Making Sense Of Tesla’s Slow-Moving Competition
Because we own Tesla stock for our clients, I listen in on the quarterly conference calls for Ford and GM to learn about their plans for electric cars. It has long bothered me that I could not make sense of these companies plans which never seem to get past the concept stage. After much discussion with people who know the auto business better than me, I think I see the rationale behind Ford’s and GM’s strategy, and my confidence in Tesla has grown. Here’s why.
The Mass Market
While Tesla strives to make the Model 3 more affordable, both Ford and GM don’t make money selling mass-market sedans. Ford has already exited this market segment and GM is not far behind. I can see why neither company is in any hurry to invest the billions it would take to make an electric mass-market sedan.
Tesla’s mass-market $35,000 Model 3 is not yet available, but they are making good progress ramping up production and getting unit costs down. In time, Tesla will be able to reach the mass market and when they do both Ford and GM will not be competitors.
To all the people who think that Tesla will fail unless it can make money on a mass-market car, I would say that Ford and GM prove that this is not a prerequisite for success.
The Pickup Truck Market
Recently, the Wall Street Journal reported that Ford, GM, and Fiat Chrysler have all introduced pickup trucks priced at $50,000 or more.
The resurgence of what we used to call “gas guzzlers” is happening now because rising domestic oil production has brought the price of gasoline down.
These pickup trucks are very profitable and can be produced in the factories Ford and GM already have so it makes sense for them to focus on this market segment.
Among Tesla shareholders, the lack of competition is regarded as evidence of incompetence at Ford and GM . This is flat out wrong. The legacy car companies are doing what makes sense given the billions they have invested in plant and equipment to make gasoline powered cars.
Another explanation for why Ford and GM have been so slow with their electric cars is that they don’t want to cannibalize sales of their gas-powered cars. This seems like a strong argument until you realize that the mass-market car sales that would be cannibalized are money losers.
This kind of explains why GM has designed the Bolt so no one in the luxury car market would want one. I suspect that after you account for tax credits, the Bolt is just as unprofitable for GM as their other mass-market sedans whereas an up-scale Bolt might cannibalize sales of their profitable luxury cars.
How To Play It
While I think I see the rationale behind the strategies adopted by Ford and GM, I am not willing to invest in either company because I am not sure. I would have confidence in these companies if their CEOs would be straightforward about their plans. I think what prevents this is that admitting how much their future depends on sales of gas guzzlers would call forth the wrath of the politically correct. Perhaps paying lip service to electric car plans that never come to fruition is a smart way to maintain good press relations, but it does not instill investor confidence.
Tesla, on the other hand, has the best selling luxury car in the United States and is working hard to reduce the price so it can take over a large market segment that is being abandoned by Ford and GM.
That Tesla’s valuation exceeds Ford’s and GM’s says the market sees a bright future for Tesla. Nevertheless, value investors and short-sellers can point to many metrics on which Ford and GM are much cheaper than Tesla.
However, three years from now the value of Ford and GM will depend in large part on the price of oil. We’ve already seen what happens to the demand for gas guzzlers when the price of oil goes up. There are many scenarios where the price of oil would be much higher in three to five years, and not too many scenarios where oil would be lower. Among these three companies, Tesla has the best chance of delivering a substantial return for shareholders over the next three years.
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