The Battle for EV Supremacy: Will Tesla Win This Decade?

Demand for EVs has never been stronger, across all vehicle categories — spurred by all-time highs in gas prices and pushes for decarbonization among corporations and consumers. People in the U.S. bought more than 204,000 electric cars and trucks in the first four months of this year, up 60% from the year before. Tesla has enjoyed 75% market share in 2022, maintaining a significant lead despite the numerous EV upstarts that raised >$20B in 2021. Challengers have emerged — both from incumbents (VW, Ford) and upstarts (Rivian); will Tesla maintain its dominance over the next decade?

Team G2 debates this question today, with Monica arguing for Tesla’s dominance in EVs over the next decade, and Neel cheering on the challengers.

MONICA: Tesla’s market leadership is the product of >$20B invested over nearly 20 years. While new entrants are catching up fast in terms of capital spending, it’s not easy to short-cut learning curves.

• Tesla raised $23B+ across 10+ capital raises over 18 years; Rivian has raised a comparable amount, with almost all of it across just 3 raises in the past 3 years.

Cumulative Capital Raised ($B)

Source: Pitchbook, company reports

• Tesla has steadily increased production to a run-rate of over 1M units per year with several near-death moments of “production hell.” This has enabled them to move down the cost curve for the Model 3 steadily through learning-curve efficiencies and with significant investments in manufacturing engineering and the supply chain. Since 2016, Tesla has focused on “building the machine that makes the machines” by investing in automation (e.g., acquisition of companies Penbrix and Grohmann) and completely changing the paradigm around auto manufacturing. For example, Tesla’s proprietary casting technology enables them to reduce labor hours on the vehicle and improve reliability.

Source: ARK Invest (2019)

• Both companies are running at comparable operating expense run-rates, but Rivian has only produced 8,000 units to date, with 25,000 forecasted for FY22. Tesla’s near-death moments in 2009 and 2018 has forced a culture of efficiency in cash burn; as Rivian races to catch up has accelerated spending much faster than its revenue base.
• Rivian has been the only credible upstart to threaten Tesla’s dominance, given the amount of capital and talent they’ve attracted (~1,000 of their employees are ex-Tesla); however, in an era of tightening capital they might quickly outspend their way into oblivion

NEEL: There are few companies I admire more than Tesla, but their days of being the dominant player in EVs are numbered, and it’s not because of Rivian or any other new entrant.

• Tesla’s $20B+ in investment over 20 years (and Rivian’s ~$20B over 3 years) will seem like a drop in the bucket soon. A glimpse inside your legacy carmaker’s board room would reveal executives (a) wondering how on earth Tesla became a trillion dollar enterprise, and (b) strategizing on how to catch up. The result is that all mass-market automakers are now spending billions annually in EV platform development, as an ever-increasing portion of a legacy automaker’s R&D budget is being allocated to electrification and away from making ICE cars better. VW (>9M in annual vehicle sales) could soon be outspending Tesla by as much as 5 to 1 with GM/Ford outspending Tesla by 3 to 1. To Monica’s point, capital doesn’t tell the full story, but when you’re willing to spend 5x more than the industry-leader, and your future (and your country’s economic future) is tied to getting EVs right, you just might have a shot at displacing the leader.

2021 Research & Development (R&D) Spend

Source: Company filings

• The billions in investment is translating to an inflection point in available EV models. For years, we were seeing only a handful of new EV models per year. In 2022, we will see nearly 40 new model launches in the U.S. Tesla makes a phenomenal consumer product, but its leadership in EVs has largely been a function of limited choice. According to Bloomberg, VW is poised to overtake Tesla as early as 2024 due to a wave of new EV models hitting the market (ID 5, ID 6, ID Buzz, Porsche Macan, etc.) coupled with its strategy to have 25% BEV sales mix by 2025–26.

Global BEV (Battery Electric Vehicle) Volumes by Automaker

Source: Bloomberg Intelligence

• What happened to the $35,000 Model 3? The cheapest Tesla (Model 3 base) is currently $46,990 before tax credits. When the Model 3 debuted in 2017, Elon proclaimed that the starting price would be $35,000 to make it widely accessible. While it seems as if there’s no shortage of demand for Tesla’s despite the high price, there are significant gaps in the product portfolio that won’t be filled in anytime soon. For context, 65M vehicles are sold annually across the U.S., Europe, & China. Based on my analysis (shown below), Tesla produces cars with price points that barely tap into ~15% of the market — and that is me being generous. Unless Tesla is willing to sacrifice industry-leading gross margins (25% in 2021), I don’t see them going down market anytime soon. Meanwhile, VW, Ford, Hyundai, and others are focused on making EVs for the masses with price points that will attract a wider swath of potential buyers. These OEMs became dominant by offering reliable transportation at a low cost. Will Tesla do the same?

