by Adam Hartung | Jan 6, 2015 | Current Affairs, In the Rapids, Innovation, Leadership
Crude oil has dropped 50% in just 6 months. At under $50/barrel, gasoline is now selling for under $2/gallon in many places. This is a price rollback to 2008 prices – something almost no one expected in early 2014.
It is easy to jump to conclusions about what this will mean for sales of some products. And many analysts have been saying this is a terrible scenario for Tesla, which sells all electric cars. The theory is pretty simple, and goes something like this: People buy electric cars to save on petrol costs, so when petrol prices fall their interest in electric cars decline. With gasoline cheap again, nobody will want an electric car, so Tesla will do poorly.
But this is just an example of where common wisdom is completely wrong. And now that Tesla has lost about 1/3 of its value, due to this popular belief, it is offering investors a tremendous buying opportunity.
There are three big reasons we can expect Tesla to continue to do well, even if gasoline prices are low in the USA.
First, Teslas are great cars. Not simply great electric cars. So quickly we forget that Consumer Reports gave the Model S 99 out of a possible 100 points – the highest rating for an automobile ever. In 2013 Motor Trend had its first ever unanimous selection of the Best Car of the Year when all the judges selected the Model S. The Model S, and the Roadster before it, have won over customers not just because they use less petroleum – but rather because the speed, handling, acceleration, fit and detail, design and ride are considered extremely good – even when comparing with the likes of Mercedes and BMW – and when you don’t even consider it is an electric car.
It is a gross mis-assumption to say people buy Teslas because they are electric powered. People are buying Teslas because they are great cars which are fun to drive, perform well, look stylish, have low maintenance costs and very low operating costs. And they are more ecological in a world where people increasingly care about “going green.” In 2015 consumers will be able to choose not only the Roadster, and the fairly pricey Model S, but soon enough the smaller, and less expensive, Model 3 which is targeted squarely at BMW Series 3 customers. Teslas are designed to compete with all cars for consumer dollars, not just electric cars and not just on the basis of using less fuel.
Second, the market for autos is global and gasoline isn’t cheap everywhere. Take for example Hong Kong, where gasoline still retails for $8.50/gallon (as of 31Dec. 2014.) Or in Paris or Munich where gasoline costs $5/gallon – even though the Euro’s value has shrunk to only $1.20. Outside the USA most developed countries have a lot more demand for oil than they have production (if they have any at all.)
Almost all of these countries offer incentives for buying electric cars. For example, in Hong Kong and Singapore the import tax on an auto can be 100-200% of the car’s price (literally double or triple the price due to import taxes.) But in these same countries the tax is greatly reduced, or eliminated entirely, for buying an electric car for policy reasons to promote lower oil consumption and cleaner city air. So a $100,000 Mercedes E class in Hong Kong will cost $200,000+, while a $100,000 Model S costs $100,000.
Further, outside the USA most countries heavily tax gasoline and diesel in order to discourage consumption and yield infrastructure funds. So even as oil prices go down, gasoline prices do not decline in lock-step with oil price declines. Consumers in these countries have a much greater demand than U.S. consumers for high mileage (and electric) cars almost regardless of crude oil prices. So thinking that low USA gasoline prices reduces demand for electric cars is actually quite myopic.
Third, do you really think oil prices will stay low forever? Oil is a commodity with incredible political impact. Pricing is based on much more than “supply and demand.” At any given time Aramco, or its lead partners such as Saudi Arabia and the UAE, can decide to simply pump more, or less fuel. Today they are happy to pump a lot of oil because it hurts countries with which they have a bone to pick – such as Russia (now almost out of bank reserves due to low oil prices) and Iran. And it helps USA consumers, reducing domestic interest in things like the Keystone Pipeline which could lessen long-term reliance on Aramco oil. And investing in risky development projects like the arctic ocean. Tomorrow these countries could decide to pump less, as they did in the mid-1970s, driving up prices and almost killing the U.S. economy.
Oil prices have a long history of instability. Like most commodities. That’s why a state economy like Texas, where they produce a lot of oil, could boom the last 4 years, while manufacturing states (like Wisconsin and Illinois) suffered. With oil back under $50/barrel drilling rigs will go into mothballs, oil leases will go undeveloped, fracking projects will be stalled and the economy of oil producing states will suffer. Like happened in the mid-1980s when Saudi Arabia once again began flooding the market with oil and exploration and production companies across Texas went out of business.
