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Tesla's skid leaves Old Auto with a new quandary

Liam Denning, Bloomberg Opinion on

Published in Business News

A weird thing happened to the global auto industry during the pandemic: Its valuation roughly tripled to about $3 trillion. Roughly a year on, a lot of other weird stuff has happened, most notably the head of the world’s most valuable automaker trying his hand at running a certain social media platform. The concurrent collapse in Tesla Inc.’s valuation explains a big chunk of the retracing in the industry’s value, just as it did on the way up — but not all of it.

The great bubble of 2021 is no more. But the great rally of 2020 remains, if reapportioned. The electric vehicle wunderkinds aged rapidly. Even with some new faces having arrived, the electrics are actually worth less today than at the end of 2020. Traditional automakers also sold off last year. Having not charged up to the same degree, their decline has also been far gentler. Even now, Old Auto is valued 23% higher than at the end of 2020.

On the electric side, Tesla went down and took all the mini-Teslas in its wake. Plain old reversion to the mean, along with Elon Musk’s Twitter Inc. fiasco and dumping of his own Tesla stock, sank Big EV. But the drama obscured a more pernicious, if banal, development: Tesla’s pressing need to gin up demand and refresh its product line, just like any old carmaker. Including plug-in hybrids, China’s BYD Co. Ltd. surpassed Tesla to become No. 1 in terms of EV units sold last year.

Even so, Tesla still sports the industry’s biggest valuation and, along with BYD, that means two of the top five by market cap are EV makers. The EV sector may have given up all of its gains, and more, since the end of 2020, but it remains six times bigger than at the end of 2019. Electric models, including plug-in hybrids, accounted for a quarter of vehicle sales last year in China, the world’s biggest market. Preliminary data suggest one in 10 autos sold worldwide were electric, up from one in 100 just five years before. Meanwhile, the old guard continues to set targets for and invest in electrification of its own vehicles. Last year saw the arrival of the Lightning, the electrified version of the best-selling model in the US, Ford Motor Co.’s F-150 truck.

Overall, the automakers’ aggregate market cap remains about 75% bigger than it was at the end of 2019 and, within that, traditional automakers are worth several hundred billion dollars more than they were at the end of 2020 after the initial leg of the rally. While the numbers have shrunk from the giddy heights of about a year ago, the industry effectively remains priced for an electric vehicle revolution led by a clutch of (chastened) newcomers and a prosperous future for the traditional companies supposedly being displaced. And all this at the end of a year when global vehicle sales appear to have fallen slightly.

Call it the fog of disruption. Warren Buffett famously said it was easier to pick the losers from transportation revolutions than the ultimate winners. Musk’s aura may be dimmed, but he isn’t being counted out by any means; Tesla still trades at a 76% premium to the S&P 500 on forward price-earnings multiples. On the other hand, traditional automakers still generate big profits from dominant internal combustion models and are starting to catch up on the electrified side.

 

Another element to this dissonance has nothing to do with different drivetrains. An anecdote: I recently took delivery of an electric vehicle and, several months in, one of my favorite things is that when I charge my phone on the built-in induction pad, the vehicle reminds me to pick it up when I park. Clearly, I thrill easily.

The point is that if an industry whose core business remains shifting 90-ish million boxes-on-wheels per year is to live up to even the diminished valuation pop of the past few years, the user experience is the likeliest path.

Technology inside, rather than under, the cabin was certainly a prominent theme at this month’s Consumer Electronics Show. For all the buzz now, electrification itself will likely become commodified to a large degree over time even as it undermines the industry’s current go-to differentiator — other than price — engine power. Features like entertainment, driver assistance and, yes, phone-charging reminders will help brands put a little distance from one another. Even better, drivers might be willing to subscribe for such services, as happens currently with Tesla’s Full Self-Driving monthly package or General Motors Co.’s OnStar.

Selling a box-on-wheels and then getting the driver to pay you recurring fees for the privilege of using it to the full — the razor-blade model with a steering wheel — is the holy grail. And there is no guarantee drivers will go for that or, looked at another way, that the industry can deliver services to justify the charges. Musk’s regular overselling of autonomous driving provided perhaps the only means of anyone even attempting to rationalize Tesla’s $1 trillion-plus peak valuation. Growing skepticism that self-driving will happen anytime soon, perhaps reinforced by expectations being set lower elsewhere in the industry, may also have contributed to the Tesla selloff.

Therein, schadenfreude notwithstanding, lies an attendant challenge for the traditional automakers. As they attempt to disrupt themselves into a more electrified and smarter future, they may not have to justify the sort of insane valuation put on Tesla not so long ago. Yet they must still convince investors that not only can the industry pull off the shift from gears and grease to charging and chips, but also make more money in the process — something Tesla’s recent price cuts are messing with already. Weirdly enough, the Tesla setback that Old Auto quietly welcomes also serves to illustrate the challenge of its own transition.

©2023 Bloomberg L.P. Visit bloomberg.com/opinion. Distributed by Tribune Content Agency, LLC.

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