Should Tesla Motors Worry About Cadillac?

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The upcoming Cadillac ELR is a plug-in hybrid like the Chevy Volt, not a true Tesla competitor. But GM's CEO says Cadillac will compete with Tesla in time. Photo credit: General Motors Co.

Consider the gauntlet thrown.

Last week, a General Motors executive said the company is "working on" an electric car that will have 200 miles of range and cost about $30,000.

That's in the same neighborhood - maybe even a bit cheaper - than the "mass market" electric car Tesla Motors has said it will bring to market in a few years.

But Tesla wasn't the least bit daunted: CEO Elon Musk tweeted that he was "happy to hear"  GM was entering his game, and that the price and range were the "right target."

But then GM upped the stakes. CEO Dan Akerson told the Detroit News that Cadillac is planning to go "head to head" with Tesla and its hot Model S.

Akerson is the first big-automaker CEO to say anything like that. So is this good or bad for Tesla?

Why this could be really bad for Tesla
There's no doubt that Tesla's Model S is an excellent product, a great luxury sports sedan that just happens to also be the world's most capable electric car -- so far.

There's also no doubt that Tesla is hoping its cars will be to the global auto market what Apple's iPhone is to the global cell phone market - a premium product that can command high margins even in the face of lower-cost competition. That hope is what has driven Tesla's lofty share price.

But it's one thing to hope for that, another thing to have things work out that way. One of my two biggest worries about Tesla as an investment has always been the specter of serious competition. After all, Tesla - for all its innovation - is a tiny company in an industry dominated by well-funded giants with global reach.

That's why I've been asking questions like this for a while: How will Tesla preserve those margins if a company like Volkswagen decides to introduce a legitimate Model S competitor at a lower price (or at a similar price, but with more range or features)?

You laugh, but imagine a big sexy-looking, all-electric Audi sedan - VW owns Audi -- with 400 miles of range, plenty of room in its Audi-plush interior, and a $65,000 price tag. The Model S is still a great car, but suddenly it's not the only choice, and maybe not the best choice for the money.

Now imagine a Cadillac with similar specs, and consider the very likely possibility that GM isn't the only giant automaker working on a Tesla rival. It's just the first one to acknowledge that push.

Now, competition doesn't mean that Tesla is toast. But given the scale and resource advantages enjoyed by every one of Tesla's major rivals, it doesn't bode well for those fat margins. Or for Tesla's stock price.

On the other hand, there's an argument for Tesla here, too.

Why this could be great for Tesla
My second big worry about Tesla has always been the possibility that electric cars would never become more than a niche product. What if there's no sustainable market for EVs? I think the jury is still out on that question, but the possibility of GM and others entering this space increases the chances that an enduring market will come into being.

That's likely why Musk has - at least in most of his public pronouncements - welcomed the idea of competition from the big automakers. There are several good reasons why he might.

First and foremost, lots of things will happen if and when electric cars become more popular. To name a few: Many more recharging stations will appear, more consumers will have comfort with the technology (and will thus be willing to consider or make their first electric-car purchases), and prices of key components like battery cells will come down.

All of those things would be great for Tesla. If Tesla can stay competitive with a premium product -- and the company has done a fantastic job of building a premium brand - then it might well thrive. Consider the example of BMW . BMW has just a 1.6% share of the U.S. light-vehicle market - and a smaller share of the global market - but it's very profitable thanks to the pricing power of its brand and market position.

If Tesla can ramp up to the production volumes it will need to thrive long term while preserving that kind of brand power, it could do just fine.

The upshot: Either way, it'll be great for electric cars
Competition from well-funded global players certainly isn't going to lead to worse electric cars. Tesla's Model S is state of the art today -- but if it gets eclipsed by a competitor, then Tesla (and everyone else) will have to do better. The result: better (and likely cheaper) electric cars for us.

And again, as the major automakers start to build these kinds of products, the idea of electric cars will become more mainstream. Remember that hybrids were considered weird when Honda brought the first Insight to the U.S. market, but now they're a mainstream choice.

As range goes up and recharging becomes more convenient -- both of which will happen as competition rises -- electric cars could follow the same path.

On the other hand, it's still possible that Tesla's sales could fade and GM's electric Cadillac could be an expensive dud. We'll find out.

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Fool contributor John Rosevear owns shares of Apple and General Motors. You can connect with him on Twitter at @jrosevear. The Motley Fool recommends Apple, BMW, General Motors, and Tesla Motors. The Motley Fool owns shares of Apple and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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