Luxury car models of Audi, BMW, Mercedes-Benz, and Porsche are being threatened by Tesla Motors, whose Model 3 electric car enticed 325,000 would-be buyers to put down $1,000 deposits during the week of its debut in April.

While making Germany home to some of the industry’s most profitable car brands Luxury car models of Audi, BMW, Mercedes-Benz, and Porsche have long dominated the world’s premium automotive ranks.

But Tesla Motors’ threat to them is being viewed as one that not even the Toyota’s Lexus was able to when it was launched.

Tesla Chief Executive Officer Elon Musk has said his most affordable car to date should be thought of as competing with luxury mainstays such as BMW’s 3 Series or the Audi A4 as the Model 3’s stats—200 miles on a single charge, $35,000 starting price—align it with General Motors’ midmarket Chevrolet Bolt.

There’s more to Musk’s claim than just bravado, car shopping data suggests. Before making purchase decisions, according to automotive researcher Edmunds.com, Tesla buyers shop German luxury brands more than any other car lines. Edmunds say that while 12 percent shop Porsche, about 20 percent look at Audi and Mercedes models and almost 30 percent consider BMW purchase.

It becomes clear that German brands are most vulnerable to customer defections as Tesla grows when the above data is compared with the fewer than 6 percent of Tesla buyers who consider a Dodge.

Tesla’s poor track record of manufacturing delays and persistent financial losses is privately squawked at by executives at rival carmakers. Yet, in a way that incumbent automakers haven’t for decades, the same executives can’t ignore that Musk’s products are exciting consumer passions.

“The innovation hat is going to move to a new place,” says Håkan Samuelsson, CEO of Volvo Cars.

“The decisive factor is what’s happening inside people’s heads. Many see in Tesla the innovation they’re missing from the Germans,” says Jürgen Pieper, an analyst at Bankhaus Metzler.

The German brands have been forced to show lots of electric concept vehicles recently due to Tesla advances and the threat of Apple entering the car business. However while Tesla plans to start delivering the Model 3 in late 2017, these cars are years away.

“Technologywise, things will probably move back to the U.S. to an extent after Europe was the center of premium carmaking for the past 30 years,” says Volvo’s Samuelsson.

The announcement by Porsche in December that five years it will build its Mission E, a fast-charging, four-door luxe sports car that will target Tesla’s Model S sedan, seems to have been induced by the above reason. As a direct rival to Tesla’s Model X SUV, Audi plans to build its electric E-tron Quattro SUV and Mercedes is planning four EVs to take on Tesla.

Another interesting analysis is that German marques may have to cut prices to avoid losing market share to Tesla or trim production to match lower demand until they launch their competing EVs and hence Tesla doesn’t have to sell huge numbers of the Model 3 to begin hurting both demand—and profitability—of traditional luxury brands.

(Adapted from CNBC)

Categories: Strategy