Elon Musk Defies a Car Industry Mantra With Tesla-Hertz Deal

Sales to rental-car fleets have at times been viewed as a liability for auto makers. Elon Musk is defying that stigma, with Tesla Inc.’s TSLA -0.63% deal to supply cars to Hertz Global Holdings Inc. HTZZ 1.03% signaling electric vehicles are ready for the masses.

Tesla has added roughly $109 billion to its market capitalization since Hertz said it had ordered 100,000 vehicles to be delivered by the end of next year. That share-price surge helped Tesla become the latest U.S. company to cross $1 trillion in market value.

Tesla got its start making luxury vehicles, beginning with its Roadster sports car, but has been striving to make plug-in cars more accessible. Mr. Musk, Tesla’s chief executive, long promoted the Model 3 sedan as a big step in that direction, though with a starting price of around $45,000 in the U.S., according to Tesla’s website, it remains out of reach for many.

Tesla dominates the U.S. electric-vehicle market, but that segment remains small. Just 2.6% of vehicles sold domestically were battery-powered through the first nine months of the year, according to research firm Wards Intelligence. The Hertz deal, which would top $4 billion based on vehicle list prices, will allow more people in the U.S. and Europe to try going electric.

The deal with Hertz is poised to make Teslas available for rent in cities and airports across the country. It also comes with another benefit: a high-profile spokesman. Mr. Musk, who proudly eschews traditional advertising, now has one of the biggest names in American sports, Super Bowl champion quarterback Tom Brady, featuring in Hertz’s marketing campaign for electric-vehicle rentals.

The auto industry has a mixed record with selling to rental-car fleets. While the business can help expose customers to brands they may not have previously considered buying, there is a certain stigma attached to models that appear too frequently on rental-car lots, analysts say.

Tesla CEO Elon Musk in early October turned his first European Gigafactory near Berlin into a fairground where visitors could tour the facility. The project faced some delays and local resistance but Musk said the company expects to start production in November. Photo: Patrick Pleul/Associated Press

Historically, such bulk rental-fleet sales offered auto makers a dumping ground for less popular models that they had trouble selling to individual buyers at dealerships. Often, daily-rental firms bought these vehicles at a discount to their showroom list price, making them a less profitable business for car companies.

The Detroit auto makers, for example, have been criticized in the past for using their rental-fleet business as a way to pad sales and keep factories running, even if demand from regular buyers was slowing.

The U.S. car companies have pulled back on this practice in recent years, giving priority to profits over market share after emerging from a recession that threatened their futures more than a decade ago. And rental-car companies have also changed the way they fill their fleets, buying more of the vehicles customers see on the dealer lot and eschewing the base-model sedans of the past.

“That deal with Tesla is good for the adoption of EVs,” General Motors Co. President Mark Reuss said Tuesday, noting that rental-car firms could emerge as important customers for his company’s plug-in vehicles, too.

For Tesla, there are risks in having its car in rental fleets, including to the value and brand image of Model 3 cars, says Jessica Caldwell, an automotive analyst for car-shopping website Edmunds.com. “It makes it feel less exclusive,” Ms. Caldwell said.

When used-car values that soared during the pandemic eventually return to a more normal level, Ms. Caldwell said Model 3 residual values could take a hit, as has historically happened with vehicles sold en masse to rental-car fleets.

Tesla didn’t immediately respond to a request for comment.

The company’s Model Y compact sport-utility vehicle has already been stealing some of the Model 3’s thunder. Model Y sales in the U.S. were up around 64% in the third quarter, compared with a year earlier, while Model 3 sales were roughly flat, according to research firm Cox Automotive estimates. Tesla doesn’t break out vehicle sales by individual model or region.

To land the order, Tesla was able to play off its first-mover advantage by offering Hertz a network of places customers could recharge their vehicles. The auto maker has built a network of more than 25,000 chargers.

Some manufacturers, like Toyota Motor Corp. and Honda Motor Co. , have made it a practice to limit rental sales, preferring to focus on the more lucrative retail business. Over time, an overreliance on selling cars to rental-car fleets can hurt a brand’s image and dent resale values, analysts and auto executives say.

Jonathan Smoke, an automotive analyst for Cox Automotive, said that doesn’t necessarily apply to Tesla. Mr. Musk said the company isn’t discounting the vehicles it sells to Hertz.

Especially in the current market, where production of new vehicles is constrained by a global shortage of semiconductors, Mr. Smoke sees Tesla’s 100,000-vehicle commitment to Hertz as a sign the electric-car maker is making strides on production, an area where the company has struggled in the past.

“It’s definitely a loud message on the part of Tesla that they have confidence in their ability to deliver on this order without detracting from what they can achieve on the retail side of things,” Mr. Smoke said.

Hertz’s order makes up a large share of Tesla’s output, which totaled roughly half a million vehicles last year. Credit Suisse analyst Dan Levy has said he expects the company to deliver roughly 900,000 vehicles to customers this year, rising to nearly 1.3 million vehicles in 2022.

Mr. Musk on Monday tweeted, “Tesla is very much a production ramp problem, not a demand problem.”

Tesla is building two new factories to support growth, one in the Austin, Texas, area, the other in Germany. Its aiming to start production at both plants by the end of the year.

The Hertz order could represent up to 30% of the electric-vehicle maker’s U.S. sales next year, said Tyson Jominy, an automotive analyst for research firm J.D. Power.

Mr. Musk has further plans to get Teslas to more customers. A year ago he laid out his ambition to eventually produce a $25,000 electric car.

Write to Rebecca Elliott at rebecca.elliott@wsj.com and Nora Naughton at Nora.Naughton@wsj.com

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