Will Elon Musk be able to turn his story into reality for much longer?

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The start-up model and the fact that they claim the right to lose money and to be supported in their desire to grow for long periods of time blurs the lines of reference: where we usually deploy clear economic and accounting criteria at the end of which companies must be profitable, we are asked to 'change the paradigm' and try to assess the sustainability of the promise of success over time. The Tesla case shows that if a sufficient proportion of investors believe in it, the innovator can benefit for more than a decade from a kind of private subsidy regime that allows the company to operate at a loss and eventually be right against the sceptics. In 2021, armed with this history, Elon Musk is embarking on a new narrative and promising to build 20 million cars a year tomorrow. Will he still find the support of the markets?

Tesla's stock market, commercial and industrial history continues to challenge our capacity for analysis and anticipation. Indeed, analysts who, like me, have been pointing out for years that the company's fundamentals do not justify confidence in its promises and that this will eventually show up and involve the bursting of what is indeed a bubble, can only note that Elon Musk has managed his business almost perfectly so far: although he has had to ride a "rollercoaster", he has managed to seduce investors sufficiently to accumulate losses without threatening the survival of his project. Thanks to this, he passed with difficulty but in a convincing manner the course of the 'down-market' and the passage to mass production that the launch of the Model 3 implied. The productive internationalisation begun in Shanghai is continuing in Europe.

The announcement in the same week of the contract with Hertz and the resounding success of the Model 3, which in September became the best-selling car in Europe (with 24,591 registrations), once again gave the impression that Tesla was "folding the match".

The storytelling of Musk and his activist community, in line with start-up phraseology, tells you that it is stupid to ask an innovative company to be profitable and that the role of the markets is not to watch over their good management by dissecting their operating accounts but to judge their promises and allow them to keep them.

From this point of view, Tesla would be like Uber or Deliveroo: the company would deserve to benefit for a very long time from a kind of 'private subsidy' from a community of believers in the company's ability to successfully 'disrupt' the dominant models and the 'incumbents' who support them. Their confidence, not blind but clear-sighted, or at least confident in the innovation, would eventually be rewarded when the victory of the promoted model was proven and would allow the innovator to be, if not the only 'winer takes all', at least one of the few kings of the new era.

Faced with this marvellous American mechanism for financing innovation via the markets, Europe would pale in comparison. To promote electrics, it could only rely on large companies with their know-how and their ability to generate sufficient profits from their old business to finance these new product lines and the technological advances that will make them convincing. The public support that they could obtain via national or European recovery plans to facilitate their task would be very 20th century and far too timid to be of any help in the face of the implacable management of creative destruction that America would have been able to put in place: Like Ford, GM or Stellantis (Chrysler), VW, Toyota or Renault-Nissan could then - at best - become followers of Tesla and possibly other electric "pure players" who would not be slowed down in their innovative impetus by their past habits and the costs associated with the decommissioning of undepreciated assets.

In this perspective, the major global manufacturers would find themselves caught between Tesla and the few American emulators that are emerging in China in particular, and the major Chinese public and private manufacturers that have long had firmly electric strategies, with the support of the authorities. They benefit from Beijing's long-standing plans, which Made In China 2025 famously reinforced in 2015. They also benefit from the unstinting support of the Chinese monetary authorities, which allow companies to avoid worrying too much about their short-term profitability thanks to generous bank loans that play the same role for these players as the financial markets do for companies like Tesla.

Thus, in the autumn of 2021, the narrative of Musk and his supporters seems validated by reality, as if market capitalisations were some kind of prefiguration of the future distribution of market shares and roles in an electrically dominated car industry. Musk is popularising with the business press and the public a seemingly insane goal of selling 20 million vehicles a year. Its supporters gloss over the comments made by the sceptics and use the parallels often drawn between Apple and Tesla to defend their relevance. They also show that although the transition from a production of 1 million vehicles to 20 will be capital intensive, this should not be a problem if Tesla's stock continues to perform well on the stock market.

In fact, after more than 15 years, we can be convinced that there is no stopping Tesla and that the steps taken over the last two years undermine the analyses and forecasts of the sceptics. From the US in particular, the feeling is that the VEB's global victory is Tesla's: since this is largely the case in the US, it must be true everywhere in the world!

However, this is not really the way things are going in Europe or China. The Model 3's sales performance in Europe in September cannot hide the fact that in the first nine months of the year, VW sold twice as many BEVs as Tesla, Stellantis is slightly ahead as well and Renault-Nissan just below. In China, Tesla sold 112,000 Model 3s and 93,000 Model Ys, but the best seller is the Hongguang Mini (SAIC-GM-Wuling).

Neither in the commercial field, nor in the technological field, the representation that the Americans have of the world electric vehicle market is in line with what is happening: Tesla's market share is falling and its ability to redefine the rules of the game in the industry, as Apple has done, is by no means obvious; moreover, its growth this year is ensured by an international expansion that will no longer be available tomorrow.

Finally, as regards the elements that, beyond the product, should have allowed Tesla to win the game, there are also some doubts: the autonomous vehicle component seems very fragile today and the sustainability of the integration of super-chargers into the business model is very weak. Beyond the overvaluation of the stock, it is the overvaluation of Musk's promise to dominate the industry when it takes off - which is now - that we should be concerned about.

02/11/2021

 

The weekly column by Bernard Jullien is also on www.autoactu.com.

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