Tesla Model 3: IT'S ALIVE!!!

**originally written in August 2018**

Elon Musk has often been compared to the Marvel comic character Tony Stark but i've always thought he was more like a cross between Victor Frankenstein and Steve Jobs. Recently however - having watched a documentery on Nikola Tesla - I realised that he is probably most like the very man he named his company after… which is appropriate.

All four of these Elon Musk comparators - including the two fictional ones - were flawed geniuses who had massive successes and massive failures. The least known character, Nikola Tesla, was unique. He invented the AC induction motor. It's difficult to do it justice here, but trust me when I say this was a huge conceptual leap built on decades of study and thought. It was a remarkable invention which made long distance high-voltage power distribution possible. It cannot be understated how transformative this invention was. But he also built Wardenclyffe Tower in an attempt to transmit electricity wirelessly across the Atlantic Ocean. He became obsessed with this project and during it he began to think he could use the tower to communicate with aliens. The project ultimately bankrupted him.

Like Nikola Tesla, Musk is obsessive, highly intelligent, visionary, often difficult to deal with and almost irrationally audacious. He is also prone to exaggeration and inclined to make ill-judged public statements (or tweets). His negative traits particularly came to the fore in the second and third quarters of 2018, creating unnecessary distractions which ironically - I believe - overshadowed what was a breakthrough moment for him and the company he founded. Whilst it is often easy to make armchair judgements of somebody that is doing something incredible difficult (and what he and Tesla employees were doing was exactly this) investors should always pay attention to the negative traits of any CEO. This is especially important with a founder-CEO who is so synonomous with its brand.

With all this in mind, the question on everyones mind in 2018 was this. Is the Tesla Model 3 going to be an AC induction motor or a Wardenclyffe Tower? An iPhone or a NeXT? An Iron Man suit or a Frankenstein Monster?

The demand curve for (good) Electric Vehicles

Regular readers will know that I have been very positive on the coming adoption of electric vehicles for about three years or so. I have long believed that the broad launch of the Tesla Model 3 (the first mass market fully electric premium car costing $30-$50k) will be the catalyst for widespread global adoption of electric cars. I expect new electric car sales will ramp up from around 3% of all cars sold today to >15% within 5 years.

During Tesla's second quarter 2018 results, analysts and the media focused on Elon Musk, near-term profitability and the Model 3 production rates. Whilst short term, these are not necessarily unimportant but my focus was on the Model 3 demand curve. The quarterly conference call included some very interesting comments which i've appended below but the key insights for me were the following:

1. Market Share: The Model 3 is taking a huge amount of market share. Very quickly.

2. Aspirational and climate conscious consumption: The top 5 non-Tesla cars people are trading in for a Model 3 are the Toyota Prius, BMW 3 Series, Honda Accord, Honda Civic and Nissan Leaf. Mostly lower priced cars than were expected, suggesting consumers are willing to pay more than they normally would for a car due to the Tesla brand and personal concerns about the environment. In short, the addressable market is bigger than was previously assumed.

3. Viral growth: Tesla customers are their best salespeople. Local demand is surging in locations where Model 3’s are being delivered. Previously unaware consumers are having their ‘Ah ha!’ moment when their neighbours take them out for a drive.

4. Critical acclaim: Despite the negative press around Musk, the Model 3 is getting fantastic reviews from fans and cynics alike.

Click here for Auto Express review

Click here for Clean Technica review

Click here for Top Gear review

Click here for Autocar review

Click here for Car Magazine review

Conclusion.. It's alive and well

Whilst Musk may seem more Professor Frankenstein at the moment, it appears the Model 3 has more in common with the iPhone in terms of product-market fit. Model 3’s are certainly not monsters. Tesla have designed a fantastic product that customers really want and the planet really needs. We are not Tesla shareholders **, nor Elon Musk acolytes. They have serious production and financing challenges ahead. But as sustainable investors, we aim to benefit from burgeoning EV demand by investing in companies that can capture value from the growth ahead. We are focused on niche, high quality suppliers to all of the EV manufacturers (including Tesla) as car buyers rush to go green.

But either way where we’re going it's clear we do need 3’s after-all – Exponential Growth.. as easy as 1,2,4

 **note we are now Tesla shareholders in the Kames Global Sustainable Equity fund having built a meaningful position between January and July 2019. Q3 2018 results were the catalyst for doing more work on the company. It is a high conviction top 10 position as at date of this publication.

Appendix

Quotes regarding Model 3 demand from the recent Tesla Q218 Conference call:

“The result you’re seeing is that the Model 3 market share has surpassed all competitor premium, mid-sized sedans combined. So Model 3 market share is now a majority. July was a majority of all premium sedans. That trend is, we think, likely to continue.” Elon Musk

“We’re also getting great feedback on the Model 3 from our customers, and we’re now delivering the performance dual-motor and all-wheel drive versions. And the Model 3 reviews are outstanding, [we] really couldn’t ask for better reviews from some of the toughest critics in the world.” Elon Musk

“…the thing that we’re recognizing is that the more Model 3s we deliver to the field, it’s actually causing viral growth of our sales. So we deliver our Model 3 to somebody, they love it, they tell all their friends, they are actually — really, our customers are our primary sales force. They love their car and take their friends for a drive, and that’s the thing that fundamentally drives our sales.” Elon Musk

“This is very interesting. So we looked at what people who are buying Model 3 cars in the United States are trading in. What we found is throughout this year, from January to July, the top 5 non-Tesla cars people are trading in to get into a Model 3, they are Toyota Prius, BMW 3 Series, Honda Accord, Honda Civic and Nissan Leaf.” Robin Ren (Head of Sales)

“Yes, they are surprising because they are not the traditional premium sedans. They are actually — many of them are mainstream midsized sedans.” Elon Musk

NOT AN INVESTMENT RECOMMENDATION. NOT INTENDED AS A FINANCIAL PROMOTION.