Most people are smart enough to realize you look at all aspects of owning a new car. There are a lot of reasons to buy Tesla automobiles. Not only are they good cars, but they are changing the sales model by eliminating those undesirable auto dealers most consumers hate. And they are offering charging stations in many locations to make refills painless. And you don’t have to change the oil, or do quite a bit of other maintenance. And you do less damage to the environment. It’s not simply a matter of the price of fuel.
It is always risky to oversimplify consumer behavior. Decisions are rarely based entirely on price. And, as Apple has shown with sales if iOS devices and Macs, people often buy more expensive products when they offer a better experience and brand. Long term investors know that when a stock is beaten down by a short-term reaction to a short-term phenomenon (such as this fast decline in oil prices) it often creates an opportunity to buy into a company with a great future potential for growth.
by Adam Hartung | Jul 11, 2012 | Current Affairs, Defend & Extend, Disruptions, Innovation, Leadership, Lock-in
The news is not good for U.S. auto companies. Automakers are resorting to fairly radical promotional programs to spur sales. Chevrolet is offering a 60-day money back guarantee. And Chrysler is offering 90 day delayed financing. Incentives designed to make you want to buy a car, when you really don't want to buy a car. At least, not the cars they are selling.
On the other hand, the barely known, small and far from mainstream Tesla motors gave one of its new Model S cars to Wall Street Journal reviewer Dan Neil, and he gave it a glowing testimonial. He went so far as to compare this 4-door all electric sedan's performance with the Lamborghini and Ford GT supercars. And its design with the Jaguar. And he spent several paragraphs on its comfort, quiet, seating and storage – much more aligned with a Mercedes S series.
There are no manufacturer incentives currently offered on the Tesla Model S.
What's so different about Tesla and GM or Ford? Well, everything. Tesla is a classic case of a disruptive innovator, and GM/Ford are classic examples of old-guard competitors locked into sustaining innovation. While the former is changing the market – like, say Amazon is doing in retail – the latter keeps laughing at them – like, say Wal-Mart, Best Buy, Circuit City and Barnes & Noble have been laughing at Amazon.
Tesla did not set out to be a car company, making a slightly better car. Or a cheaper car. Or an alternative car. Instead it set out to make a superior car.
Its initial approach was a car that offered remarkable 0-60 speed performance, top end speed around 150mph and superior handling. Additionally it looked great in a 2-door European style roadster package. Simply, a wildly better sports car. Oh, and to make this happen they chose to make it all-electric, as well.
It was easy for Detroit automakers to scoff at this effort – and they did. In 2009, while Detroit was reeling and cutting costs – as GM killed off Pontiac, Hummer, Saab and Saturn – the famous Bob Lutz of GM laughed at Tesla and said it really wasn't a car company. Tesla would never really matter because as it grew up it would never compete effectively. According to Mr. Lutz, nobody really wanted an electric car, because it didn't go far enough, it cost too much and the speed/range trade-off made them impractical. Especially at the price Tesla was selling them.
Meanwhile, in 2009 Tesla sold 100% of its production. And opened its second dealership. As manufacturing plants, and dealerships, for the big brands were being closed around the world.
Like all disruptive innovators, Tesla did not make a car for the "mass market." Tesla made a great car, that used a different technology, and met different needs. It was designed for people who wanted a great looking roadster, that handled really well, had really good fuel economy and was quiet. All conditions the electric Tesla met in spades. It wasn't for everyone, but it wasn't designed to be. It was meant to demonstrate a really good car could be made without the traditional trade-offs people like Mr. Lutz said were impossible to overcome.
Now Tesla has a car that is much more aligned with what most people buy. A sedan. But it's nothing like any gasoline (or diesel) powered sedan you could buy. It is much faster, it handles much better, is much roomier, is far quieter, offers an interface more like your tablet and is network connected. It has a range of distance options, from 160 to 300 miles, depending up on buyer preferences and affordability. In short, it is nothing like anything from any traditional car maker – in USA, Japan or Korea.
Again, it is easy for GM to scoff. After all, at $97,000 (for the top-end model) it is a lot more expensive than a gasoline powered Malibu. Or Ford Taurus.
