Automobile manufacturers shipped 88 million cars in 2016. Tesla shipped 76,000. Yet Wall Street values Tesla higher than any other U.S. car manufacturer. What explains this more than 1,000 to 1 discrepancy in valuation?
Too many people compare Tesla with what already exists, and that's a mistake. Tesla is not another car company.
At the turn of the 20th century, most people compared existing buggy and carriage manufacturers with the new automobile companies. They were all transportation, and they looked vaguely similar, with the only apparent difference being whether the vehicle was moved by horses attached to the front or had an unreliable and very noisy internal combustion engine.
Automobiles were different. And carriages and buggies are now only found in museums. Companies with business models built around internal combustion engines disrupted those built around horses. That's the likely outcome for every one of today's automobile manufacturers. Tesla is a new form of transportation disrupting the incumbents.
Here are four reasons why:
Electric cars pollute less, have fewer moving parts, and are quieter and faster than existing cars. Today, the technology necessary (affordable batteries with sufficient range) for electric cars to be a viable business has come together. Most observers agree that autonomous electric cars will be the dominate form of transportation by mid-century. That's bad news for existing car companies.
First, though car companies have more than a century of expertise in designing and building efficient mechanical propulsion systems--internal combustion engines for motive power and transmissions to drive the wheels--if they want to build electric vehicles, all those design skills and most of the supply chain and manufacturing expertise are useless. And not only useless, but a legacy of capital equipment and headcount that's a burden to a company. In a few years, the only thing useful in existing factories building traditional cars will be the walls and roofs.
Second, while the automotive industry might be 1,000 times larger than Tesla, Tesla may actually have more expertise and dollars committed to the electric car ecosystem than any legacy car company. Tesla's investment in a lithium ion battery factory (the Gigafactory), its electric drive train design, and its manufacturing output exceed the sum of the entire automotive industry.
Third, the future of transportation is not only electric, it's also autonomous and connected. A lot has been written about self-driving cars, and as a reminder, automated driving comes in multiple levels:
- Level 0: The car gives you warnings, but the driver maintains control of the car--for example, a blind spot warning.
- Level 1: The driver and the car share control--for example, adaptive cruise control (ACC), in which the driver controls steering and the automated system controls speed.
- Level 2: The automated system takes full control of the vehicle (accelerating, braking, and steering). The driver monitors and intervenes if the automated system fails to respond.
- Level 3: The driver can text or watch a movie. The vehicle will handle situations that call for an immediate response, like emergency braking. The driver must be prepared to intervene within some limited time, when called upon by the vehicle.
- Level 4: No driver attention is ever required for safety, i.e., the driver may safely go to sleep or leave the driver's seat.
- Level 5: No human intervention is required--for example, a robotic taxi.
Each increasing level of autonomy requires an additional, exponential amount of software engineering design and innovation. While cars have had an ever-increasing amount of software content, the next generation of transportation is literally a computer on wheels. Autonomy and connectivity, like electric vehicle drive trains, are not core competencies of existing car companies.
Fourth, large, existing companies are executing a known business model and have built processes, procedures, and key performance indicators to measure progress to a known set of goals. But when technology disruption happens (electric drive trains, autonomous vehicles, etc.), changing a business model is extremely difficult. Very few companies manage to make the transition from one business model to another.
And while Tesla might be the first mover in disrupting transportation, there is no guarantee it will be the ultimate leader. However, the question shouldn't be why Tesla has such a high valuation.
The question should be why the existing automobile companies aren't valued like horse and buggy companies.
Few market leaders in an industry being disrupted make the transition to the new industry.
- The assets, expertise, and mindset that created the current leaders are usually the baggage that prevents them from seeing the future.