Automobile manufacturers shipped 88 million cars in 2016. Tesla shipped 76,000. Yet Wall Street values Tesla higher than any other U.S. car manufacturer. What explains this more than 1,000 to 1 discrepancy in valuation?
The future.
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Too many people compare Tesla to what already exists and that’s a mistake. Tesla is not another car company.
At the turn of the 20th century most people compared existing buggy and carriage manufacturers to the new automobile companies. They were both transportation, and they looked vaguely similar, with the only apparent difference that one was moved by horses attached to the front while the other had an unreliable and very noisy internal combustion engine.
They were different. And one is now only found in museums. Companies with business models built around internal combustion engines disrupted those built around horses. That’s the likely outcome for every one of today’s automobile manufacturers. Tesla is a new form of transportation disrupting the incumbents.
Here are four reasons why.
Electric cars pollute less, have fewer moving parts, are quieter and faster than existing cars. Today, the technology necessary (affordable batteries with sufficient range) for them to be a viable business have all just come together. Most observers agree that autonomous electric cars will be the dominate form of transportation by mid-century. That’s bad news for existing car companies.
First, car companies have over a century of expertise in designing and building efficient mechanical propulsion systems – internal combustion engines for motive power and transmissions to drive the wheels. If existing car manufacturers want to build electric vehicles, all those design skills and most of the supply chain and manufacturing expertise are useless. And not only useless but they become this legacy of capital equipment and headcount that is now a burden to a company. In a few years, the only thing useful in existing factories building traditional cars will be the walls and roof.
Second, while the automotive industry might be 1000 times larger than Tesla, Tesla may actually have more expertise and dollars committed to the electric car ecosystem than any legacy car company. Tesla’s investment in Lithium/Ion battery factory (the Gigafactory), its electric drive train design and manufacturing output exceed the sum of the entire automotive industry.
Third, the future of transportation is not only electric, it’s autonomous and connected. A lot has been written about self-driving cars and as a reminder, automated driving comes in multiple levels:
- Level 0: the car gives you warnings but driver maintains control of the car. For example, blind spot warning.
- Level 1: the driver and the car share control. For example, Adaptive Cruise Control (ACC) where the driver controls steering and the automated system controls speed.
- Level 2: The automated system takes full control of the vehicle (accelerating, braking, and steering). The driver monitors and intervenes if the automated system fails to respond.
- Level 3: The driver can text or watch a movie. The vehicle will handle situations that call for an immediate response, like emergency braking. The driver must be prepared to intervene within some limited time, when called upon by the vehicle.
- Level 4: No driver attention is ever required for safety, i.e. the driver may safely go to sleep or leave the driver’s seat.
- Level 5: No human intervention is required. For example, a robotic taxi
Each level of autonomy requires an exponential amount of software engineering design and innovation. While cars have had an ever-increasing amount of software content, the next generation of transportation are literally computers on wheels. Much like in electric vehicle drive trains, autonomy and connectivity are not core competencies of existing car companies.
Fourth, large, existing companies are executing a known business model and have built processes, procedures and key performance indicators to measure progress to a known set of goals. But when technology disruption happens (electric drive trains, autonomous vehicles, etc.) changing a business model is extremely difficult. Very few companies manage to make the transition from one business model to another.
And while Tesla might be the first mover in disrupting transportation there is no guarantee they will be the ultimate leader. However, the question shouldn’t be why Tesla has such a high valuation.
The question should be why the existing automobile companies aren’t valued like horse and buggy companies.
Lesson Learned
- Few market leaders in an industry being disrupted make the transition to the new industry
- The assets, expertise, and mindset that made them leaders in the past are usually the baggage that prevents them from seeing the future
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Filed under: Technology, Tesla |
Tesla isn’t a leader in EV and not a leader in self-driving. It is buying it’s core technology from suppliers like Bosch or Panasonic.
It’s manufacturing processes are bad, its financial management is bad, its quality is bad, the only thing Tesla is good is brainwashing.
Its real market value is <$1bn.
And it is not a startup.
> Electric cars pollute less, have fewer
moving parts, are quieter and faster
On “faster”, no, not really: From the
math of basic electricity and magnetism, a
series wound electric motor has infinite
torque at stall. From that, an electric
car can have terrific acceleration from a
standing start and quite good elapsed time
from 0-60 MPH.