Source: Evercore ISI Research, G2 analysis

MONICA: Tesla’s platform and brand enable it to quickly diversify across vehicle categories. While savvy competitors are targeting gaps in the current product line, Tesla’s technology, talent, and supply chain enable the company to respond quickly to both upstarts and incumbents — and build a durable moat through its ecosystem

• Tesla has quickly responded to close gaps in their product line, and their brand has transcended their luxury sedan wedge. When Rivian and Ford teased pickup trucks, Tesla came out with the Cybertruck — a design so polarizing that it played right into the media circus around the company. The Tesla Semi had orders for hundreds of units from Pepsi and Walmart even before production began.
• Tesla’s initial growth was driven by early adopters and die-hard fans, but as EVs cross the chasm to pragmatist and conservative buyers on both the passenger and commercial sides, Tesla’s track record will look like a safer bet than choosing a new upstart (unless, of course, your billionaire founder has a 20 year+ long rivalry with Musk) — further cementing their lead across different vehicle categories.
• Tesla’s investments in the core battery and cell technology and supply chain enable it to ramp volume production of vehicles across different platforms, and creates deep moats that incumbents will struggle to replicate given their highly fragmented supply chains. In the wake of the Inflation Reduction Act, with its high domestic content thresholds, Tesla’s control over their end-to-end supply chain and domestic cell manufacturing capacity become even more valuable.
• Most critically, Tesla and Elon are talent magnets in a way that incumbent car makers have struggled to be. While incumbents have tapped into Silicon Valley talent through acquisitions (e.g., Cruise/GM, Electriphi/Ford), these have remained relatively autonomous during R&D phase, and we have not yet seen them integrated or operationalized at scale.
• Moving beyond the vehicle itself, Tesla is building a powerful ecosystem with autonomy, charging, and home energy services, which will be critical to long-term value creation and lock-in. Our partner Brook draws an analogy with Apple: just as they initially dominated the smartphone market with hardware, but built durable moats against new entrants by layering on services (apps, AppleTV, cloud storage, etc.), the war for passenger EV dominance won’t be won on cars alone. Tesla has an edge on multiple adjacent technology dimensions — in charging, with the Supercharger network, in home energy services, with the Powerwall and solar products, and — most critically — in autonomy. Tesla’s dataset, based on real miles traveled every day, is incredibly expensive for competitors to replicate, and will unlock the next $T+ of market capitalization in recurring services.

NEEL: The buyer that made Tesla a $1T company is very different from the buyer who will determine the winner in ten years.

• I won’t even comment on the Cybertruck. “Polarizing” (Monica’s words) says it all!
• Tesla may be the safer bet vs. new entrants, but what about household brands like Mercedes, Toyota, and others? A 2021 Cox Automotive survey found that 84% of non-EV owners considering an EV would repurchase from their current brand if they went all-electric. While Tesla has extraordinary brand loyalty, getting mainstream buyers to choose Tesla will become challenging as household brands launch EVs.
• Tesla/Elon may be talent magnets, but the consumer will have the final say. This Bloomberg piece suggests that Elon’s antics are a turnoff for many prospective EV buyers, but I won’t go down that rabbit hole.
• Tesla has a headstart on the supply chain and charging infrastructure, but carmakers are throwing billions at the problem. Headlines such as this have become common — a mass-market OEM partnering with a mega battery supplier (e.g., LG, Samsung, SK) to deploy a massive EV battery factory somewhere in the U.S.
• Tesla’s battery/cell technology advantage will diminish as the supplier ecosystem flourishes. Now more than ever, innovation is happening across the battery value chain, from silicone anode materials (Sila, Group14) to dual battery chemistries (ONE) to battery analytics software (Electra, AMP), all of which will boost battery range and cycle life.
• With respect to Tesla’s powerful ecosystem, I agree that long-term success will be driven by factors such as its self-driving tech. Here, I’ll concede that no legacy automaker is close to matching Tesla’s capabilities. However, achieving Elon’s fully self-driving (FSD) promise with the current hardware stack is not plausible. Most autonomy experts agree that a vision-only system is insufficient and that actual FSD will require tens of thousands of dollars in additional sensors (lidar, radar) and compute, which will drive a bigger wedge in buyer affordability. Legacy OEMs are releasing increasingly sophisticated L2 (ADAS) systems with the help of Mobileye and Tier 1s, albeit at a slow pace. Ultimately, these solutions (including Tesla’s) are a stop-gap until robotaxi companies like Zoox, Waymo, and Cruise deploy at scale.

We’ll call it here! What we both agree on is that the inflection in EV demand has created an opening for others to displace Tesla’s lead in EVs, but it’s easier said than done — even for incumbents with strong brands and balance sheets, scaling EVs requires talent and operating models that took Tesla 20 years to build.