How Tesla is shaking up the European market, from the top down

It began as a trickle.

In July 2012, just a dozen units of the Tesla Roadster, a 100,000-euro electric two-seat sports car based on the Lotus Elise, were registered in Europe. 

Fast forward to 2021. Tesla is neck-and-neck with Volkswagen as the No. 1 electric vehicle brand in Europe, with sales of 131,801 through November, an increase of 85 percent on the same period last year, according to figures from JATO Dynamics, and the Model 3 is the leading EV.

Elon Musk's brand has profoundly shaped the way consumers perceive EVs, and the way automakers build and sell them.

Along the way, Tesla has carved out market share by outselling iconic models from premium automakers such as Mercedes-Benz, BMW and Audi, first with the Model S luxury sedan, then with the Model 3 midsize sedan. 

Now, in lower-level trim tailored to local incentives, the Model 3 is encroaching on the turf of top-tier volume brands such as Peugeot and Volkswagen, analysts say. 

Looking further into the future, Musk has mused about moving down-market with a smaller car where volume brands such as Renault, Citroen, Hyundai and Kia play. 

"Everybody at the upper-mid segment is going to be feeling some pressure from Tesla," said Philippe Houchois of Jefferies, referring to vehicles that sell in a price range of 45,000 to 60,000 euros. He noted that the just-launched Model Y midsize SUV will go up against EVs such as the BMW iX3, Mercedes EQC and Volvo XC40 Recharge. 

"VW [Audi], Volvo, BMW and Mercedes are still feeling the brunt of Tesla," said Houchois, who has set a price target of $1,400 on Tesla shares, one of the highest among analysts. "If Tesla's average price point continues to go down, then you get a bit of relief from the pressure on BMW/Mercedes, but you get more pressure on Toyota, Stellantis and VW." 

Tesla's share of the EV market is likely to decline as more rival models are launched, but the brand continues to gain overall share in Europe. 

"Tesla's share of the BEV [battery-electric vehicle] market has halved from the peak it experienced in 2019, at 31 percent, in the debut year of the Model 3 when it was left to roam the European BEV wilderness essentially without a lot of competition," said Matthias Schmidt of Schmidt Automotive Forecasting.

In 2021, Schmidt said, Tesla will account for 15 percent of the western European EV market -- "but more significantly," he said, "it will account for around 1.7 percent of the total western European passenger car market, putting them somewhere between being ahead of Jaguar Land Rover and behind Volvo Cars." 

Schmidt tracks registrations in 18 western European countries that make up the vast majority of the region's EV and overall premium vehicle sales.

Tesla has accomplished this largely with a single vehicle, the Model 3, in a segment, midsize cars, that has stagnated as buyers turned to SUVs in recent years. The automaker's reach could extend even further in 2022, when production of the Model Y begins at Tesla's first European factory, near Berlin. 

Already in November, the Model Y was the best-selling vehicle overall in Norway, a country seen as a test lab for the transition to electrification. The No. 2 seller? The Model 3.

But sales tell only a part of the story, analysts say.

While legacy automakers squirrel away profits to finance the enormous costs of transitioning to electrification, Tesla, as a "born electric" company, has a free and clear path to use its 14.6 percent margin (in the third quarter of 2021) to expand its growing vehicle production network and develop new models.

"Those are scary numbers for the car industry," Houchois said. "Nobody got 14 percent margin on a $48,000 average price point," he added, referring to what he believes is the average selling price of all Tesla models.

"The way we look at Tesla is that it challenges the business model of the industry on many levels," he said, "It's almost like whatever the auto industry does inefficiently, they try to do better." 

Tesla arrived on the European market concurrently with two mass-market models, the Renault Zoe small car and the Nissan Leaf compact, which sold at about one-third of the price of the Roadster and the flagship Model S.

The German premium brands were the first to feel the pinch from Tesla, in 2018, when the Model S outsold their luxury standard-bearers, the Mercedes S-Class, BMW 7 Series and Audi A8.

Tesla hit its stride in 2019, when it launched the Model 3 in Europe, where it quickly eclipsed the Zoe and Leaf to storm to the No. 1 EV spot.  

Tesla's EV market share reached 31 percent that year on sales of about 109,000 vehicles, of which some 95,000 were Model 3s. 

Schmidt said Tesla's growth in that year was somewhat illusory, as automakers held EVs off the market in the final year to update fleet average CO2 targets before new ones took effect in 2020.

"This led to established automakers reducing or delaying BEV supply in 2019 and shifting customer deliveries and market debuts to 2020 to help their CO2 average," he said.  

As a consequence, Tesla's EV share fell to 13.2 percent in 2020. Schmidt said he expects Tesla's share of the EV market to grow to 20 percent in 2022, with the introduction of the Germany-built Model Y, with western Europe volumes of about 300,000 units, for a 2.3 percent share. 

For reference, Jaguar Land Rover had a 1.5 percent share and Volvo a 2.9 percent share in western Europe (16 countries) in 2020, according to industry association ACEA.

The Model 3 reached a symbolic landmark in the first half of 2021, outselling the BMW 3 Series, Audi A4 and  Mercedes C-Class.

Schmidt said he expects Tesla's EV market share to top out at about 20 percent in face of new models from traditional automakers and new Chinese entrants.

