WisdomGroup

Ted SpoonerNovember 22, 2008

The future looks great for electric cars, whether the Tesla company survives or not. I’ll bet that private investors will pump capital into Tesla quicker than the government and with fewer regulatory strings. This is like investing in television in the 1940s - massive returns await those with the guts and the cash to take this risk!

MaxNovember 22, 2008

They got the round they needed http://tinyurl.com/54tapk. Now let’s go IPO!

Edward T. HightowerNovember 22, 2008

I’m not sure the carbon paper vs. typewriters analogy fits.  A more appropriate analogy might be Cray supercomputers vs. Dell or Compaq PC’s in the 1990’s.  Sure the Cray was more advanced, but which company had a greater impact on enabling everyone on the planet to own or have access to a computer?  Companies like Dell and Compaq effectively commercialized computers.  True innovation is commercially viable. 

The Detroit auto companies have invested the profits from vehicles like the Cadillac Escalade, Chevrolet Suburban, Hummer H2 and Lincoln Navigator - vehicles that consumers who did not need their utility demanded when gas was cheap - into several fuel saving technologies that are affordable and available to the consumer right now.  The Detroit automakers gasoline engines have become more efficient.  For example, the fuel economy of the Ford Focus is equal to that of the Toyota Corolla and the Chevrolet Malibu’s fuel economy on the highway is 2 mpg better than that Honda Accord.  GM and Ford each offer more hybrid vehicles than Honda and Nissan.  GM’s and Ford’s pickup trucks get better fuel economy than Toyota’s and Nissan’s comparable offerings.  GM also invested Escalade, Hummer and Corvette profits in the creation of the 2010 Chevy Volt - a plug-in hybrid that will run on electricity-only for 40 miles (no hybrid can do this today, including the Prius), will seat 4-passengers (unlike the Tesla), will do 0-60 in the 8 sec range, and will likely be priced in the high $30’s vs. the $100K+ Tesla.

All companies need working capital to fund their day-to-day operations.  There is a lag time between when a car company for example, buys and pays for steel, turns that steel into a car and then gets paid for that car.  Working capital funds that lag time.  The current financial crisis has made it difficult for all companies in all industries to get access to working capital.  Because automobiles are so expensive to design, engineer, produce and buy, their working capital requirements are proportionally higher than other industries.  The current financial crisis has also created a crisis in consumer confidence and caused buyers to stop purchasing vehicles, from all manufacturers.  For the month of October, GM sales down (45%), Toyota down (23%), Ford down (32%), Honda down (25%), etc., vs. October of 2007.  Overall annual vehicle sales in the US market will be down this year from ~16.2M vehicles in 2007 to ~13.5M vehicles.  As a result of the current financial crisis - cash is coming in slower and working capital loans are more difficult to come by.  The external macro factor of the credit crisis, has resulted in all companies using their cash reserves at a much faster rate.  A $25B loan, not a bailout as Friedman and the media positions it,  to help the automakers make it through this externally driven working capital / liquidity crisis, avoid putting 3M+ jobs at risk, avoid driving our economy further into recession and keep an American company that is bringing affordable / commercially viable technology that will reduce oil consumption to market, is in all of our best interests. 

In 2007, GM sold more vehicles than anyone else in the world - 9,369,524, about 3k more than Toyota.  GM also holds the #2 market share in the fastest growing automobile market in the world, China (Honda is #3 and Toyota is #4).  GM sells more Buicks in China than in the US.  This achievement in China was also funded by Escalade profits.  Governments throughout Asia and other parts of the developing world are spending billions to develop an auto industry in their respective countries because of the huge impact it can have on creating jobs and developing their economies.  Why would we idly sit by and let the credit crisis destroy ours?

Brad RitchieNovember 23, 2008

Tesla is currently working on a $60,000 5-seat luxury sedan that delivers 200+ miles per charge.  They expect it to be available in 2011.  (Pushed back from 2010 because of financing and the economic environment which delayed an IPO.)  The success of Tesla will spur other entrepreneurs and more importantly, more readily available financing. 

Any plan to salvage an industry where one business sold 9.3 million units at WELL over $15,000 per unit and a year later is broke should be slowly and carefully considered.  GM only offers a few hybrids at exorbitant prices eight years after gas hit $2.00 per gallon.  No one offers a hybrid comparable to the mix of price, size, functionality, fuel economy and resale value that the Prius offers.  It is now almost a decade since the Prius launched.

Invest in the future first.  Salvage the past second.  Forty million to the future and twenty-five billion to the past is not a wise blend.