Low elapsed time in the standing start 1/4
mile? Not so good: High performance
there requires high horsepower, beyond
what we will be getting from batteries.
An internal combustion engine can give as
good or better standing start acceleration
— just have 1-2 lower gears in the
transmission. Indeed, back in the 1950s,
a favorite ‘performance’ feature was the
effortless ability to smoke the rear tires
at a standing start; both Pontiac and
Oldsmobile liked this feature. This was
done with a 4500 pound car, a 400 cubic
inch engine, a torque converter with
torque multiplication at stall in the
transmission, a low first gear in the
transmission, and a rear axle ratio of
about 3.23 to 1. No problem. Later
smoking the rear tires was considered
reckless driving, and the cars were
designed to make such tire smoking less
easy.
But, “faster”? No. There’s a reason high
performance cars have engines with 400 to
700 HP: For rapid acceleration starting
at, say, 40 MPH, that HP is required.
Trying to get 400 to 700 HP out of an
electric car will present big problems for
the electric motors and especially the
battery, its temperature and cooling, and
the vehicle range.
> Today, the technology necessary
(affordable batteries with sufficient
range) for them to be a viable business
have all just come together.
The batteries are not “viable”
because (A) the range is too short,
(B) the charging time is way
too long, and (C) the reliability after
a few thousand cycles of charge and
discharge likely sucks and will
for a long time.
> Most observers agree that autonomous
electric cars will be the dominate form of
transportation by mid-century. That’s bad
news for existing car companies.
Nonsense. “Mid-century” is only 30 years
away. Most of the cars with internal
combustion engines sold for the next 30
years will still be on the roads in 30
years.
> If existing car manufacturers want to
build electric vehicles, all those design
skills and most of the supply chain and
manufacturing expertise are useless.
Nonsense. There is still a frame, body,
doors, windows, glass, paint, accessories,
HVAC, interior, and in total they are a
big fraction of a car.
Next the major car companies have already
long demonstrated that they are fully
capable of building an electric car. The
needed “design skills”, “supply chain”,
and “manufacturing expertise” were not
biggie problems.
> In a few years, the only thing useful in
existing factories building traditional
cars will be the walls and roof.
Total nonsense. The assembly lines for
electric cars will be much the same.
> Each level of autonomy requires
for the higher levels will require a lot
of re-engineering of the roads. The roads
will have to become electronically defined
tracks in quite standard ways. That will
be too expensive to happen.
Even with all that electronics, simply
following the instructions of flagmen
around road emergencies or construction
will be too difficult.
Great comment.
It’s very early in the game, and it isn’t sure which technology will dominate in cars in 20-30 years.
Here the incumbents do have a huge advantage they can offer different engine types: ICE, Battery, Fuel Cell, Fuel Cell/Battery Hybrids, etc.
And they are doing this, that means the existing car makers have no downsize risk, but battery only players like Tesla, are taking unnecessary risks by betting on a single approach.
Hint: my favorite future engine technology are FC/Battery hybrids… at the right price they could be the killer app.
> The batteries are not “viable” because (A) the range is too short, (B) the charging time is way too long, and (C) the reliability after a few thousand cycles of charge and discharge likely sucks and will for a long time.
There’s a lot more to it than this. Battery range has been increasing every year. There is absolutely no range concern for daily driving. In fact because you can just plug in your car at home, EV’s are better than gas cars as daily drivers since gas cars require visiting a fuel station. It’s long distance driving where there’s a tradeoff for EV’s.
The charging time is pretty long, but as I said this is only a concern for long-distance traveling. While the grid is everywhere, fast charging is electrically-intensive and not so straightforward to get the infrastructure up. Tesla attacks this aspect directly, but even their solution is 5-10x slower than the gas pump. For many people that’s acceptable. If EV investments keep up, it’ll be 10+ years before fast-charging is on-par with gas stations.
The reliability of batteries isn’t a concern whatsoever. Unlike laptops and cellphones which use individual battery cells, EVs have battery management which prolongs the life of the battery to maintain 80% of range after hundreds of thousands of miles. I wouldn’t call that sucky.
