Tesla (TSLA) on Watch as German Automakers Try to 'Kill It'

(Updated - December 8, 2015 11:03 AM EST)

Tesla (NASDAQ: TSLA) is weaker off the open following cautious comments from Bernstein analyst Max Warburton on German competition.

"The Germans are setting out to match Tesla – and ideally, to try to kill it," Warburton said in a note to clients today discussing the European automakers ramp up to compete against the fast-growing U.S. automaker.

The analyst said that German OEMs have been working furiously to understand battery chemistry and electric vehicles and in the next three years, Audi, BMW and Mercedes will launch products that compete directly with the Model S and Model X.

While deep down the Germans still don’t really believe in EVs, they are willing to willing to lose money if necessary to dispute the disrupter. "The men running these companies still have gasoline running through their veins," Warburton comments. "But even if they don't fully endorse the concept – and can't yet match Tesla's battery costs – they are now convinced that they need to build rival cars. The pride of the German engineering community is at stake – and yes they've noticed Elon Musk's rude comments about German engineering. So they are working on their own versions of the Tesla Model S and Model X – with cars like the Porsche Mission E, Audi Q6 e-tron, BMW i5 and a Mercedes product (unnamed) all due in the next few years. They won't make money, but they will show consumers that Germany can match Tesla."

On battery technology, the two sides differ greatly. Tesla built its first battery in a quick, low capital and expedient way – by buying Panasonic 18650 batteries, designed for old generation lap-tops, and packaging them together (6,831 of them to be precise). The batteries are mass produced and cheap. While a bit 'home made' in design and appearance, they work. In contrast, the Germans are pursuing large format batteries, which they are convinced are superior. Large format cells are currently more expensive but OEMs are convinced costs will fall and they offer better safety, cooling and even durability. Within the cells, there are some differences in the lithium-ion chemistry, with Tesla using NCA while the Germans prefer a chemistry called NMC, which is thought to be more durable.

Warburton met with some of the key brains at Tesla and also met with some of the key engineers involved in EVs at the German OEMs. They asked Tesla what they think of the Germans and vice versa. The Germans criticized many aspects of the Tesla approach (notably durability, battery build quality and safety) and all insisted that large format batteries offered better overall performance and ultimately could be made as cheaply. They also accused Tesla of having "weight, service and production issues", having "unlimited belief in their own abilities" and "failing to see their limitations". Meanwhile, a very senior German executive called the gigafactory "nonsense." On the other side, Tesla's CTO argued that "Auto guys don't know how to analyze our battery" and that "the technology is changing too fast for them to keep up".

Shares of TSLA last traded down 2.7% to $224.90.

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