Op-Ed: Here Comes Tesla – In-Depth Analysis Into Automaker's Future

I take an in-depth dive into Tesla as it stands. Where has it come from, where is it going, what does the future hold?

After listening to Tesla’s Q4 2019 earnings call the lyrics of a popular old song came to mind.

Oh-oh, here she comes

Watch out boy she’ll chew you up

Oh-oh, here she comes

She’s a man-eater

I wonder if any of Tesla’s competitors are now hearing this when they think of Tesla.

I’m sure in the past, none would have thought that. But today, there might be a few beginning to be haunted by the tune’s sentiment. Volkswagen Group CEO Herbert Diess’ commented in December 2019 that they are taking Tesla seriously. The number of hardcore Tesla detractors are becoming fewer. Those bears that are left are grabbing at the air, trying to justify their positions. The Q4 conference call impressed me and reaffirmed some of my opinions about where Tesla stands in the market and why I think they are in an ever-increasing positive position.

I know I’m preaching to the choir here. Many of you reading this are rooting for Tesla, even if you own another EV brand. Tesla is the vanguard EV company. Its success means the advancement of EV adoption. I can’t help but wish that my words could run in Forbes or some comparable magazine. I wish a lot more people would get the message.

Growth and Market Cap

The Q4 financial results were impressive. Strong cash flow increased cash and equivalents on hand by over $1,000,000,000 (I like seeing all those zeros). The stock market has responded handsomely in kind. My intent here is not to rehash the financials. There are plenty of folks that do a great job of that (1). I’m just pointing out that Tesla is in a very strong position, something that most detractors would have not thought possible just 10 months ago.

ARK Invest has a very bullish stance on Tesla. ARK invest CEO, Cathie Wood, was on CNBC Squawk Box back on December 9 (3). One of the moderators on the program, Josh Lipton, was drilling her on questions about Tesla’s market capitalization (market cap). He was tearing into her about Tesla’s recent share price run-up and ARK Invest’s bullish target. She apparently hadn’t planned on the type of questions Mr. Lipton was throwing at her. I felt bad for her.

But, here is the answer to his questions. He questioned whether Tesla’s automotive business does or will justify the type of market cap that Cathie and ARK Invest are projecting. The short answer is YES. In the Q3 earnings call, Elon and Zach mentioned, almost in passing, that Tesla’s long-term goal is to grow the company production capacity to the point of replacing 1% of the global fleet annually. That amounts to over 10 million cars produced and sold per year.

Once Tesla is that large, it will be in the same category as VW Group or Toyota. Toyota’s market cap is about 230 B. (note: I was going to mention Tesla’s current market cap here, but it keeps changing upward every day, can’t keep up with it.) So, to only reach Toyota’s market cap, Tesla shares would have to rise to over $1,200 a share, approaching ARK Invest’s projected (revised) bear case scenario.

Keep in mind, this is a bear case scenario that does not include mobility services (Tesla Robo-Taxi) or Tesla Energy, each of which has the potential to grow into multi-billion dollar businesses in their own right.

I readily admit that it could be argued that Tesla’s share price is ahead of itself in the immediate term. However, I for one, believe that Tesla’s longer-term prospects justify ARK Invest’s long term targets.

Product Demand

Amazingly enough, some people continue to question the demand for Tesla’s products. Bank of America analysts recently said, “We believe that investor optimism about TSLA addressable market for electric vehicles … is overblown.”

In a Jan 23rd Seeking Alpha article, a writer going by the handle “Critical Scenarios” asserted “Sales will drop to sustainable levels, which by definition should be lower than 2019 levels without significant price cuts.” He goes on to make derogatory assertions about the business, assertions which only Tesla insiders (upper management) would have the true knowledge about. He alludes to the old demand cliff argument. He must think himself clairvoyant. (I love Tesla FUD, it’s too crazy.) He makes his assertion about Tesla demand without doing even one marketing survey. It is made without talking to even one potential Tesla customer.

