I’ve had Tesla (and I guess by extension Elon Musk) on my blog list for some time; unfortunately finding a topic with a narrowed focus that wasn’t written with such scepticism was a bit tricky!
This article will not be looking into the technical innovations that a company like Tesla tries to pioneer (that and Elon bashing will have to be for another time), but into something very interesting that happened last week. Tesla briefly became the most valuable US auto maker (by market cap). Numbers wise Tesla was valued around $53 billion versus GM’s $49 billion. We are going to explore how tech companies can compete in a traditional market (in this context car making) and also some of the pitfalls and hazards.
American cars become less alluring
Let us take a step back and first look at the conditions that lead to this brief market shift. The US buys around 17 million cars per year. Well that was the plan. However those annual adjusted figures are softening leading to a belief that the auto industry could be facing a bit of a crisis. This sort of makes sense when you consider interest rates are on the up in the States and most car sales are usually financed. Plus second hand prices are also suffering from deflation meaning the affordability of buying a new car will have taken a serious hit.
This stagnation was reflected in the numbers shared by the likes of Ford and GM. Conversely Tesla showed ‘good’ numbers – shipping 76,000 cars in 2016. In perspective this is let’s be honest quite a minimal impact on the 17 odd million vehicles sold in 2016.
Looking to the future
To understand Tesla’s continuing rise we need to understand the future. Their most important vehicle, the Model 3 will be released later this year. This will be a relatively affordable Tesla ($35,000 before tax incentives). Pre-orders are going well at around 400,000 vehicles and it is on target to begin shipping by year end. As with most high profile tech companies, investors are excited by where Tesla goes from here. They feel success can enable them to grow and dominate an old industry that needs to continue to innovate. And this is probably the biggest takeaway from this article; the potential to disrupt and dominate an existing industry continues to be the driver that excites investors. That long term philosophy has also been a factor for the likes of Amazon to grow in areas not considered conceivable even a few years ago.
Fighting back
But that is not to say the current carmakers are resting on their laurels. As well as looking to inevitable future tech such as electric cars there is an acute awareness of needing to improve now in whatever way possible. GM are connecting their robots to the internet to ensure better monitoring and reduce downtime via preventative maintenance. This is a great example of utilising the ‘Internet of Things” to enhance performance.
The car industry used to be pioneers of innovation and manufacturing. Somewhere in the 90s and 00s they seemed to have lost their ways. The last 10 years has seen a shift and a realisation that fighting for survival is part and parcel of today’s world. And the future will test them further. Yes petrol based vehicles will dominate their sales for the coming years, but the likes of GM are readying themselves if the change to electric vehicles picks up. And they are better prepared/experienced producing in the mass volumes the US market requires compared to Tesla.
So can Tesla maintain this new lofty position? Can their ‘visionary’ leader not only keep keep them ahead technically but also to scale to meet future demands? Or will the traditional car makers adapt faster and beat Tesla at their own game? Let’s not forget that Tesla are also crippled with significant cash flow issues. I’ll update over the months if I see movement in Tesla’s price as well as how the react to meeting demand for their new car. Suffice to say we have a few more twists and turns in this story!
J
Junaid Rahim 