Why Tesla isn’t the future
The car manufacturer Tesla has always been an internet darling and in recent days much hay has been made about the fact that the companies market capitalization has made it the second most valuable car company in the United States^1. This is undeniably a significant milestone and good new for Tesla but a reality check is in order for both investor betting on the company and internet fans celebrating the success of their idol. The stock market is prone to buying into the hype as anybody familiar with the dot-com bubble is aware of, this effect is particularly pronounced with young silicon valley companies such as Tesla. The high-tech nature of tesla and their promises of being the future have caused many to ignore some very real problems present in Tesla such as limited market, low profitability and high-risk investments.
Tesla cars are fundamentally a luxury with even their cheapest planned model costing more than 20% more than the average purchase price of a car in the united states. The market for luxury cars are limited and they only make-up about 10% of the automobile market. It is possible for Tesla to make a healthy profit and generate profits by concentrating on this market but this created a hard-cap on their sales and limits their scalability. Tesla has yet to create any competitive low-end cars as even their model 3 is more than 20%^2 the price of a normal car. While the cars have received almost 400,000 pre-orders, it remains unproven how many pre-order will translate into sales and if the model 3 will be able to take over the market. Telsa car prices have to come down if they want to achieve their mission of transition us away from gasoline cars
This brings me to the second major issue with Tesla, Scaleability. Tesla has to this point only produced around a 170,000 units^3 in its 13 years of existence for comparison, Ford has sales of almost 2.5 million in 2015 alone. Silicon valley companies have always had problems with scaling up from their initial model and while Tesla has taken steps such as the creation of the Giga factory, it’s not yet demonstrated its ability to produce the number of cars required for it to achieve the profits expected by it shareholders. This problem is exacerbated due to their need to create their own infrastructure of superchargers to deliver their cars biggest selling point, fast charging. Tesla hopes for its supercharger network becoming a new standard for electrical cars has proven rather hollow as no non-tesla supercharger station has come into existence. This has cause Tesla to have to spend a huge amount of capital creating charging stations with almost no end in sight.
This brings me to my third issue with Tesla, it’s highly dependent on governmental subsidies and tax breaks to maintain profitability. Tesla has only recently started making a profit making them easy hurt with higher taxes. Tesla and its buyers have received numerous tax incentives to buy the car despite the mixed evidence for the cars environmental benifits^4. Many of their sales in the united states are being driven by a tax-credit given to the first 200,000 electrical cars from a certain company which will soon be withdrawn^5. This removes one of the biggest incentives to buy a Tesla and causes the car to become more unaffordable. Lookin beyond that, Tesla as a company has received almost $2.391 billion^6 in tax-break and subsidies whose continuation seems unlikely with the current Trump administration, while many of these subsidies are on a state-level and unlikely to be withdrawn by Trump, His victory has created a chilling effect and reduces the likelihood for Tesla to receive future subsidies. A removal of tax breaks in America would almost certainly be a huge blow for Tesla given the huge investment, it has made there. Europe is unlikely to prove much better as many governments lack any tax-incentive scheme for electrical cars and the market for automobiles is far smaller while China prefers to fund and support home-grown companies which almost certainly arise soon. Markets outside these countries are either too small or lack any Tesla presence.
In summary, Tesla faces numerous issues from a bad geopolitical climate to a small market size that is being ignored by both the stock market and the most rabid Tesla fans. These issues need to be solved before Tesla can fulfil it promises both to its stockholders and to its buyers. It’s quite likely that the future of automobiles will be electric but Telsa isn’t the only game in town regarding the technology and the company itself faces huge structural issues before it will truly be able to change the world.