But, it's a fraction of the price of a supercar Ferrari – or even a Porsche Panamera, Mercedes S550, Audi A8, BMW 7 Series, or Jaguar XF or XJ - which are the cars most closely matching size, roominess and performance.
And, it's only about twice as expensive as a loaded Chevy Volt – but with a LOT more advantages. The Model S starts at just over $57,000, which isn't that much more expensive than a $40,000 Volt.
In short, Tesla is demonstrating it CAN change the game in automobiles. While not everybody is ready to spend $100k on a car, and not everyone wants an electric car, Tesla is showing that it can meet unmet needs, emerging needs and expand into more traditional markets with a superior solution for those looking for a new solution. The way, say, Apple did in smartphones compared to RIM.
Why didn't, and can't, GM or Ford do this?
Simply put, they aren't even trying. They are so locked-in to their traditional ideas about what a car should be that they reject the very premise of Tesla. Their assumptions keep them from really trying to do what Tesla has done – and will keep improving – while they keep trying to make the kind of cars, according to all the old specs, they have always done.
Rather than build an electric car, traditionalists denounce the technology. Toyota pioneered the idea of extending a gas car into electric with hybrids – the Prius – which has both a gasoline and an electric engine.
Hmm, no wonder that's more expensive than a similar sized (and performing) gasoline (or diesel) car. And, like most "hybrid" ideas it ends up being a compromise on all accounts. It isn't fast, it doesn't handle particularly well, it isn't all that stylish, or roomy. And there's a debate as to whether the hybrid even recovers its price premium in less than, say, 4 years. And that is all dependent upon gasoline prices.
Ford's approach was so clearly to defend and extend its traditional business that its hybrid line didn't even have its own name! Ford took the existing cars, and reformatted them as hybrids, with the Focus Hybrid, Escape Hybrid and Fusion Hybrid. How is any customer supposed to be excited about a new concept when it is clearly displayed as a trade-off; "gasoline or hybrid, you choose." Hard to have faith in that as a technological leap forward.
And GM gave the market Volt. Although billed as an electric car, it still has a gasoline engine. And again, it has all the traditional trade-offs. High initial price, poor 0-60 performance, poor high-end speed performance, doesn't handle all that well, isn't very stylish and isn't too roomy. The car Tesla-hating Bob Lutz put his personal stamp on. It does achieve high mpg – compared to a gasoline car – if that is your one and only criteria.
Investors are starting to "get it."
There was lots of excitement about auto stocks as 2010 ended. People thought the recession was ending, and auto sales were improving. GM went public at $34/share and rose to about $39. Ford, which cratered to $6/share in July, 2010 tripled to $19 as 2011 started.
But since then, investor enthusiasm has clearly dropped, realizing things haven't changed much in Detroit – if at all. GM and Ford are both down about 50% – roughly $20/share for GM and $9.50/share for Ford.
Meanwhile, in July of 2010 Tesla was about $16/share and has slowly doubled to about $31.50. Why? Because it isn't trying to be Ford, or GM, Toyota, Honda or any other car company. It is emerging as a disruptive alternative that could change customer perspective on what they should expect from their personal transportation.
Like Apple changed perspectives on cell phones. And Amazon did about retail shopping.
Tesla set out to make a better car. It is electric, because the company believes that's how to make a better car. And it is changing the metrics people use when evaluating cars.
Meanwhile, it is practically being unchallenged as the existing competitors – all of which are multiples bigger in revenue, employees, dealers and market cap of Tesla – keep trying to defend their existing business while seeking a low-cost, simple way to extend their product lines. They largely ignore Tesla's Roadster and Model S because those cars don't fit their historical success formula of how you win in automobile competition.
The exact behavior of disruptors, and sustainers likely to fail, as described in The Innovator's Dilemma (Clayton Christensen, HBS Press.)
Choosing to be ignorant is likely to prove very expensive for the shareholders and employees of the traditional auto companies. Why would anybody would ever buy shares in GM or Ford? One went bankrupt, and the other barely avoided it. Like airlines, neither has any idea of how their industry, or their companies, will create long-term growth, or increase shareholder value. For them innovation is defined today like it was in 1960 – by adding "fins" to the old technology. And fins went out of style in the 1960s – about when the value of these companies peaked.