Say, recharge every night for
21 years; full (deep) or nearly so
recharging. That’s ballpark
7000 rechargings. I never
heard of a battery good for
anywhere near that many deep
rechargings. If Tesla can
get such a battery, then
fine. Good for them.
There is no such battery. Battery “fatigue” due to deep/full charging is a real issue, also for Tesla’s warranty accruals.
The only solution so far is to charge the battery continuously, which is a strong argument for hybrids, FC/Battery hybrids for example.
The statement “you can charge you car at home”, doesn’t apply for people living in dense urban areas, like NYC, London, Paris, Berlin.
And also not in Mumbai, Beijing, or Shanghai.
Given the Urbanisation trend, charging at home is not a mass market option.
The arithmetic of Amperes, Volts, Watts,
etc. I’ve done suggests that recharging
at home after quite a lot of driving, say,
50 miles one way to work, plus some
side trips, or 100 miles one way to
a weekend party at the Hamptons, will
be a close call on the usual home grid
connections.
The battery has some internal resistance,
that means that fast charging or discharging
will make the battery hot. That heat can
be the bottleneck on fast recharging, say,
as fast as filling up with 15 gallons of
gas, even if have a charging station with
megawatts of power.
A simple, blunt bottom line point is that
for a car or truck, a tank of gasoline or
Diesel oil is one heck of a good energy
source and just super tough to compete
with.
I’d like to hear about the option of a much
smaller battery, still all electric drive, but
a ceramic gas turbine to recharge the
battery while driving. The gas turbine
works at only one power level, and that
helps efficiency and simplicity. So, now
for one more moving part, the turbine
and the generator shaft it connects to,
we get a much smaller battery and no
concerns about recharging. If the
turbine puts out 600 HP, then we can
drive the big SUV full of people with a
trailer, AC blasting, up the Rockies all
day with no worries. Another option
is to dump the battery and use a
capacitor — that can have essentially
no internal resistance and, thus, can
be charged/discharged as fast as
you please, say, full discharge in
1 millisecond as wanted for some
military direct energy weapons.
For all the folks living in townhouse and condominium communities with no covered parking or garage, charging outdoors will be an issue.
Your “electrics are not faster” analysis may be true, but, well, so what? The majority of automotive applications do not benefit from superior standing-start quarter-mile times, and a fast 0-60 should be good enough for almost anybody.
I agree about the 0-60 MPH point. But even
when Tesla is quite good there, that doesn’t
really mean high performance in all situations:
On busy Interstate highways used for commuting,
it is easy for people to want a lot of acceleration at
speeds well over 40 MPH to permit shaking off
tailgaters, taking an opportunity to change lanes,
getting around a clump of cars or several 18
wheel trucks, merging into the traffic, say,
with enough acceleration so that the person on
the ramp behind you can’t fill the slot in the
traffic you are going for. Such “high performance”
is desirable for some people but takes lots of
old fashioned HP. An EV is not going to be
a player in that market. Steve claimed that a
Tesla had high performance; I was just correcting
the record.
“for the higher levels will require a lot of re-engineering of the roads… Even with all that electronics, simply following the instructions of flagmen around road emergencies or construction will be too difficult”
Utter nonsense. And it’s also a form of arrogance – believing a computer would so struggle to master the task of driving a car. Only a human is clever enough for that! Wait about 10 years and you’ll see…
> Most observers agree that autonomous
electric cars will be the dominate form of
transportation by mid-century. That’s bad
news for existing car companies.
Nonsense. “Mid-century” is only 30 years
away. Most of the cars with internal
combustion engines sold for the next 30
years will still be on the roads in 30
years.
“Nonsense, the internet is just a big billboard”
“Nonsense, it’s just a phone with touch screen”
“Nonsense, it’s just blog with people connected”
It all happened within the 30 years timeframe. If you know anything about technology advancement you’d know it grows exponentially. If you know math you’d know it means “growing faster than before”. And to dismiss the proposition as “nonsense” is just laziness either with words or with thinking.
Steve ,
It’s because we are in a bubble like we we’re in 2000,. Tesla’s governance models are atrocious , as are its accounting standards , capital /debt models and quality control . They have very few unique patents .
