My investment thesis in Tesla is that all transportation will eventually be electric due to falling battery and power costs, and they have no automotive competition. The legacy automakers have crippling conflicts of interest with dealerships, existing products, and aversion to vertical integration.
The biggest conflict is competing with their existing products. If they made a more compelling electric car it would likely harm their existing sales in that class, more than it helps. There are many risks including limited battery supply that is likely to cause shortages, backlogs and reductions in revenue. What they have attempted to do is carve out a new class of car, one that is usually a play on gas cost savings such as the Nissan Leaf. The Chevy Bolt is said to target the ride sharing market. They are attempting to create these new niches to avoid competition with existing lines.
Kodak was a Dow component in the 90s, in 2012 they filed for bankruptcy. Even though they had pioneered digital camera technology they were unable to adapt to the disruption of digital cameras because it meant cannibalizing their film sales revenue. The analogy is that consumers bought expensive film for cameras, now a digital camera can take a virtually unlimited number of pictures with no marginal cost of operation. Today consumers buy gasoline, but with a solar setup and an electric car, they have virtually unlimited usage with marginal costs.
The automobile didn’t disrupt the horse and carriage. The falling costs from Ford’s assembly line is what disrupted the horse and carriage. Similarly, the electric vehicle per se isn’t disrupting the internal combustion engine vehicle. It’s the combination of falling manufacturing costs due to economies of scale, and AI automation, in combination with the lower maintenance and fuel costs for solar and EV owners.
What we’re seeing is the “electronic conusmerization” of automobiles. As surely as the cost of all consumer electronics fall, such as TVs, computers, phones, so will the cost of electric vehicles.
The legacy car dealerships face conflicts of interest in selling EVs. Typically dealerships derive 45% of profit from the service center, but EVs require 10 times less service because they have very few moving parts. The dealerships owners have little incentive to sell cars that require less service. Car salesmen work on commission and have little incentive to spend extra time educating consumers about EVs. If legacy car manufacturers attempt to bypass dealerships it is likely to result in lawsuits and put their sales channel at risk.
The auto industry has outsourced the manufacturing of nearly every component except the engine. Outsourcing lowers costs when technology is mature and commoditized and you can stay at the top of the value chain. Outsourcing has been a great strategy for increasing margins and reducing liabilities for many years. But now that innovation and investment are required, I don’t think the current batch of CEOs will be able to adapt to this change in strategy. Their strategy for battery supply, charging networks, autonomy, and sales is to outsource it. At the point these technologies are mature, pervasive and commoditized, it might make sense to outsource them or divest them. But in a period of rapid innovation it’s critical that the technologies and networks are timed to achieve market adoption in synch. Independent suppliers have little incentive to risk building out the necessary technology.
The most likely sources of viable competition are from Chinese startups, ride sharing services, and other tech companies. The competition from big auto is likely to suffer the same fate as Kodak. Bankruptcy.
The conflict of interest regarding existing products is well documented in the book the innovator’s dilemma. Also read my full investment thesis for Tesla for more detail.
