The scale of Tesla’s near term and future dominance tricks you into thinking it is hype. You think that people who are trying to tell you about it are Elon Musk fans or people who have drunk the Tesla Koolaid.
Tesla rise as a stock is similar to when Apple was reborn and went on to crush industry after industry. It is similar to the multi-decade rise of Amazon. Most people did not load up on Apple or Amazon stock during those legendary runs. If they did most did not buy and hold for two decades or more. Tesla is only a decade into its historic rise. You can see the decade long rise. Tesla came out at $17 per share at IPO. It is up over 100 times to $2050. I missed the first 10X and caught most of the second 10X. I will tell you now it is not too late. There is another 10X in the company and as difficult as it is to believe there could another 10X after that.
The Tesla model 3 utterly dominates the luxury mid size car market in the USA. Tesla has very few subsidies in the USA because they used up the federal electric vehicle tax credits. Tesla is beating gas luxury cars. BMW, Lexus, Mercedes, Audi are all getting crushed. Tesla even has broken out of the luxury segment and is outselling Honda and Toyota models in California.
What are some similarities and differences about this Tesla domination? Tesla is making batteries that are cheaper and cheaper. They are making them cheaper by 10-15% every year. Pick your favorite non-Tesla luxury brand. In the USA, let say it was BMW, Lexus or Mercedes. Let us imagine it was 2000 before Tesla. This model and brand are number one in luxury. They have 40-50% market shares. They develop a key technology which enables the engine and drivetrain to get cheaper by 10-15% every year. They can also increase acceleration every year. Instead of 4-5 seconds on the mid-luxury it goes to 3.2 seconds. Other features keep improving. They have the best driver assistance and this keeps improving. It is so good 25% of the car customers will pay $8000 per year for it. This “car company” has $1 billion per year in Artificial Intelligence software sales.
The company lowers the price on the car by 5-10% every year. They initially used the cost reductions to grow margins and to make up for losing $6000 in initial tax credits. The tax credits are gone and they have grown margin from money losing to 26% gross profit per car.
The cars started at $40,000 to 60,000 but have dropped to a starting price of $31,600 with three years. These top selling cars in their class also run on special fuel that is three times cheaper than gasoline and the car has fewer parts and lower maintenance costs.
In five years, they could have a starting price of $26,000. They can introduce a lower range version at $20,000. They can spread to all other categories of cars. They can make trucks, SUVs and other vehicles. They are not limited by size.
Would you say that a better version of a luxury car maker with proven technological advantages could not succeed in the mass market?
The denial response is that other car makers will be able step up and compete. Interesting. How long were BMW and Mercedes the dominant luxury car makers? How long do any of the car makers dominate a category? Top luxury carmakers are there for decades. BMW and Mercedes were there for decades and got joined by Lexus. They pushed out the top end American models (Lincoln or Cadillac) in the 1980s and 1990s and then stayed there until Tesla. Where was the ultra-competitive response from the big American makers?
Toyota rose up and dominated at the cheap and then the mass markets and then the lower part of the luxury class. Where was the response from the other might auto makers to stop their rise? Where was the Prius hybrid killer?
If Tesla builds factory capacity at $4000 per car like they did in Shanghai, then it will cost $2 billion per 500,000 car per year factory.
Tesla has over $8 billion in cash which is enough for 4 factories. This would be 2 million cars per year in additional capacity.
There is a seven seat Model Y that will be made soon and the Cybertruck. An SUV frame can be placed on top of the Cybertruck skateboard of batteries and engines. It is just different seats and a different top shell.
Most of the car makers in the world make only the frame and body of the automobile in their own factories. Almost all other parts, from the steering wheel to the radiator to the seats are produced by contract manufacturers. The car manufacturer’s factory assembles the outsourced parts into the frame and body.
On battery day (Sept 22, 2020), Tesla could announce $100 per kwh batteries. This has long been the level where the US Department of Energy and academics have said would be where electric vehicles become cheaper than gas cars without subsidies. Tesla and its major battery suppliers have already been talking about $80 per kwh batteries. Tesla batteries and drive train technology is ahead of other car makers. Tesla is extending its lead. The other car makers already pay Tesla a hundred dollars for each of Tesla’s cars to avoid penalties.
Tesla with dominant Maxwell dry cell batteries and drive trains could sell other car makers the batteries and drivetrain. The other car makers are already buying almost all of their parts from other parts makers. Tesla could make $10,000 in profit from all the car makers that contract with them. If we want to be more conservative let us assume that it is $5,000 for the mass production cars and only $10,000 on the highend.
If Tesla does this for half of the cars produced in the world, this would be 50 million cars per year. This would be $250 billion per year in profit. This would be about 5 times the profit of Apple. This would be pretty good for only the car business.
EV Core Efficiency table updated. @Tesla Model Y with official EPA Range of 315 miles is now on top!
— Matt Joyce (@matty_mogul) February 6, 2020
Tesla’s newest car batteries and drivetrain are 15-40% more efficient than competitors. The Hyundai Kona at 6.7 efficiency ratio is 15% more than the best Model 3 and Model Y. The Audi e-tron is 40% less efficient than the best Model Y and Model 3. The Model S has not had a major upgrade and redesign since it was introduced in 2012. The Model S is still 3% more energy efficient with its batteries and drivetrain than other competitors. It is 27% better than the Audi e-tron. Eight years… But do not worry any year now… real competition. Make a car that can compete on efficiency, performance and price. Initially, it will likely be at loss for every vehicle that is made. The real competitor will then have to scale and grow profitability.
The alternative is for the CEO’s of the other auto companies milk profits from SUVs and Trucks for two more years while they collect about $30 million per year. The CEO then retires rich while they allowed their companies to fail. The CEO knows that trying to come up with capital and research spending of $10-30 billion in an attempt to catch up had a low chance of working. They have to keep their dealer network happy. The dealers make money by overcharging to service and maintain vehicles. Tesla has the upper hand in technology, volume of sales for the new vehicles, and now they have more financial resources. If I were a regular car CEO, who’s claim to fame was being handed a successful SUV or pickup truck line and then not blowing it for the 12th or 13th iteration then I would know that creating and launching new technology is beyond me and my company.
Many people say that Tesla is only a car company.
They make their own custom AI chip and they have over $1 billion in AI software-hardware sales. This is the $8000 per car full self driving package.
They have a data driven insurance product. They take the driver data and price their insurance using individual driver data.
Batteries and drivetrains are technologies. They have made hundreds of millions in battery storage sales to utilities.
Battery day could announce battery production breakthroughs or business breakthroughs to radically increase battery supplies. Tesla has to keep producing more and more batteries. Ten times the batteries would mean ten times the car units sold or five times the car units sold and the rest in battery storage for homes or utilities.
Tesla has introduced software to let Tesla car buyers act as their own utility. Electricity pricing is variable in many locations. This means a 100 kwh battery could charge up at $10 cents per kwh and sell back to the grid at $25 cents per kwh. The 15 cent per kwh price difference would be $15 per charge. A million mile range car would have 4000 charges. 1000 charges used for electricity trading would be $15,000. 2000 charges used for electricity trading would be $30,000.
SOURCES- Ford, Wikipedia, Tesla, Tesla Daily, Solving the Money Problem
Written By Brian Wang, Brian owns shares of Tesla