Tesla Choices: License, Acquire... or Die
Next week, Elon Musk will unveil Tesla's newest product — the Model Y crossover — thereby achieving his longtime goal of completing the four-character combination: S3XY.
Yes, it was indeed intentional, in case you were wondering.
The public spectacle will be well timed, as Tesla's Model 3 sales in the U.S. market did not fare well for the month of February, dropping to 5,750 from 6,500 the previous month.
Not a good trend for a vehicle that at the end of last year had captured the title of the world's best-selling EV.
And that's just the beginning of the company's woes, which are now starting to accumulate to potentially catastrophic levels.
The legendary Geneva auto show, which kicks off today, will host a lineup of new electrical vehicles, many of which will be direct competitors to Tesla's offerings.
Brand Names Are Narrowing the Gap
One of the more notable examples is the Audi Q4 E-Tron, which will be featured as a concept vehicle at this year's show but is expected to graduate to full production status by 2020 and become available for sale in the 2021 model year, in direct competition with Tesla's Model Y.
With the cards stacking up as they are, it appears as if the prophecy made by a number of market analysts is finally coming to pass: Tesla is beginning to lose its edge.
Looking at things objectively, this should not come as a major shock.
Tesla was conceived as, and always has been, an electrical vehicle maker for the mass market.
Without a solid base of proven, conventionally fueled products to back up its EV line, however, Tesla stands at a decided disadvantage to competitors like VW, Mercedes, BMW, Audi, and, on the lower end, Chevy, Toyota, and Ford.
Today, those automotive dynasties offer their own constantly expanding lines of electric vehicles to consumers who crave the brand as much as they trust the technology, and in some cases even more so.
That plus reliability issues are just two of the major pitfalls of being a first-to-market EV-only automaker.
Technical Issues Run Deep
But put all that aside and look deeper, and there are two more failings, of a purely technical nature, that just may put the nail in the coffin for the Northern California-based car builder.
The batteries and the motors themselves.
Tesla batteries, aside from being exceedingly fragile (as a recent example, a Model X caught fire and burned down to its frame earlier this year on a frozen lake in Vermont after driving over some rocks), have proven to be hard to reliably market as a used product.
The reason: They degrade at very unpredictable rates.
This isn't something we hear much about because the used car market for these vehicles isn't substantial in North America, but in Scandinavia, it's relatively huge.
With the 6,000-plus cells of an average Tesla power array degrading at highly varying speeds, the performance of two otherwise identical three-year-old Teslas can vary by double-digit percentages in terms of range and charge time.
Tesla's Short-Lived Wonder
And there's nothing that can be done about this. That's just the nature of existing lithium-ion batteries.
They age and fail with almost organic randomness, and when you stack thousands of them together, that weakness compounds into a highly chaotic system.
That may not be a huge problem now, but as the market fills up with aging Teslas, consumers will begin to view these vehicles in a completely different light.
Nobody, no matter how wealthy, wants to pay upwards of $100,000 for a disposable car.
The problem with the motors themselves is arguably worse.
Based on the original 200-year-old Faraday design, the heart of every Tesla is flawed literally at the core.
Optimal efficiency and torque can only be achieved at a single preset engine speed.
Go faster or slower, and efficiency and power drop off.
Two Centuries in the Making
This isn't something we can blame on the Tesla engineers, as almost all electric motors in use today suffer from the same problem, but once a solution appears on the market, Tesla's lack of non-electric products to fall back on while costly redesigns and production-line refits are implemented will make this failing a deadly liability.
Unfortunately for Tesla, that moment has now arrived.
A tiny company, based in British Columbia, has recently perfected the world's first "smart motor," which uses AI algorithm charge-management to solve the efficiency issues inherent in all electric motors.
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A Trillion-Dollar Patent?
This technology is applicable in almost every electric motor on the market, from the smallest examples, like the kind that makes your smart phone vibrate, all the way up to the behemoths used to propel cargo ships.
It's also highly useful in electric generators (an electric motor working in reverse), allowing wind turbines, hydroelectric dams, and nuclear power plants to produce more power from inputted mechanical force.
This company already has partnerships in place and is already putting this technology into major commercial products including high-speed trains and conversion kits for transforming traditional internal combustion cars into EVs.
Late last year, this company took this a step further when it acquired an artificial intelligence-based solution for the monitoring and management of complex battery arrays — solving the lithium-ion performance decay issues I described earlier.
When paired, these technologies have the potential to create more efficient, reliable, longer-lasting electrical vehicles, as well as a laundry list of other products that rely on electric motors and rechargeable batteries.
Hundreds of consumer and commercial products are on that list, each of them standing to benefit greatly from these innovations.
Unfortunately for Tesla, that means a very tough decision is ahead.
Three Choices: License, Acquire... or Fail
Unless the company starts licensing these patents and implementing the technology into its own products, every one of its existing products — including the as-of-yet unreleased Model Y — will face imminent obsolescence.
Alternatively, Tesla could choose to just buy the company outright, thus giving itself a huge advantage over its brand-name competitors.
The company behind these innovations is just barely out of its startup phase, but it's already garnering major attention from the industry.
Pretty soon, mainstream consumers will also become aware.
Since its stock is already public, this means right now is a key moment for prospective investors.
Those holding shares today stand to rake in millions in the long term, but this moment will pass quickly.
I recently published an in-depth research report on the company for my premium readership.
Fortune favors the bold,
Coming to us from an already impressive career as an independent trader and private investor, Alex's specialty is in the often misunderstood but highly profitable development-stage microcap sector. Focusing on young, aggressive, innovative biotech and technology firms from the U.S. and Canada, Alex has built a track record most Wall Street hedge funders would envy. Alex contributes his thoughts and insights regularly to Wealth Daily. To learn more about Alex, click here.
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