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Rise of Tesla

By Ichiro Suzuki Tesla has lately stunned the investment world with a sharp upswing. Having more than tripled its share price in a few months, Tesla has become the second largest car maker on earth, overtaking Volkswagen in market capitalization and is almost twice as valuable as GM and Ford combined. At $240 billion only Toyota exceeds Tesla’s $134 billion (as of February 7), and Tesla is yet to turn profits. (Tesla has become cash flow positive lately.) It is only too easy to dismiss Tesla’s meteoric rise as a bubble, frenzy or irrational exuberance. It seems nearly impossible to apply conventional wisdom to Tesla in order to justify its share price. (See attached article). However, Tesla has been trading in the Nasdaq for ten years. It has been trading on the same old story throughout the decade of bringing up a high-end electronic vehicles to the auto market. The financial markets at times find it difficult to value new, new things, but this does not apply to Tesla. Every move of Tesla and Its founder Elon Musk has been scrutinized for a decade. This is not a company that has suddenly sprung up in the financial markets with a radically new story. It’s hard to think that the markets can be  fooled by Tesla ten years after its debut in the Nasdaq. Everyone agrees that the car industry is facing a disruptive change for the first time since automobiles replaced horses and carriages as a means of transportation over 100 years ago. It is fair to think that the markets know something that we don’t know about Tesla.  Tesla would be a dominant player in the premium segment of electric vehicles, as has been widely expected. Its technology is still ahead of competitors, according to some analysts. Despite a market share as defined by EV unit sales, Tesla might still capture a significant portion of profit market share, leaving others who make inexpensive EVs to settle with small profits. This is the case with Apple’s iPhones in the smartphone space. Despite a modest 15% market share in terms of units, Apple rakes in over two-thirds of profits generated in the entire smartphone market. All the car makers are getting into EVs, but carrying a heavy burden of conventional car-making operations whose future is beginning to look limited. The U.K. has recently announced its intention to eliminate all the combustion engine cars from its roads by 2035, and continental Europe would follow the suit. While every car maker would move toward EVs, only Tesla is freed from heavy fixed costs on combustion engine cars. This could make a huge difference on the value of the company. Rise of EVs and Tesla spells trouble for the current champions of cars, notably Germany and Japan. Making of EVs is considerably simpler than combustion engine cars. The latter requires complex, state-of-the-art production systems and a variety of parts that are made by sprawling support industries. This is why the car industry offers hundreds of thousands of jobs. And these jobs would have to be phased out some time in the future. Detroit and Michigan would be hard hit. However, its impact on the economy would be far greater in Germany and Japan. For Japan, the car industry is the primary source of trade and current account surpluses, after the electronics industry lost competitiveness in the digital age. Deterioration in trade and current accounts could lead to smaller national savings with grave consequences. Smaller private sector savings would make it difficult for Japan to sustain sensationally high level of public sector debt. The country would find it hard to hold that much U.S. Treasury securities, approximately $1.16 trillion as the top holder at present, a touch ahead of China whose economy is three times larger than Japan. These combined effects could exert downward pressure on the currency, and push up interest rates, amid a lost capability to maintain the status quo in the financial markets. It could spell a doomsday for the world’s most indebted government by far. Some pundits started talking about this doomsday as far back as a quarter centuries ago, and long-term interest rates kept relentlessly falling to zero. Bears on the Japanese government bonds might get it right some time down the road, at long last. Worse, Japan’s Ministry of Economy, Trade and Industry (METI) is promoting fuel cell - based cars, as a clean energy alternative. Pushed by the METI, Toyota is allocating considerable amount of resources  into fuel cell cars. Though it is a good technology, it looks EVs are winning the game for the future, making fuel cell also-ran. This makes burdens on Japan’s car industry even heavier. Ichiro Suzuki is a retired senior investment banker and sits on several university boards.


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