How many Teslas can Elon sell?

Looking at two recent forecasts

There have been some pretty crazy Tesla forecasts lately, from ARKK's to Sal Demir’s on Seeking Alpha.

Removing Tesla Semi from Sal’s forecast, he has Tesla making 5M cars in 2025 at an ASP of $45,000, and 16.4M in 2030 at an ASP of $42,000 (and lowest priced car at $25,000 ASP). AARK’s forecast has Tesla making between 5M and 10M cars in 2025 at an ASP of between $36,000 and $45,000. How reasonable are those numbers?

In 2021 car makers are estimated to sell 70M cars world-wide, with roughly 15M USA, 12M Europe, 25M China leaving 18M for ROW (Rest of Asia, Africa, south America, Canada, etc). The average year for the last decade has been 71M, so it's hard to forecast much growth.

In 2020 Tesla sold 500,000 cars, which was a 0.85% worldwide market share. The forecasted values of 5M Teslas in 2025 would increase Tesla market share to 7%, 10M cars would lead to a market share of 14%, and 16.4M Teslas in 2030 would be a market share of 23%.

How reasonable is that? From a top level, it seems very audacious. Currently the largest market share in automobiles is Toyotas at 10%. Second place is VW at 7.5%, and Ford at 5.6%. Combining manufacturers into holding groups puts VW Group on top at 12.1%, but VW Group combines 12 brands, including VW, SEAT, Audi, Porsche etc, while Tesla is a single brand. 

So the question is, how likely is it a company grow unit sales within a mature market by 10x to 20x in only 5 years to vault over more than a dozen competitors to become the largest or even a top three manufacturer? Or grow units by 32x in ten years to double the market share of any other competitor?

Just because something seems wildly improbable, doesn’t mean it can’t happen, just that it isn’t likely to. So what data to we have that allows us to make logical inferences about the likelihood of these events?

Teslas Existing Growth Rate

The first step is to look at Tesla’s current and historical growth rate in units sold and compare to rates needed to reach these forecasts. To grow 10x in five years requires a 58% annualized growth rate, 20x in five years requires a 82%annualized growth rate, and to grow 32x in ten years requires a 41% annualized growth rate. 

Tesla units in 2020 grew 36% from 2019, at a 42% annualized rate from 2018, and 69% annualized from 2017. On the surface this looks like close to a fit, esp. the trailing three years growth rate. But the problem is the last year growth rate is only 36%, and the pattern almost perfectly shows how growth slows as companies get larger. Sales increased by 143,000 units in 2018, but only 121,000 in 2019, and 132,000 in 2020, adding similar amounts to a larger sales bases always yields lower growth. Which should be expected, as the future should always hold fewer new markets and new market opportunities for Tesla than the past. 

But the opening of China in 2020 has opened up growth again, Q1 2021 grew 109% over prior year Q1. And Tesla itself is forecasting 50% revenue growth the next few years. As great as that is it still wouldn’t be enough to reach the 5 year forecasts (it’s a strange sign when outside forecasts are higher than the actual company forecast). 

Teslas Addressable Market

The bigger problem with the Tesla market share forecasts are that neither forecast expects any Tesla to sell for less than $25,000, which means they can only be selling to a subset of the total world car market. 

The majority of cars bought world-wide are purchased at lower prices than the forecast Tesla ASPs, some far lower.  Here is a list of top selling chinese cars from 2017. In China the Baojun 560, GAC Trumpchi GS4, VW Jetta all start at roughly 80,000 to 90,000 Yuan, or $12,000-$13,000. The VW Lavida, Nissan Sylphany, Buick Excelle GT, Great Wall Haval H6 start around $17,000 to $18,000. The Baojun 730 starts at $11,000. And the best seller, the Wuling Hongguang, starts at $9,000.

So of those 25M cars purchased in the Chinese market, what percentage are bought for more than $23,000? McKinsey estimates only 33% for 2020 (page 7) and only 13% above $38,000, which is still below some of the forecast Tesla ASPs. In fact that means Tesla at their current ASP is only competing for about 3M annual purchases, and their total future addressable Chinese market maxes out at 8M cars. Counting everything above $23,000 in the third world as Tesla’s potential addressable market produces a total potential market for Tesla in China/ROW at 13M annual units (33% of 41M units). 

The high end markets are obviously larger in the first world, with the average US car price is now $40,000, and only roughly 15% sell for under $25,000. Applying that 85% to US & Europe gives Tesla a potentially addressable First World market of 23M units, and a total worldwide market of 41M units.

So within Tesla’s total addressable market assuming it makes a $25,000 car, the forecasts have in five years Tesla going from a 1.3% share to either a 12% share (5M units sold annually) or 24% share (10M units). And on to a 40% market share in 10 years.

All Tesla has to do to achieve these forecasts is:

1) Build a successful $25,000 car.

2) Increase unit sales growth substantially over last few years at a much higher run rate and maintain these higher growth rates for at least 5 - 10 years.

3) Maintain its overall ASPs at levels much higher than the largest volume car companies in the world while taking large chunks of market share from them.

4) And do this all without other car companies offering any viable EV competition to Tesla’s offerings for at least the next decade.