What does Israel hold for Tesla?

Tesla

What is Tesla is doing in such an insignificant market? Are Israeli consumers ready to buy expensive cars through an app? Just two of the questions.

The moves by pioneer US electric car maker Tesla to build a presence in the Israeli market give rise to two questions: what is Tesla doing in this market with vehicles that have been sold up until now at premium prices; how will Tesla's entry affect the Israeli auto market and Israeli consumers.

1. Is Israel an important enough market?

What business interest does Tesla have in entering a small, isolated and remote auto market like Israel with a limited number of premium electric models, when Israel is still just beginning to become acquainted with electric vehicles?

The first answer is the constant pressure exerted on Tesla in recent years by Israeli entrepreneurs to represent the company in Israel. The talks were held through intermediaries and through Tesla's European division in Brussels, dealers all over the world, and even directly with Elon Musk through personal connections.

All of these queries and pressures were of no avail, because Tesla markets directly to consumers online, and because Tesla had no merchandise to sell, due to surplus demand and constant delays to planned expansion of its production capacity.

Now that Tesla is starting to overcome this bottleneck, and also has a plant in China that will produce hundreds of thousands of vehicles a year at peak production, its global expansion is inevitable. It is happening: Tesla introduced its Model 3 in Europe last spring with impressive success. 17,490 cars of this model were sold in Europe in September 2019, making it the bestselling electric car that month by a wide margin. 75,000 Tesla vehicles of various types have been sold in Europe since the beginning of the year.

Tesla is also gradually entering small markets. For example, Tesla has already been active in Jordan market for the past three years, and is believed to have sold several dozen vehicles there to date.

The second reason for Tesla to come to Israel is that the Israeli market passed a maturity test in the adoption of electric vehicles over the past year, particularly in the luxury segment. Nearly 500 electric luxury electric vehicles have been sold in Israel over the past year, and demand outstripped supply. This proves that there is a hard core of a few hundred customers a year who want, and can afford, to buy electric cars for about $100,00 after tax.

Furthermore, Tesla has lively ongoing business activity in Israel, although this is in the auto-tech sector. These are two separate divisions of the parent company. Activity is taking place with Israeli auto-tech companies, which includes cooperative ventures and ordering components for trials of future autonomous vehicles. It is even possible that supply contracts for future models have been signed in secret with Tesla's R&D section in Palo Alto, which has no direct connection with the marketing arm in Europe. Tesla's management greatly esteems Israeli technology, however, and has already sent senior executives from the company to Israel, including Elon Musk (visits that were described as private).

What will Tesla's activity in Israel consist of? The company is not inclined to share information with the media or to answer direct inquiries. It can be assumed, however, that it will act along the same lines as in Jordan in recent years: setting up a showroom in central Israel, and online marketing to interested customers. Inquiries to senior executives in the premium vehicle segment in recent months indicate that the company will also focus on active marketing to targeted customers.

2. Vehicles: Neither cheap nor popular

Like many boutique manufacturers, Tesla adopted a high-end strategy from the beginning - aiming at the richest and most profitable part of the auto market. The first model launched by the company early in the previous decade was an electric two-seater sports car called the Roadster priced at $112,000. The following models, which cost $70,000-110,000 before taxes and tax benefits, and still do, are aimed at the top 1% of the market.

In the middle of the decade, Tesla's management realized that it had no choice but to start mass production of cheaper and more accessible models, because Mercedes, Jaguar, Audi, and other companies were starting to push programs for developing luxury electric vehicles for the top end of the market, with specifications and prices that made deep inroads into Tesla's sales. Another reason was the enormous gap between the company's market cap and investors' expectations and its ability to make profits on expensive models.

The result was the relatively compact Tesla Model 3, whose official price in the US started at $40,000, and the crossover Tesla Y, which will debut next year with a $35,000 basic price. Tesla is now beginning Model 3 production at a huge and completely new plant in Shanghai, but anyone expecting a lower price as a result of the moving of production from the US to China is in for a disappointment. In China, the "local" Model 3 is only $2,000 cheaper than the imported version, despite the customs duties applying to imports from the US.

