Out in front
The Tesla phenomenon is a mortal threat to car incumbents everywhere
Tesla is today worth as much as the entire European car industry. It is a textbook misalignment that will self-correct over time.
That does not mean the upstart pioneer of electric vehicles is therefore in a pure momentum bubble. The price moves look less unhinged if you gauge Tesla as a Silicon Valley disrupter with a near unassailable lead in data accumulation and artificial intelligence, rather than a hyperinflated car company.
This week’s parabolic spike lifts Tesla’s market value to $300bn, up fourfold since the March lows. It has been turbocharged by short-covering, this time after Elon Musk smashed estimates by eking out a profit through the worst of the pandemic (helped by carbon credits).
Tesla has racked up four quarters in the black and earned its ticket into the S&P 500 index, adding more fuel to the virtuous circle. However, my assumption is that the stock will fall back to earth along with the Nasdaq FAANGs as the economic fundamentals of a truncated recovery intrude later this year.
Tech guru Richard Windsor, a Tesla champion, says the price is too rich even for him. “Now would be a good time to take some or all of the money off the table,” he said. Yet the Tesla phenomenon remains, a mortal threat to car incumbents everywhere.
German technology investor Frank Thelen, from Freigeist Capital, says the company is in a “positive spiral” akin to Google’s lead once it had established a self-reinforcing lockhold through control over terabytes of data.
Tesla already has 900,000 vehicles on the road equipped with sensors. These are building up a data bank, constantly learning how to overcome the pitfalls of robotic self-driving. Nobody else is close. Mr Thelen thinks Tesla has already reached an “iPhone sorpasso”, sending the likes of VW or BMW into terminal run-off.
Anthony Ginsberg, from ETF specialists HANetf, says Tesla is poised to cream off chunks of value-added across the industry by selling its intellectual property and battery technology to Old Autos through
‘Volkswagen will get there. The threat of extinction concentrates the mind wonderfully’
leasing agreements. Tesla’s direct car sales tell only a fraction of the bigger story. Personally, I think the Germans will bounce back, but they have left it dangerously late. VW’s futuristic chief, Herbert Diess, warns that the German industry could succumb to the Coventry syndrome, going the way of the British car industry in the 1970s. Downfall can be swift. Britain was the world’s biggest exporter of cars in the 1950s, before being crippled by strategic errors and complacency.
There is no exact parallel with Germany but one has to ask: what were VW directors smoking when they told each other that Tesla would fall flat on its face trying to engineer a good car? And what were Daimler executives smoking when they ditched their 10pc holding of Tesla in 2014, concluding that the company was going nowhere?
So far the omens are not good for challengers in the US market. Porsche’s Taycan has flopped this year, while Jaguar has sold just over 1,000 of its I-Pace sports utilities.
The software is not integrated. The “companion apps” that give the best EV’s an edge – and will be a big source of future revenue – are not fully functional in most models. Mr Windsor says a Land Rover driver needs three different apps: one to plan routes; a second to remote start the vehicle; a third to check the user guide.
The maximum range of the Taycan and the Audi e-tron is around 200 miles. Most Tesla models surpass 300 miles. The cheapest Model 3 can run for 250 miles. The European Battery Alliance has launched a “Manhattan Project” to crack the technology, with a large infusion of EU state aid.
Mr Thelen says the battery gap is too wide to close. “No German electric car can even begin to compete with Tesla models that are already eightyears-old,” he said.
That may be going too far, but what is clear is that the Europeans lag horribly on autonomous vehicles. Tesla’s self-drive prototypes certainly have problems. The Mobileye on a robotaxi recently mistook a slightly obscured 35mph speed sign for 85mph. Deep learning has a way to go. But the company has eliminated so many of the early glitches that these vehicles are already eight times safer than human drivers.
VW’s Diess is betting the farm on EVs – computers on wheels, as he calls them – mobilising €30bn for breakneck investment to close the gap. “The era of the classic car-maker is over. What passes for success today could soon be worth nothing,” he says.
His hair-raising pep talks to VW staff should be taken with a pinch of salt. His aim is to shake the management structure to its foundations. It is “Tesla or us”, he says, and the battle for critical scale and ascendancy will be decided within four years. It will be an uphill struggle. VW’s 5,000 software specialists know how to programme IT components from dozens of suppliers, but not how to integrate the internet into every aspect of the car. Its manufacturing system is geared to the one thing the company does superbly well: building combustion engines.
Volkswagen will get there now that it has abandoned all hopes of fossil redemption. The threat of extinction concentrates the mind wonderfully. Today it is worth a third of Tesla. My guess is that VW will be worth just as much before long.