Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Tesla vs Toyota, Fuel Cells vs Electric Cars—Which Will Win?

There is an interesting battle taking place in the world of automobiles—the contest between Toyota’s fuel cell vehicles and Tesla’s lithium ion battery-powered electric vehicles. The struggle is a fascinating one because it is reminiscent of the early days of the automobile around the turn of the 20th century.

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A very similar battle played out in the years between 1900 and 1920 when three rival sources of power competed for the attention of early drivers. Back then auto buyers had a choice between battery-powered electric cars, oil-burning steam cars and vehicles driven by gasoline-burning internal combustion engines.

The Lesson of the Stanley Steamer

The interesting twist to the story is that gasoline-powered vehicles won the battle even though many people believed that steam cars were a better technology. Steam cars like the Stanley Steamer were faster and quieter than gasoline vehicles. One big reason why steam cars did not catch on was that the leading manufacturers in the field, the Stanley brothers, had no real interest in developing a mass market vehicle.

The Stanley Steamer in action.
The Stanley Steamer in action.

Gasoline vehicles were widely adopted because the major pioneers of mass market automobiles, such as Marcel and Fernand Renault in France, Henry Ford in the United States and Herbert Austin in the United Kingdom, utilized gasoline technology. Gasoline became the fuel of choice because it was pushed heavily by the major manufacturers, not because it was a better technology.

Today we see a similar battle shaping up between lithium ion and hydrogen fuel cell vehicles. Hydrogen fuel cells seem to be the better technology, but an aggressive entrepreneur, Elon Musk, is pushing the development of a mass market fuel cell. Musk is a master publicist and a popular figure. His electric vehicle company, Tesla Motors (NASDAQ: TSLA), has captured the public imagination.

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Interestingly enough, the development of electric cars seems to be moving faster than many of us would have anticipated. Tesla is now boasting that its Model S sedan gets up to 58 miles of range per hour of charging. The Model S gets up to 270 miles on a fuel charge of electricity and can go from 0 to 60 mph in 3.1 seconds. Toyota’s Mirai fuel cell sedan has a similar range with a lower top speed.

Can Tesla Survive?

Tesla also reported some very impressive financial numbers on March 31, 2015. The most extraordinary of these was a quarterly year to year revenue growth rate of 51.46%; in other words, Tesla’s revenues will double in the next year if that growth keeps up.

Elon Musk shows off a prototype of the Next Tesla the Model X.
Elon Musk shows off a prototype of the Next Tesla the Model X.

Tesla’s revenue actually did very well over the past year, increasing by $1.438 billion between March 2014 and March 2015. Tesla reported revenues of $2.072 billion in March 2014 that increased to $3.518 billion a year later.

Okay, that’s impressive, but some of Tesla’s other numbers are bothersome. It reported a profit margin of -16.40%, a net income of -$398.42, a free cash flow of -$557.85 and a return on equity of -43.68%. That translated into an earnings per share number of -3.178%.
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Even though its revenues are exploding, Tesla is still on very shaky ground. The company needs to greatly increase its revenues just to survive.

How Toyota Seems to Threaten Tesla

Tesla’s biggest problem is that the rival technology, fuel cells, is being promoted by a large and very wealthy competitor. Toyota is not a boutique startup operation; it is a gigantic automaker. Toyota reported revenues of $248.06 billion on March 31, 2015; in contrast, Ford (NYSE: F) reported revenues of $142.1 billion, General Motors (NYSE: GM) reported revenues of $154.23 billion and Honda Motor Company (NYSE: HMC) reported TTM revenues of $115.17 billion on the same date.

Toyota also had a net income of $19.93 billion, an enterprise value of $336.65 billion and a market cap of $213.12 billion. Tesla had a market cap of $31.58 billion and a $32.74 billion enterprise value. Unlike Tesla, Toyota has money to burn and the resources to roll out a totally new technology worldwide if it wants to.

Toyota also such impressive resources as an extensive dealer network. Unlike Tesla, it does not face a political battle to get its brand into new markets. Dealers have blocked Tesla from opening its retail stores in Texas and Arizona. Note: This battle is a rather artificial one because Musk could defuse it by simply selling Tesla dealer franchises.

The Toyota Mirai gets a tank of hydrogen gas.
The Toyota Mirai gets a tank of hydrogen gas.

Toyota also seems to be as committed to fuel cells as Tesla is to electrics. Toyota’s CEO, Akio Toyoda, has even appeared in videos promoting its Mirai fuel cell sedan. The company is also committed to building a network of fuel cell filling stations, much as Musk is creating a network of electric car filling stations he calls Superchargers.

This means Tesla and Toyota face the same problem with their new fuel technologies. They have to essentially create a network of filling stations from scratch. Tesla obviously has the advantage of being able to buy power from the grid here. Toyota would have to build a network of trucks or pipelines to deliver its fuel to filling stations. The cost of providing a fueling infrastructure could be the barrier to widespread growth of either technology.

How Toyota’s Fuel Cells Could Drive Tesla Sales

Interestingly enough, Tesla and Toyota’s technologies could be mutually compatible. The Mirai can double as a home power plant; its fuel cell can be used to provide electricity to houses and businesses. That means it could also be used as a generator to charge Tesla’s Powerwall home battery system. The Powerwall is designed to hold enough electricity to power a home or business for hours or days as a grid backup or alternative.

Perhaps Musk and Toyoda should get together to try to develop a new home power system. That could be a bigger money maker than the new vehicle technology. It might also be the most disruptive technology yet by giving average people the means to produce all the electricity that they want without relying on the “grid.” The widespread availability of fuel cell cars could actually drive demand for the Powerwall by providing a convenient source of electricity that home or business owners could tap.

One has to wonder which technology will win this battle. Lithium ion batteries are popular, but Toyota has greater resources. My prediction is that battery-powered electrics will only win if larger car makers try to commercialize them. One has to wonder which of these technologies will end up alongside the Stanley Steamer as a footnote in automotive history.