It's a complete myth that the rest of the auto industry is chasing Tesla
- Tesla has mastered electric cars, but the technology is nothing that the rest of the auto industry can't easily replicate.
- Traditional carmakers know that vehicles can be a low-margin business, so it's pushing toward mobility-as-service undertakings.
- Tesla has no meaningful mobility business and might struggle to catch up in this area.
By the numbers, Tesla is getting bigger in a hurry. The company should deliver more than twice as many vehicles as it did last year, and its financials are showing one stunning area of improvement, as revenue swells to historic levels.
But, also by the numbers, Tesla continues to punch far above its weight in terms of its actual physical presence in the global auto industry. It has one car factory and one partially completed battery factory, in California and Nevada, respectively. Its total manufacturing capacity is roughly 500,000 annually, while the rest of the industry in the US alone can do 14 million. Its market capitalization is higher than Ford or Fiat Chrysler Automobiles.
This outsized impression of success has led numerous Tesla boosters to attribute a massive first-mover advantage to the company, arguing that Tesla somehow has a huge lead and that everybody else will need to play catch-up.
There are two major problems with that case. The first is that the market for electric vehicles is currently rather tiny. Tesla has established itself as a force to be reckoned with in the automotive equivalent of the solid-gold fluegelhorn market. Solid-gold flugelhorns could become really, really big in the next few decades. But for now, well ... they're sold-gold flugelhorns, and the auto industry is far from sure that they constitute a true mass market anytime soon.
The second is that Tesla will somehow get a pass on spending to remain competitive. My view is that Tesla has the potential to fill a large role in the middle of the US market, sales-wise. But to get there, it will require new factories, and it will have to build them at 21st-century prices.
Addicted to reinventing the wheel
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Beyond that, Tesla and CEO Elon Musk are sort of addicted to reinventing the wheel. A massive investment in automated assembly at its Fremont plant failed in 2017-2018. Meanwhile, GM upgraded its Orion factory in Michigan to build the Chevy Bolt electric car by reinforcing an existing assembly line to handle the heavier weight of vehicles with electric batteries and by adding a battery pack entry point and installation process. That was about it. And the same line still builds cars with gas tanks.
Another factor to consider is that the traditional car business doesn't consider electrification to be that big a deal. Electric vehicles have been around, in one form or another, for a century. Tesla under Musk rebranded the electric car, making it sexy and fast rather than virtuous and underpowered. But swapping gas-engines for electric propulsion isn't a heavy lift. Up to this point, the industry has avoided it because EVs cost a lot more than gas vehicles, achieving long-range with EVs is challenging, and the recharging infrastructure is skimpy. Also, consumer demand has been slight.
Regulatory pressures and a rapidly expanding auto market in China are forcing carmakers to rethink EVs, but the economics are anything but worked out. No one is really sure if EV net profit margins will materialize, even though Tesla often touts its 20%-ish gross margins.
For this reason, two big pivots have occurred in the more futuristic area of automobility. Number one is the shift to self-driving cars. This is the electric car of the moment, as compelling as EVs were ten years ago. Billions of dollars in value are now being attached to serious autonomous efforts from GM's Cruise division and Alphabet's Waymo.
Mobility-as-a-service is driving business activity
Number two is mobility as a service. Much of the M&A activity in the industry is now around alternatives to the automobile and is focused on the highly urbanized environments of the future, which could be highly car-unfriendly. Ford just bought a San Francisco scooter startup, Spin, and has already acquired a ride-sharing service in Chariot. GM has developed a ride-hailing/sharing service, Maven. And various other car companies are doubtlessly planning to use the massive amount of cash they've raked in selling big SUVs for the past few years to make their own moves.
Tesla has been talking about a networked transportation service, but it doesn't yet have anything. Additionally, its very traditional own-lease model for its cars is somewhat incompatible with the notion that customers will want to allow strangers to borrow vehicles that go for $50,000-$150,000. There's nothing quite like getting your Model 3 back with a back seat full of In-N-Out wrappers to turn you off sharing.
Make no mistake, Tesla is an impressive car company, the first new player to come along in decades. But it doesn't have an infinitely flexible business model, and if anybody is going to play catch-up on mobility-as-a-service, it's probably going to be Tesla. The company might not succeed. And guess what? That wouldn't be a bad thing. Tesla has upped its electric-car game considerably since 2014. That should be good enough. It's simply the flighty attention spans of Silicon Valley that are endlessly scoping out the shiny new thing.
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