Tesla’s Success in Europe Catches Industry Off Guard

Source: By Jack Ewing, New York Times • Posted: Tuesday, March 10, 2020

The Model 3 outsold some of the most popular luxury models in recent months. BMW, Mercedes and Audi risk missing the transition to electric cars.

A Tesla showroom in Berlin. The company’s Model 3 has become one of the best-selling cars in Europe and was just named the runner-up as the European Car of the Year.
Fabrizio Bensch/Reuters

FRANKFURT — Until recently European auto executives regarded Tesla with something like bemusement. The electric car upstart from California was burning cash, struggling with production problems, and hedge funds were betting it would fail.

The car executives are not laughing anymore. Almost overnight, the Tesla Model 3 has become one of the best-selling cars in Europe. In December, only the Volkswagen Golf and Renault Clio sold more, according to data compiled by JATO Dynamics, a market research firm.

The success of the Model 3, only months after it went on sale in Europe, has come as a shock to industry executives who only months ago were ready to write Tesla off. The company was building cars in a tent, for goodness’ sake.

Tesla’s surge, assuming it proves sustainable, raises questions about whether traditional carmakers like Volkswagen and Mercedes-Benz are in danger of missing a striking shift in automotive technology. Despite plenty of warning, they are only beginning to introduce competing electric vehicles.

Electric vehicle manufacturers “are in a much more mature place than two years ago or even last year,” said Axel Schmidt, a senior managing director at the consulting firm Accenture who focuses on the auto industry. “Today they are real players on the market.”

Traditional carmakers, on the other hand, are in tough shape. The coronavirus has battered sales in China and forced cancellation of the Geneva International Motor Show, probably the premier showcase for the European auto industry. Last year the event, which was scheduled to be open to the public from March 5 to March 15, attracted 600,000 visitors.

The Model 3 was runner-up in the contest for European Car of the Year, which was still presented in Geneva. The Model 3 finished behind the Peugeot 208, a sporty compact, in the voting by a jury of auto journalists. But Tesla beat models by Porsche, Renault, Ford, Toyota and BMW.

At first blush it seems absurd that traditional carmakers would have anything to fear from Tesla. The company sold fewer than 100,000 cars in Europe in 2019. Volkswagen, which is the world’s largest carmaker, sold 4.6 million in the region. Companies like Daimler have been reliably producing vehicles for more than a century.

It’s by no means certain that Tesla will be able to keep up the momentum. The company’s shares have been hammered as part of the widespread sell-off caused by the spread of the coronavirus. Tesla has also come under fire in the United States after its Autopilot self-driving software was seen as contributing to two fatal crashes.

But European managers remember what happened to Nokia, once one of Europe’s most admired companies. In the early 2000s, the Finnish company dominated the global market for mobile handsets. Then, in 2007, Apple introduced the first iPhone. Today the iPhone is ubiquitous, and phones with the Nokia brand account for about 1 percent of global handset sales.

Tesla is a long way from iPhone-style domination. Because of its limited selection of models, Tesla remains a small player over all. It was in 21st place in Europe in December among all carmakers. Still, it sold 24,000 vehicles during the month, one-third as many as BMW or Mercedes, even though they offer dozens of models.

The German luxury giants, perhaps reluctant to compete with their own most profitable products, waited too long to offer a battery-powered midsize car comparable to the Model 3, analysts said. That has allowed the Model 3 to sneak up on midsize luxury stalwarts like the BMW 3 Series, Audi A5 or Mercedes-Benz C-Class, all of which are in the same general price range.

Many of the electric cars offered by the established companies are basically conversions of conventional cars, such as the Audi e-tron or Mercedes EQC. They do not take full advantage of the opportunity that electrification offers to rethink automotive design.

“They are not really game changers,” Felipe Munoz, an analyst at JATO Dynamics, said of the electric cars offered by traditional carmakers. They “lost some time and that’s why Tesla is doing so well.”

There are exceptions, like the Porsche Taycan, a battery-powered four-door sedan that the Volkswagen subsidiary designed from the ground up to be electric.

The Taycan has gotten rave reviews since it went on sale late last year, including from Bill Gates. But with a starting price of 106,000 euros in Germany, or $115,000, the Taycan is not exactly aimed at the masses.

It was not as if the traditional carmakers had missed seeing the threat coming. BMW began producing the battery-powered i3 in 2013. But, while technically innovative, with a carbon-fiber body, the i3 is essentially a very expensive hatchback.

With a starting price in Germany of 39,000 euros including tax, the i3 costs almost as much as the roomier Model 3, which starts at 45,000 euros. The i3 does not go as far on a charge and does not offer software as sophisticated as Tesla’s Autopilot self-driving software.

One of the automotive establishment’s best chances to thwart the Model 3 will come later this year when Volkswagen begins selling the battery-powered ID.3. Volkswagen bills the ID. 3, which will start at around 30,000 euros, as the car that will put electro-mobility within reach of middle-class buyers.

But Volkswagen has been struggling to perfect the software in the ID.3 That is not an auspicious sign.

One of the Model 3’s big selling points is its autonomous driving software, which can be updated on the fly. The software, and a huge digital display on the dashboard, seems to be more important to buyers than the Model 3’s workmanship. Reviewers have found the body fits and other markers of quality to be inferior to the German makes.

The competition from Tesla is poised to get more intense. In November, Elon Musk, Tesla chief executive, announced plans to build a factory near Berlin that, beginning next year, will produce the Model 3 as well as the Model Y, an electric S.U.V.

The Model Y, with a starting price of $39,000, positions Tesla to steal a share of the S.U.V. market, one of the few segments in Europe that is still growing.

Analysts see Tesla’s decision to build a factory outside Berlin as a deliberate attempt to get in the faces of the German carmakers. The company will be in a position to poach German engineers and manufacturing experts, while confronting the German carmakers on their home turf.

The choice of Berlin also puts Tesla close to Germany’s scrappy start-up capital. Audi, Mercedes and BMW are all in southern Germany, a region that is prosperous but stodgy.

The Tesla factory has run into opposition from some Germans upset that the factory will displace a forest. But the company has fended off court challenges and has the strong support of local political leaders. Tesla has already cleared trees from the site.

In Europe, as well as the United States and Asia, Tesla has installed charging stations, rather than waiting for governments to do so, to give customers confidence they will be able find a place to plug in. Customers can order Teslas online and from storefront dealers in cities like Paris and Frankfurt.

Tesla could not beat the traditional carmakers by being like them, Mr. Munoz of JATO said. “It’s not only about the car itself. It’s also the way they are selling these cars,” he said. “They want to change the way the industry has worked for 100 years.”