Tesla

There has been so much in the news recently about Tesla that it has been a potential subject of my blog for most of this year, and I’m sure that now I’m (metaphorically at least) committing pen to paper, there will be a lot more news in the weeks following this publication, making this rapidly look stale.  Depending on where you get your news from, the outlook for Tesla is anywhere on a spectrum from “the glory days are over” to “the only manufacturer who will survive the Chinese is Tesla”.  As is often the case, the truth is probably somewhere in the middle.

Tesla was for several years the only place to go if you wanted a premium battery electric vehicle (BEV), with the Model S launched in 2012, and Model 3 in 2017.  The first competitors turned up in the form of the Jaguar I-Pace in 2018 and Audi e-tron in 2019.  For early adopters, it was therefore a sellers’ market, and Tesla was able to grow with fixed pricing and a lean direct channel.  Service consistently fell behind customer expectations over that time in seemingly every market, but customers tolerated it, and the result was that revenue grew by almost 70% annually from US$413 million in 2012 to US$81 billion last year, although it took until 2020 to actually make a full-year profit.

Over the last couple years, there are suggestions that things have become much tougher for Tesla.  In the face of more competition and new capacity coming online (Berlin and Texas, with more to be added in Shanghai), Tesla cut prices across the board on multiple occasions, interspersed with some increases, but sales volumes have not shot up in line, and the cash generated by the business net of investment fell by 75% year on year to the third quarter.  Although Tesla has a recognised cost advantage due to its in-house battery technology and giga-casting based modular approach to assembly, price cuts have outpaced this, with gross profit margin down from over 25% a year ago to under 18%.  The much-vaunted ‘Semi’ heavy truck and Cybertruck are finally making it into production, but it seems unlikely that these will have the global reach of the existing car products.

The ‘Full Self-Driving’ capability (FSD) that Musk has regularly promised would be available ‘in a year’ remains more of an ambition than a realty, resulting in multiple law suits against the company in the US, where customers have been persuaded to buy a feature that does not deliver against the promise - and some would argue - never can.  Recent evidence such as the decision by Cruse (wholly owned by GM) to stop all self-driving trials in the US only emphasises how tough it is to deliver Level 5 autonomous capabilities, even when you utilise a much more sophisticated (and expensive) range of sensors than Tesla do with FSD.

Tesla reports that its Supercharger network is profitable, which might have been supported in part by opening it up to non-Tesla owners, leading in the US to the Tesla standard being adopted by many other competing manufacturers.  In doing so, they gave up the competitive advantage of having what was recognised as one of the highest-performing and most reliable charging networks around.  However, this has also led to the sale of the units becoming another product line for Tesla, with sales reported to BP, Ford and UK-based filling station operator, EG Group, who plan 20,000 chargers across its filling station network and wholly-owned Asda supermarket chain.

Increasing costs of insurance for BEVs is also becoming a concern for manufacturers as they strive to drive up BEV sales, and Tesla’s response in the US was typical of the company, that it decided to set up its own insurance business, with Musk promising policyholders a “vastly better” service and more competitive premiums enabled by the knowledge Tesla had of its cars and drivers through the universal fitment of connectivity.  The reality has been that crash repairs are still delayed by parts availability, and poor customer service has led to legal claims now being launched by customers.

The connectivity that is supposed to aid insurance risk assessment clearly brings huge opportunities in over-the-air updates, features on demand and accident management.  I benefited from it personally when an idiot drove into the side of my Model S three years ago, but I was able to source the event data from the car down to thousandths of a second to prove that I was not at fault.  However this huge volume of data capture also brings huge responsibility to protect that data well.  Germany's Handelsblatt reported back in May that 100 gigabytes of confidential data had been leaked, which Tesla subsequently blamed on two former employees.

The direct sales model of Tesla has also been frequently reported as competitive advantage with a reduced cost of distribution and direct customer contact cited as benefits.  We have looked at this in the past within the ICDP research programme, and suggested that as the volumes of sales and customers grow, and the size of the physical network expands, then Tesla could easily invite dealer partners to take over the operation of the network on an agency basis.  There is still not yet any concrete evidence for this, but we are hearing rumours in Germany that Tesla is speaking to dealers, so watch this space as they say…

Taken together, it is clear that as Tesla deals with some challenges, others emerge.  Do we believe that Tesla will reach the 20 million sales target (i.e. twice the size of Toyota) by 2030 that Musk has referred to?  Simple answer is no, but investment analysts have a range in their forecasts for the share price in 12 months of over 7x, from a low of US$53 to a high of US$388.  This highlights the sheer unpredictably of the company and its founder.  One consistency has been innovation and a reluctance to follow what many would see as the obvious, or possibly only, path.  They will continue to put pressure on the established industry, probably continuing to tread a path which has higher levels of risk on many dimensions that those established players (and their shareholders) would consider acceptable.  They are not therefore in my view a business to seek to emulate, but one that has in many areas shown itself to be a good source of inspiration and examples of what can be done at the outer edges of the envelope.