." Tesla's next model, codenamed BlueStar, is, purportedly, a crossover that will be priced at $30,000 to target "early majority" electric-car buyers. This strategy, called "crossing the chasm", is derived from the Everett-Rogers diffusion of innovations theory. Smart-phone and tablet-computer designer Apple ( AAPL) has repeatedly implemented it, flawlessly. It is unlikely that Tesla will enjoy comparable success. But, so far, the company's performance is praiseworthy. U.S. automotive behemoths GM ( GM) and Ford ( F), despite solid progress since the recession, are still lagging behind rookie Tesla in key respects. Neither of the old-line automakers has an all-electric vehicle. The Chevrolet Volt, a plug-in hybrid, utilizes a battery similar to Tesla's. GM Vice Chairman Robert Lutz has credited Tesla as Volt's muse. Other companies, including Toyota and Panasonic, which builds Tesla's highest energy-density lithium ion cells, have made equity investments in the company. Toyota owns 3.2% of shares outstanding and Panasonic controls 1.5%. Toyota invested $50 million into Tesla, immediately following the company's initial public offering, underwritten by Goldman Sachs, Morgan Stanley, JPMorgan ( JPM) and Deutsche Bank, three of which now cover its stock. Deutsche rates the shares "hold." Goldman ranks them "neutral." JPMorgan ranks Tesla "overweight", forecasting that its stock will advance 29% to $30 during 2011.
JPMorgan believes that "the investing community (and the majority of the automotive industry) is substantially underrating Tesla's potential, not just on electric vehicle powertrain technology (where converts arguably have been made of Toyota and Daimler) but more broadly on its ability to deliver world-class non-powertrain-related vehicle engineering and to eventually grow into a full-line premium carmaker with atypical cost competitiveness." The research team just visited Tesla's new production facility and met with management, which confirmed the bank's bullish view. JPMorgan's $30 target was derived from a discounted cash flow model. However, several of the bank's assumptions are notably cautious. For example, it forecasts a terminal operating margin of just over 8%, standard for German luxury carmakers, whereas Tesla management forecasts a stable mid-teens operating margin over the long run. If management hits its projection, a higher share price is warranted. JPMorgan forecasts a loss of $1.88 a share in 2011, a loss of $1.46 a share in 2012 and a profit of $1.51 a share in 2013. Still, there may be material upside if demand for the S Model exceeds expectations. A video of the S Alpha version, operating in real-world conditions, was released online in January. The video received 85,000 hits in a matter of hours. Ultimately, Tesla's success depends upon brand perception with global consumers. Environmentally conscientious, tech-savvy customers have propelled one company, Apple, to the rank of sector hegemon. It seems that Tesla is striving to be the Apple of auto, even modeling its showrooms in the likeness of Apple stores. But, risks abound. Although Tesla's the first mover in the electric-car space, many other first movers failed to achieve lead market share because of competitive pressures. The company's distribution network is far behind established peers and its capital limits marketing potential until cash flow ramps up. Nevertheless, Tesla's unlikely ascent is accelerating.
-- Written by Jake Lynch in Boston.
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