The truth about Tesla’s organic demand is that we don’t really know what absolute demand is. To date, Tesla rapidly sells every car it can make. The addition of Giga-Shanghai and the production of the Model Y should help ease the strain on Model 3 demand. Zach Kirkhorn said on the Q4 conference call that in 2020 production may outpace demand. This may provide a better grasp on how much true organic demand there is for Tesla’s automotive products.

It’s important to keep in mind that Tesla will continue to drive down the costs and also leverage other revenue streams such as software add-ons. This will enable Tesla to offer its vehicles at ever more competitive prices without negatively impacting overall margins. This may give Tesla price levers that they can comfortably pull to balance out demand with production as needed.

Speaking on a podcast with veteran tech journalist Kara Swisher, Scott Galloway explained that it was a mistake for him to bet against Tesla, partly due to the strength of the company’s products. Galloway mentioned that one of his mentors had emphasized: “it is never wise to bet against a company with a great product.”

Model S & X Demand

Just a word (once more) about the drop in Model S & Model X sales. I’m confident that once Tesla updates those vehicles to extend their range and, perhaps more importantly, accept V3 supercharging, the sales of those products will rise. They will capture a solid share of their respective markets (4).

Coming Competition?

In the Seeking Alpha article, “Critical Scenarios” goes on to sing the competition song, a song which is way off tune. One of the reasons that the competition argument is a “no va” is because there exists a much larger potential EV market than Tesla can satisfy on its own (5). As long as competing EVs are well designed and well promoted they should have success alongside of Tesla. The term “Tesla killer” is a fabrication of Tesla bears and the media. There has never been a single legacy automaker that has put forth this term.

We’re here talk about the fact that there are a lot of competing electric vehicles in the works. They are coming “soon.” Hopefully, this is not just talk, not just window dressing, not just something to make the legacy automakers look good in the public’s eyes. It appears that they are serious, but we wait to see. There are a lot of bumps in the road that discourage legacy automakers from racing down the EV track. Because of the inherent challenges, they either are not highly motivated to compete and/or they find it difficult to successfully do so.

Wishing They Didn’t Have To

Mark Wakefield of Alixpartners appeared on Autoline After Hours a while back (6). His message on the program was that legacy automakers are facing a very challenging financial future. The upcoming transition to electrification will have negative financial impacts on old-guard automakers. He coined the phrase “profit desert” to describe what legacy automakers will be facing. He said “… and that five year period we have to get through that desert of investment before we start really getting any return on this investment.”

The quandary is that automakers need to invest in electrification but no CEO wants to be at the helm of a company that is losing money. As Tom Moloughney said last summer on E for Electric, “Profits rule all …. during your tenure you don’t want to be the CEO that lost money, … that wasn’t profitable … EVs are not good for short term profits.” (7)

Eric Noble of The CARLAB has asserted his belief that all-electric cars built by legacy automakers are, in fact, all compliance cars. He maintains that Ford, for example, will only build and sell as many Mustang Mach-E crossovers as is required by mandate. He said, “I don’t think there’s a manufacturer out there that would do an EV if they didn’t have to” (8). (If that is really true, can you hear Tesla saying “more for me!”)

We can look at a couple of examples that support this thesis. The Hyundai Kona Electric and the Kia Niro EV are highly praised EVs. People that have them really like them. They have good range and are reasonably priced (in the range of Model 3) and yet last year they had less than 1% of the sales that Tesla Model 3 enjoyed.

Clearly, Hyundai is not motivated to produce and sell these cars in volume or simply can’t make that happen yet. In his comment, of course, Mr. Noble is referring to government mandates. But even without government meddling, Tesla is pressing automakers to make the transition. Tesla’s presence is causing “market trauma”, a concept proposed by Tony Seba (12). This trauma can be caused without Tesla “owning” the auto market.

Tesla only needs to capture less than 3% of the market to have this effect. The presence of a superior product upsets the market status quo. Along these lines, there is something interesting that I’ve noticed about Tesla’s product strategy. Tesla’s product offering is unusually spartan when compared to its competition. Tesla offers just one vehicle in each of it’s represented categories. What other successful major car company has such a limited lineup? Tesla could be called the “In-and-Out Burger” of the automotive world. This simplicity surely must contribute to keeping costs down. Again though, Tesla’s very presence in these segments challenges the way things are and pushes the market for change.