Rich white guys like us pay a premium for vehicle that is is in the short term unique , the question is when companies like Porsche deliver their electric cars next year will they continue to be able to keep their market share .
Craig
Sent from my iPhone
>
The other thing not mentioned here is that traditional car makers rely on their dealer maintenance models for a lot of their revenues. What happems when electric cars (that have fewer moving parts/need less maintenance) also are largely self driving (and save us from costly collisions). Those dealer models fall apart. It’ll be hard to keep up with Tesla of traditional car cos. try to maintain this model. Will always be a drag on their business.
yep. good point. and when driving becomes an option as autonomous services pick and deliver
Less mechanical issues but much more electronical issues.
Cars are getting more complex each generation, not less complex, and engine failures or power train issues are not the biggest problems.
And current EVs might sit on a looming battery warranty disaster…
Fewer moving parts. Less complex.
http://www.businessinsider.com/credit-suisse-on-tesla-2014-8
1) Most of the early gas car companies went bankrupt
2) technology changes so fast now that Tesla is already building a batter factory based on dated technology
3) 90% of it’s tech is from Panasonic etch
4) it’s best strategy is bypassing the dealers to keep the margin … But that’s in defensible
5) valuation still has to be based on real numbers
Not a very argument/article
The real answer is marketing. Elon Musk sees the future with a clarity matched by only a very few people over the span of history.
In the long term, marketing is all about building sustainable commercial entities, and to do that, you need to see things the way Musk does.
Oh please! … Mush (Musk) figured out a scheme to fund his ventures with taxpayer backed loan subsidies. i.e. He’s a snake oil billionaire.
By contrast, Ford, Chrylser, et-al actually had to practice -real- capitalism and create truly viable products to attract -private- money and build a company the old fashion American way… not via welfare.
Same goes for Bezo bozo… Amazon is a warehousing & distribution operation, which is still operating in the red and gets a huge discount from the (taxpayer) supported USPS. These guys are GRIFTERS.
I have said it before. Tesla will be gone in five years.
You could argue that the core capability of the mainstream automotive industry is low margin complex manufacturing – something that Tesla also concluded last year.
In recent automotive history technology has not provided sustainable competitive advantage because it has proved to be relatively easy to copy. It is yet to be seen whether the same will be true for electric and autonomous developments – the high level of complexity may suggest not, but if key players decide to licence technology rather than become automotive manufacturers then we may see a different outcome.
This is true to all businesses. Generally speaking, digital is having the same transformation effect on the economy now as the transcontinental railroad had in the late 1800’s. It is those visionaries and entrepreneurs that understand and capitalize on it that will be the winners. Those that don’t will be relegated to the dustbin of history.
http://bit.ly/2lv1Ubn
I agree with Bill Ross and of course Steve Blank. I fear we (folks commenting) may be missing the forest through the trees. Disruptors and Innovators can’t be looked at through a conventional lense. I see it in IT every day.
The battery has some internal resistance,
that means that fast charging or discharging
will make the battery hot. 1) Most of the early gas car companies went bankrupt
2) technology changes so fast now that Tesla is already building a batter factory based on dated technology
3) 90% of it’s tech is from Panasonic etch
4) it’s best strategy is bypassing the dealers to keep the margin … But that’s in defensible
5) valuation still has to be based on real numbers
Not a very argument/article
this was awesome. thank you for the analysis!
Tesla deserves credit for disrupting the old and complacent auto industry not only in technology, but, as importantly, in confronting the protectionist dealer franchise network.
But this has been and continues to be a formidable challenge. In my opinion, the company’s ability to reach volume manufacturing is still in question. See http://joebarkai.com/tesla-making-cars-is-hard-to-do/.
Although Tesla’s Autopilot captures headlines, companies like Delphi and Continental may not only have more a mature technology, but are also better positioned to help traditional OEMs move faster in that direction. Tesla’s closed ecosystem and vertical integration may not serve it well in the long run.
Tesla’s market valuation assumes the company will be able to produce a mass market vehicle. Enormous backlog, manufacturing challenges, limited service capacity, and upward pressure from Chevy Bolt, Nissan Leaf and Hyundai Ioniq should be a concern.