Raymond T. HightowerNovember 23, 2008

Companies in an industry are like individual trees in a forest. Individual trees are born, they live, and they die. Yet the forest (as a whole) remains. The dead trees serve as fertilizer for younger, stronger trees.

Edward, I agree with you: We should not sit idly by and let the credit crisis destroy our auto industry (forest). We need our auto industry for economic and military reasons. But if individual companies (trees) are unhealthy, maybe it’s time for them to serve as fertilizer for younger, stronger companies like Tesla.

You know the auto industry far better than I ever will and if I debate you on automotive issues you will win. But when I look at the numbers, it appears that a tiny investment in Tesla will yield a bigger return than a huge investment in the big three.

Brad’s post says we should “Invest in the future first. Salvage the past second.” Is it time for us to plant some new trees in the forest?

Edward T. HightowerNovember 23, 2008

Tesla has done a good job of creating an electrical energy storage, control and propulsion system.  However, they are not a car company.  All of the bits that make their energy and propulsion system into a car come from Lotus Engineering of the UK and other suppliers that also supply the major global automotive OEM’s.  Tesla does not have the capabilities internally to develop vehicles.  This requires the skills to meet other attributes that are important in developing cars for the mass market, factors such as design & styling, safety engineering, vehicle dynamics / handling, noise & vibration, quality and durability engineering, among many others.  The fact that Tesla has to outsource these core capabilities also contributes to their high prices. The market for $100K and even $60K cars will be limited for the foreseeable future.

Tesla’s potential for success will be improved if they adopt a business model that has them selling their electrical energy storage and propulsion technology to automakers that can commercialize it en masse.  Indiana-based Cummins Engine has successfully used a similar business model for decades.  Cummins makes diesel engines for a variety of customer’s applications, but doesn’t make vehicles.  It will be interesting to see how competitive Tesla’s vehicles are once the electric offerings of the major OEMs hit the market in 2010-11.  The major automakers can afford to temporarily loose money on new technologies like modern electric vehicles, because they have their base vehicles paying the bills.  On the plus side for Tesla, developing the Tesla Roadster model has given them the visibility that would make them a credible supplier.

Electric and other alternative energy motor vehicles will succeed only if there is consistent consumer demand for them.  There were electric cars in the early 1900’s but they did not succeed because a fossil fuel based design solution was cheaper and therefore more desirable to the consumer.  The sales velocity of hybrid vehicles rises and falls with the price of gasoline.  Hybrid sales first peaked after hurricane Katrina (2005) shutdown refinery capacity and caused a spike in the price of gasoline.  By late 2006, sales of the Prius and Hybrid Ford Escape SUV had slowed and Lexus was offering $6000 rebates to move the RX400h hybrid.  As you would expect, the demand for hybrids became strong again with the $4.25+/gallon prices at the pump we saw this summer.  Guess what will happen to hybrid sales if fuel prices stay below their current sub $2/gallon level? 

Beyond preventing a further decline in the current US economy by providing the requested bridge loan to the domestic automakers - made necessary by the credit crisis, the best way for the Government to help is with an energy policy that consistently encourages conservation by the consumer.  If a conservation-focused energy policy were in place, SUVs would have never become as popular in the late ‘90s - early ‘00s.  The EU has such policies, which is why most vehicles sold there are considerably smaller and are powered by high-efficiency diesel engines or 4-cyl gas engines with manual transmissions.

Brad RitchieNovember 24, 2008

Ah.  There is a great tragedy in the free market economies of today.  Truly, a large multi-national with deep pockets can wash out future competitors by undercutting prices until the small companies fold and then raise prices hurting competition and the consumer and labor.  Or in worse cases use lobyist or the courts to stifle small competitors like Tucker. 

Should we salvage and re-arm financial bandits therby supporting oligopolies?  Or, should we help the fledgeling companies and truly keep competition and a market economy?

Edward T. HightowerNovember 24, 2008

Tesla’s electric drivetrain is their real compeitive advantage.  Since the article asks the question about investing in Tesla, I’m suggesting that they would be a better investment if - beyond focusing on the Roadster and the White Star sedan - they focused on getting (selling) their drivetrains into in the product portfolios of the major automakers of the world.  This would generate the greatest return for Tesla investors - including the US Government who has already given Tesla $50M in Dept. of Energy loan guarantees plus several million in sales and use tax holidays from the State of California.

Raymond T. HightowerNovember 24, 2008

I like Edward’s idea of selling the Tesla drivetrain for other auto manufacturers to use. Reminds me of Intel’s role in the PC marketplace. “Tesla Inside” could become a badge of honor for future auto makers.