Another area of friction legacy automakers face is dealing with their dealership networks. Plenty of producers face the complex problem of dealing with middlemen and retail outlets. Often premiums and incentives are given to help move products off the shelves. The automotive world is unique with its own special set of middlemen challenges. Legacy automakers have the challenge of figuring out how to properly incentivize their dealer networks. It occurs to me that had Tesla tried to be a company 20 years ago they would have had a much more difficult time succeeding. The widespread adoption of the internet allows Tesla to sell direct and avoid middlemen problems.

Tesla is dragging automakers into this new electrified world. Tesla is accomplishing its mission to “ACCELERATE the world’s transition to sustainable transportation.”

Challenges to Competing

To date, the product offering of competing automakers is still not up to what Tesla introduced eight years ago. Automakers face supply chain and technical challenges. They are pressed to try to catch up while Tesla is moving forward faster than they can. I can’t help but wonder if YouTuber Matt Ferrell is correct. He theorizes that Tesla has set the EV bar so high that EV buyers naturally gravitate to buy a Tesla. This may result in low sales volumes for the competition. He fears that this may inhibit the overall EV market and thus EV adoption (9).

It is no secret that automakers are having difficulty obtaining enough batteries to build EVs in large quantities. It’s a scenario that has been highlighted in various news articles. Tesla’s move to build Giga-NV seen as foolish by some at the time. It has proven to be a very wise move. I think about the present massive raw material supply chain needed to globally produce 70 million IC cars each year. Switching that supply chain over to EV batteries and motors is no small feat. This thought exercise illuminates a major challenge that current automakers face.

Tesla’s experience in battery pack assembly is way ahead of the competition. As Elon said on the Q4 earnings call, “We are way deep in batteries”. Its acquisition of Grohmann Automation has played an important role in its nimble ability to build battery packs. An ability that has yet to be replicated by legacy auto manufacturers.

To quote an article, “Mercedes-Benz council chief Michael Brecht told Germany’s Manager Magazin that Tesla’s acquisition of the engineering partner … is impacting the German automaker’s battery pack manufacturing situation” (9). Tesla’s battery and powertrain management software is first class. The combination of great battery chemistry, superior battery pack design (and building), superior motor design and excellent powertrain management software give Tesla an edge that can not (as of yet) be matched. Tesla is able to offer vehicles with greater range at better prices than any competitor.

Coming Competition Complications

In a Forbes online article, Stephen McBride made some disparaging remarks about Tesla’s future. One valid point that he did correctly infer was that the 250-mile range EV segment is going to get very crowded in the next year or two. However, this should not affect Tesla. Happily, there will still be lots of higher range EV market share to go around for a few years.

Tesla’s 300-plus mile range vehicle sales will have plenty of room to grow. Ironically, the companies that will be hurt the most by the stiff competition to come will be one or more of the legacy automakers themselves. If competitors were willing to employ RExEV technology, such as that available from Oberist-powertrain.com, they might have a shot at competently competing. The only hold back on RExEVs is the question of whether the general market is sufficiently primed to accept EVs. It will take the broad market buying EVs before RExEVs will find their mojo. Traditional EV advocates tend to disregard them. Thanks to advertisements such as those that recently ran in the Super Bowl, the general public is being eased into the idea of going electric. Perhaps RExEVs will yet have their day in the sun.

The Tesla Network (Robo-Taxi)

It’s easy to envision that Tesla’s Robo-Taxi network will be a low capital/high margin business. Having that business will mark a shift in Tesla’s business and business model. If Tesla can get the Robo-Taxi running before the next recession, the revenues from that business alone will be able to sustain Tesla while other auto competitors are fainting by the way. I think some will not survive (at least not without bailouts).

Detractors could wave the red flag and say that Elon is missing another target. Last year he said he thought by the end of 2019 Full Self-Driving (FSD) would be feature complete, inferring that it would be out in the wild by now (at least in early access).