LMC Automotive analyst Sammy Chan says Tesla's sales in Europe could reach 400,000 by the mid-2020s, "with the potential to expand further, depending on how aggressively they expand their model range."

Chan says the Model Y will only put more pressure on premium brands, but that could be offset somewhat by expected growth in the premium segments.

Chan's colleague, Al Bedwell, chief powertrain analyst at LMC, said that even as Tesla lost market share to new EV models, "The Model Y has added a lot of volume and brought Tesla back to the front in Q3 2021. They continue to amaze us as to how well they are doing.

"They continue to be the BEV of choice for tech-minded buyers," Bedwell added. 

Tesla's next target may be the upper end of the volume market, where Peugeot and VW brand sell highly optioned sibling models of their parent companies' lower-cost brands (Skoda, Seat for VW Group; Citroen and potentially Fiat for Stellantis), and where Renault aspires to be with its new Megane E-Tech Electric compact. 

That is a natural hunting ground for Tesla, Houchois says, because it needs to tailor its prices to meet local EV incentive rules.

"The driving force at Tesla is affordability," he said, "So, they want to get wider adoption. Depending on what the specific market condition is in the country, then they will change the car to make it affordable." 

Tesla's current margins give it room to do this, he said: "Given the profitability in Q3 [2021], they can have their loss leaders, the cars you need to make sure that you get incentives in the UK or France." 

The big question for Tesla-watchers -- including competitors -- is when will it roll out new models. For Europe, that would be a rumored Model 2 compact hatchback, but Tesla executives were noncommittal on a third-quarter earnings call, saying new launches would have to wait until battery cell supply increased. 

"We don't want to add any new vehicles to our lineup when we are generally in a cell-constrained world," said Lars Moravy, vice president vehicle engineering.

Nevertheless, Musk has said he wants to sell 20 million vehicles a year by 2030, averaging 50 percent growth a year. 

"We will eventually expand the vehicle lineup to get to larger volumes," Moravy told investors, "and we believe that we will need to be in all major segments across small and midsize, large sedans, SUVs, and trucks to do so, along with, of course, the massive space of robotaxi."

Schmidt called the introduction of a compact hatchback "crucial for Tesla to continue its market share push and rise toward the magic 5 to 6 percent share of the market where all three German premium automakers hover."

But, he warned, "The only problem is, the rule of thumb is the lower you slide down the segments the faster the profit margin evaporates." 

Chan of LMC says Tesla can expand into the compact hatchback segment because it needs far fewer hours to build a car, preserving profit margins. "That could then be aimed squarely at the VW ID3," he said.

The decision about if and when to launch a Model 2 is a strategic one, Houchois said. Tesla still has unfulfilled demand for the Model 3 and Model Y that it can exploit, he said. 

"They are right in the middle of where the market wants to be, in the $50,000 to $70,000 price point to optimize profitability," he said. "There's no money to be made selling Zoes or Leafs at this stage."

"The big question mark is when they launch the Model 2," he said. "Given their profitaility, they could decide to produce it at a lower margin."

Tesla stands to continue to gain sales, if not market share, but it is doing so in Europe on a glide path that sets investors' hearts racing as the automaker's market capitalization (about $1 trillion) surpasses its top five rivals combined.

Simply put, Houchois says, Tesla has mastered processes in less than a decade that automakers with a century of experience are still struggling with. Its market position is threatened much more by the possibility of a self-inflicted wound (such as a massive recall or successful safety-related lawsuit) than by others, he said. 

"You have seven or eight challenges launched by Tesla to the industry, and most automakers can respond to one or two of them at a time," he said. 

Among Tesla's advantages are direct-to-consumer retailing worth three or four points of margin compared with a traditional dealer; building the Supercharger network; integration of software and over-the-air updates; battery management; eliminating parts diversity and complexity; and design to manufacture -- which may be Tesla's biggest advantage, Houchois said.

As an example, he pointed to huge casting machines in the Berlin factory that can produce two aluminum panels that replace 40 stamped and welded parts. That reduces by 40 percent the number parts that go into a body in white -- and also reduces the number of costly welding robots as well as the floor space needed for them.

"People need to listen to Musk because he does what he says," Houchois said. "[In 2019] he said that Tesla's advantage will be manufacturing expertise, and everybody guffawed because nobody makes cars better than BMW."

Tesla will build the vast majority of its cars on a single platform in 2022, on a scale unmatched by any other automaker. The Model 3 and Model Y have about 80 percent parts commonality, Houchois said, and could total nearly 850,000 units together in 2022. 

At some point in the second half of the 2020s, Tesla is likely to be eclipsed in volume by huge legacy automakers, analysts say, as they bring dozens of new electric models to the market on new platforms and electronic architectures. 

In Europe, that is likely to happen starting in 2025, the next step-down in EU emissions targets. Until then, Tesla's premium competition such as BMW and Mercedes will continue to push sales of more profitable internal-combustion-based models with comparatively few EVs. After that, they will release a raft of EVs on platforms such as BMW's Neue Klasse and VW Group's SSP.

Houchois said that in the end, Tesla's impact on other automakers could be a kind of a death by a thousand cuts.

"My thinking for a long time was Tesla would kill carmakers, but all they have to do is take a quarter-point share from VW, a point from Toyota and a point from Stellantis and that gives them growth, and also it destabilizes the economics of their legacy competitors," he said. "VW cannot lose one point of market share."