Tesla’s woes have deepened. It is still the world’s most valuable car company, and the shares have recovered from their lows on Monday, but it has had a dreadful first quarter of the year.
It has laid off more than 10 per cent of its workforce, and its revenue was down nine per cent year-on-year, the sharpest fall since 2012. While its market capitalisation was over $500bn in early trading yesterday, it is plausible that later this year it may be passed in value by Toyota, the largest car company in terms of sales, currently worth $375bn.
Tesla shares are down 33 per cent so far this year, while Toyota’s are up 29 per cent. The gap is closing.
Share prices are only a snapshot of the perceptions of the market at one particular moment, often a knee-jerk reaction to hopes (and fears) that turn out to be unfounded.
2.7 seconds
The recent boost for Tesla has come from Elon Musk’s assertion that it will start to produce more affordable cars, and his promise of further information on 8 August.
An entry-level Model 2 is known to be under development, and the pencilled-in selling price for the US market will be below $25,000. Elon Musk has been able to surprise the markets with new products before, notably the hugely successful Model 3.
The new Performance version of that will reach 60 mph in 2.9 seconds, something that gets close to the fastest 911 Porsche, which manages to hit 100 kph – that’s 62 mph – in 2.7 seconds. UK drivers may think that this is all a bit irrelevant as they struggle through the jams on the M25, but if that is what the market wants, then Musk has another winner.
And if he can produce a sub-compact, the Model 2, which also offers extraordinary performance, then the world may indeed continue to beat a path to his door.
Consumer pushback
That leads to a wider question: at what speed will the transition from internal combustion-powered vehicles to the pure electrics proceed? We know it will happen right across the developed world over the next 20 years, and probably across the emerging economies too. But at the moment there is consumer pushback.
There have been worries about the loss of range in cold weather, about charging difficulties, about drivers that have sold their electric car and gone back to a diesel. And so on. There are further concerns that electric vehicles are not as environmentally positive as they are billed as being.
All this suggests that hybrid technology, particularly plug-in hybrids, may prove the most attractive intermediate technology for several years. In engineering terms it is inelegant to have the complexity of two different types of engine, and to lose the simplicity of the pure electric drive-train.
Trim back
But if that is what the buyers want, it would be a brave government to tell them that they cannot have it. It may well be that current legislation in the UK that prohibits the sale of internal combustion-engined cars from 2035 onwards, which has already been pushed back from 2030, will be delayed further. If the EU delays its current plans, expect the UK to do so too.
The US has adopted a different approach, aiming to have half its car sales electric by 2030 rather than having an outright ban on ICE ones. Besides, the EU and UK are not now the dominant car markets of the world. Last year the largest market was China, selling 30.1 million cars, followed by the US (15.6 million), Japan (4.8 million) and India (4.1 million). Germany, Brazil and the UK came next, well down the league table.
To be brutal, the future of the industry will be determined by the top four, particularly China, since it can make electric cars more cheaply than anyone else – India may challenge it but not for a while yet. So Tesla’s future depends on China too. Tesla cars are selling well in China, particularly Model Y, but even there it has had to trim back its production.
So where does this leave Tesla? There are two views in the market. One is that it remains exceptional. It can produce better electric cars than anyone else.
It won’t be special
You can say that it is a faith-based judgement rather than a rational one, but plain fact remains that so far Elon Musk has continued to confound the sceptics. Maybe he can continue to do so. Maybe the next leap forward will be in self-driving cars that he promises also to unveil on 8 August.
The other view is that Tesla is a normal car manufacturer that stole a march on the entire industry by mass-producing electric, seductive vehicles, something that none of them had managed to do before.
Gradually, they are catching up. Tesla will go on growing and be successful in general industry terms. But it won’t be special.
If the first view is right, then a year from now Tesla will still be the world’s most valuable car company. If the sceptics are right, expect Toyota to pass it in value some time before summer 2025 is out.
Need to know
The fate of car companies, and indeed of car industries, has been extremely fluid over the years. In 1950, the UK was the world’s second-largest producer of cars, after the US, and it continued in that position until it was passed by Germany in 1957. There is a video here, which runs through the top 10 car-producing countries from 1950-2019.
The UK was also the largest exporter, as the home market was restricted and the majority of its production was shipped abroad to help pay off war debts. Then the long decline began, with first Germany, then Japan and then eventually China taking over. By 1990, the UK was down to number nine, before dropping out of the top 10 altogether.
That story, along with the disappearance of once-famous brands including Triumph, Austin, Morris, Hillman and so on, is pretty well-known. Less widely appreciated is the near-failure of many individual companies that managed to come back from the brink.
For example, BMW was in desperate trouble in 1959 before the Quandt family took control and developed the new class of medium-sized cars, which proved massively successful. Chrysler in the US had faded vis-à-vis General Motors and Ford, despite excellent engineering, but now as part of Stellantis, which also includes Fiat, is worth $78bn, compared with Ford and GM, both with market caps around $50bn.
I suppose the revival of Jaguar Land Rover by India’s Tata Group is a bit of a similar recovery tale, though it has a long way to go to achieve true global status.
A difficult few years ahead
The question that cannot be answered yet is how well the Chinese motor industry will perform over the next 20 or 30 years. At the moment it dominates the world in the middle and lower electric market segments. If it follows the pattern of Japan and South Korea, it will establish some local assembly plants partly to blunt protectionist challenges but also to hold down costs.
What is not at all clear is how it will treat foreign manufacturers that have set up factories in mainland China. It is a huge issue for VW, and a sizable one for Tesla. There is a lot riding on China and the US maintaining an adequate working relationship through what is inevitably going to be a difficult few years ahead.