Personally, I’m not sweating it. While Musk set a goal and hopes for it to be released ASAP, many naysayers are fighting tooth and nail just based on the current Tesla Autopilot. So, if he has to wait until it’s truly ready and much safer, so be it. Honestly, that’s the smart thing to do. The issue here again is that if Tesla falls behind on a promise, it’s publicized as a huge failure. But, if it pushes something forward to prove naysayers wrong, and that feature is not up to snuff, it gets a ton of scrutiny. At any rate, let’s put safety first.

I imagine that the challenges to get to general vision FSD is more difficult than can be envisioned. Most of us are familiar with the 80/20 rule. The rule states that 80 percent of the total time needed for a task or skill is spent accomplishing or perfecting the last 20 percent. I would not be surprised to discover that in the FSD realm the rule is actually 99/1. Ninety-nine percent of the time required will be spent perfecting the final one percent of improvement.

As I drive around town encountering everyday navigation challenges, I think to myself, can a computer really do this? It seems very difficult. Not to say Tesla won’t achieve it. It just may take a little longer than first imagined. Having lofty goals is one integral part of pushing the envelope and planning for the future.

With that said, Tesla has some secret weapons (11). I tend to believe Elon. I believe that Tesla is making significant progress and that the Tesla team will be the first to market with a general vision FSD product available for the masses. Knowing Elon’s love for announcing things on special dates, I would not be surprised if FSD is released (at least in early access) on April 22, 2020. That is one year to the day since the Autonomy Investor Day.

When Tesla does release FSD into the wild, it will be the first mass-produced intelligent robot. It will be the first mass-market robot that hundreds of thousands of people will interact with. I can only imagine it will be quite something to see.

Tesla Energy

This is an area I don’t know much about. So, I’ll only say that it looks like there is the potential for Tesla to see significant growth in this area. I think we’ll have a better idea about that by the end of this year.

When contemplating all the combined facets (and assets) of Tesla’s business, an eventual trillion-dollar market valuation doesn’t sound unreasonable. It’s really more a question of how many years it may take to get there.

A Final Note

I recently watched a video with Tony Seba as the keynote speaker at the NC DOT Transportation Summit. In the video, he makes some predictions about the disruption that EVs will make. His predictions even challenge some of my assumptions. If he is right, EVs will not only transform transportation but also other aspects of society. If you have the time (1 hour 5 min) I’d say go ahead and watch the video (12). However, if you don’t have time, I plan to put together an article for you soon, where I summarize the video and provide an in-depth analysis related to Seba’s thoughts.

Video Sources and Related Content:

1. Galileo Russel: Hyperchange www.youtube.com/watch?v=tHJqdKbAoUU

2. Cathie Woods on Squawk Box  www.youtube.com/watch?v=UwPkts0u0co&t=4s

3. CNBC article on BoA stance on Tesla: www.cnbc.com/2020/01/29/bank-of-america-admits-rude-awakening-for-bearish-tesla-call.html

4. Dan Markham, What’s Inside? Family www.youtube.com/watch?v=gvlB50odTk8

5. Electric Car Range And Affordability: Is There A Magic Combo? www.insideevs.com/news/380555/ev-range-ev-market-evolution-exposed

6. Mark Wakefield, Alixpartners – Autoline This Week 2320: www.youtube.com/watch?v=Vsgs_pgHciw

7. Tom Moloughney on E for Electric www.youtube.com/watch?v=qgf9UiNklhs&list=WL&index=16&t=3s

8. Eric Noble on Autoline After Hours Nov 21 2019:  www.youtube.com/watch?v=2sHpSxIPQ-o&t=573s   

9. Matt Ferrell: www.youtube.com/watch?v=xRSKhSv3wz8

10. Grohmann acquisition impacting Mercedes-Benz www.insideevs.com/news/395392/tesla-grohmann-acquisition-taking-toll-mercedes

11. Warren Redlich: Dojo self-driving training tool?  www.youtube.com/watch?v=Fdp4Uu9vb4s

12. Future of Transportation, Tony Seba, NC DOT Transportation Summit    www.youtube.com/watch?v=y916mxoio0E

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