What the price for Israeli consumers will be is anyone's guess. Taking into account the price structure in Europe and the current taxes on electric cars in Israel before the upcoming January revision of taxes on environmentally friendly vehicles, which include a 10% purchase tax, shipping, and VAT, the result is a price in the NIS 200,000-220,000 range for the basic Tesla Model 3 with a 400-kilometer range. The price of the Tesla Y, which has a 300-kilometer range in the basic configuration, may be lower. This is a relatively accessible price, but it still appeals to a fairly limited segment of the Israeli market, which is crowded with electric and hybrid competitors.

Tesla's leading models, S and X, are likely to cost NIS 400,000-500,000 in Israel, which restricts the market for them to a few dozen or a few hundred sales a year. In this market, they will soon face competition from European cars made by Audi, Mercedes, Jaguar, and many others on the way. In short, what is involved is a niche within a niche - an electric car brand competing in the premium segment of 8,000-10,000 cars a year. This is something that will definitely not change the overall picture.

3. The marketing method: Forget bargaining

Tesla duplicated the model of Apple and Steve Jobs, taking it from the smartphone market and applying it to the auto market. Tesla's marketing method, which began in the US and is being applied in every market that the company enters, gives the auto manufacturer complete control of the customer experience, with no intermediaries: online purchasing, maintenance, and upgrading the customer to a new model at the end of the ownership period, and even resale of the customer's old vehicle to the company.

Tesla's customers can view the new vehicles (only in showrooms, or "customer experience centers," as they are called); arrange a test drive; and then make the purchase online, without ever meeting a salesperson, including making the payment, clearance and financing through the app. The help wanted ads recently published by Tesla indicate that such a center is also planned in the vicinity of Tel Aviv.

Israeli customers are regarded as sophisticated and expert in buying online. In Israel, however, online auto sales are still not very developed, although importers have conducted several pilots. It turns out that when a product costing tens of thousands of dollars is involved, Israelis are still unwilling to forego the human touch and Middle Eastern bazaar tactics.

Tesla, on the other hand, maintains fixed and inflexible pricing. It will therefore be interesting to see what happens when these two different cultures meet.

4. Service: Keeping everything in-house

Tesla itself offers all of the services for car buyers, including marketing of charging packages for dedicated charging stations that it manages remotely; maintenance and tune-ups for vehicles, a large proportion of which is conducted remotely through communications between the company's servers and customers' vehicles; and comprehensive control of the market for used Tesla vehicles through trade-ins and repurchasing.

Despite Tesla's wireless remote-control capabilities, establishing a physical service center in Israel will probably be unavoidable for it, because of the complexity of physically maintaining vehicles, such as repairing damage to the sensitive aluminum body and complicated electronic systems. Furthermore, the law in Israel requires importers to open their databases to other service centers, and allow installation of alternative spare parts, which directly conflicts with Tesla's business and logistics philosophy.

5. The elephant in the room: The capital market

Tesla has had a long and difficult romance with its investors. Its current market cap is $60 billion, far higher than that of auto manufacturers who produce and sell ten times as many cars and make profits in the billions.

From a financial standpoint, Tesla still behaves like a startup, and has yet to prove that it is capable of finishing an entire year with a consistent and stable profit. It has a history of delays in production and deliveries, troublesome quality problems, doubts concerning Musk's management ability, and a tendency to make dangerous gambles.

Tesla has also made a substantial investment in building a plant in China for production of its Model 3 cars. The plant is commencing operations now at the exact time when the Chinese auto market is in full retreat and in the midst of a trade war.

The personality cult and media gimmicks are still helping to maintain financing and trust in the company, but investors have already proved that they can lose patience.

For this reason, no one is willing to bet that Tesla will continue to exist as an independent company, and will persist in its development plans. A sale of the company to external investors is possible. How likely is it? Ask Adam Neumann about WeWork.

Published by Globes, Israel business news - en.globes.co.il - on December 4, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018