What’s your view on Tesla at the moment?
We feel pretty good about it; don’t ask us about what might happen next quarter, quite frankly we couldn’t care less. When we think about Tesla we think about the broader market in which it operates; the big question is: how many people think EVs will represent most vehicles on the road by the 2030s? Most vehicles sold by then will be electric, at least in the domestic use category. If that’s the case, who will sell the EVs? If it isn’t going to be Tesla, who could it be? If you say Ford or BMW or GM or Toyota, you have to be able to explain where they will get their lithium and where their battery manufacturing capacity comes from – and indeed where their broader capability to build EVs will come from.
We could draw a pretty EV and say we are going to build 100,000 a year by 2025. This is what the traditional auto companies are doing; there is very little thought or emphasis put on the supply chain. Where are the semiconductors coming from? We all know about the disruptions to global trade caused by the war in Ukraine, but semiconductor shortages predate that. The requirement for semiconductors in EVs is absolutely huge, particularly for things like power management; where will these come from? The quarter before last, Tesla beat its production estimates when everyone else was battling major supply chain problems. How did they manage things so well when they need far more semiconductors than an ICE-powered car needs? We think it’s because they have been doing EVs for longer, and it’s the only thing that they do.
What do you think about Tesla's valuation?
To invest in Tesla, you have to believe that they are one of – not the– market leaders, certainly in the Western Hemisphere, and arguably globally, by the end of the decade.
This poses the question: what will the market structure look like by the end of the decade? Is it feasible to think there could be five players globally with a 15% share each? If you go back to the middle of the twentieth century in the US, and look at the big three automakers, they collectively had 85% market share. The biggest market share in the US now is down in the low teens, reflecting the fact that ordinary cars have become very commoditised. The market is certainly diverse by historic standards. If we move to a market that is disrupted by EVs (as opposed to automation, which is something else), is it reasonable to think that there will be technological differentiation between brands, i.e. not everyone will ‘figure it out’? To make Tesla’s valuation stack up, you need to believe that they can get to 10-11% market share by the end of the decade. That seems perfectly reasonable, but what if they are at 25%? This isn’t our base case, but it is not unreasonable either. Tesla also has huge optionality on automated driving, which is another potential source of value.
What are Tesla's capabilties beyond electric cars?
There are other ways to think about Tesla; for example, it could play a key role in the electrification of power grids. The ability to store and move power and the ability to generate energy locally are key challenges that have to be addressed over the next decade to help mitigate climate change and provide energy security. Then there are ‘pipedream’ things like robotic strategies and also the automated driving platform. There is a lot of mud slung at Tesla over the true extent of automation but we shouldn’t rule it out as a possibility. They’ve got hundreds of thousands of cars on the road and this means they can capture vast amounts of data. Data is the holy grail for automation – this is real-world info, not something that has been captured or developed in a lab. Nvidia can create virtual environments for virtual cars but these are not the same as real-world environments. With the possible exceptions of Waymo and Baidu, Tesla has racked up more ‘real world’ miles than anyone else.
It’s also worth remembering that Tesla doesn’t have a lot of capital and labour tied up in legacy technologies, e.g. the VW Group has around 700,000 staff employed in the production and development of diesel engines and related technologies that don’t have a long-term future. If Tesla is on 30x next year’s earnings and VW is on 6x, which one is cheap and which one is expensive given the structural challenges faced by the industry? The market share of diesel engines will necessarily decline over time.
The way Tesla manufactures is very interesting; rather than having tens of thousand of individual components, each of which creates a point of weakness and a potential supply chain issue, Tesla has a relatively simple production process that has more in common with the production of say the iPad. By using advanced metal stamping and pressing techniques, hundreds of parts can become a handful. No-one else can do this yet; reducing complexity means an easier production process and fewer things that can go wrong – and fewer places to rust. Tesla may produce electric cars but they have shorter wiring looms than VWs. That’s mind boggling. There are lots of things that Tesla does differently.
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