Efficient Markets And The Tesla Gamble

Last year Bloomberg and, I suppose everyone else, asked will Tesla ever make money? They lose $4000 on every model S they sell. What else could they have done with the money?

Solid investment?: source
Solid investment?: source

As anyone who reads the financial news knows, the world´s economy is awash with cash and has been for almost a decade. The Bank of Japan is so keen to get people to spend their lucre that they are now charging negative interest rates. The surplus of cash has led to commodity and asset bubbles as far as I can tell. Want to know why a zero-bedroom windowless chamber in London costs £800,000?

Because someone thinks it is a better bet than leaving the money in a bank.  So, if there was ever a time to find loose money and spend it launching a new business this is that time. If you run out of money someone will give you some more.

Money loser: caranddriver.com
Money loser: caranddriver.com

One argument runs that Airbnb and Uber’s real secret is not that they have a great idea but that they are using easy access to capital to spend the competition into the ground. In the realm of hotels and taxis this is easy as most of the players are small firms living hand to mouth. As soon as certain proportion of the competition have gone to the wall, these new firms will then raise prices and start acting in a monopolistic fashion. This is what Amazon has done with books.

Tesla is not in the same position. Its competitors are not mother-and-father businesses but mighty combines such as Toyota, Ford and General Motors. Tesla is burning through cash at a huge rate in the hope that it can build a customer base and steal sales from its peers. This is possible because at the moment putting money into Tesla looks like a good idea compared to keeping it in the bank or buying something else.

2016 Tesla Model X: autobodyprice.com
2016 Tesla Model X: autobodyprice.com

The question is this: would that money not have achieved a worthier goal if it had been spent on public transportation?  And why hasn’t the money been spent on sustainable transport instead? The answer is that while corporations are free to spend money on any idea no matter how pointless, the governments that created the money using quantitative easing are not free to spend money on anything, however much the need exists. All across the world the mantra is that smaller government and less government spending is the order of the day.

I am wondering as we discover that Elon Musk is demanding his Model X is sold at a profit, whether the money spent on his electric cars was a mis-allocation of resources. What if European governments had spent that money on more or better trains? What if the money had been spent on making our cities more energy efficient? It’s true that an electrically powered car is more eco-friendly way to get about than a petrol-driven one. But better than that is to avoid having to travel in the first place and, if you do have to, to take a train or bike. They say the best is the enemy of the good, but in this case, the good is the enemy of the best.

Author: richard herriott

I like anchovies. I dislike post-war town planning.

14 thoughts on “Efficient Markets And The Tesla Gamble”

  1. Much like Jeff Bezos at Amazon, Elon Musk has been looking to the long game. As much attention as it attracts, the main purpose of Tesla Motors is to drive the development of and demand for rechargeable batteries. His biggest play is the Gigafactory near Reno, which promises to flood the market with cheaper large capacity rechargeables. At that point everyone from GM to Toyota to Home Depot to Trina Solar will be beating a path to Nevada, creating a boom in demand with Tesla at the centre as OEM.

  2. Another key aspect of the Uber or Amazon model is aggressive ‘tax optimisation’. While that may not apply to the same extent to Tesla, I’m guessing they’re getting a fair amount in subsidies, rebates and incentives. But at least these can be seen as a form of investment which will benefit society in the long run, and not just the private interest of a few.

    1. Amazon’s tax practices are a disgrace, pure and simple. But our governments stuffed with well-healed tax evaders create the environment where these practices continue to prosper.

  3. The US/California government money was/is spent for a good cause. Tesla managed to make EV’s fashionable and by doing so accelerated public acceptance of EV’s. The anti-EV lobby is defeated. The fuel cell lobby needs to be alarmed: battery technology is improving on capacity and cost.

  4. It’s appalling how persistent the efficient market hypothesis on the one hand and the notion of inefficient (and generally useless) state bureaucracies actually is.
    I suppose that you, Richard, are fully aware that is not that easy to compare money spent by Tesla with money (not) spent by government. There is, at least, the detour via taxes, as Laurent rightly points out. There are alternatives to the dominant austerity regime. What’s lacking is the will – and maybe the means – to enforce them.

    1. I used the term ironically. Corporations waste Money all the time and are as full of inefficient people as state organisations except states are accountable and corporations much less so. By and large I prefer to see both private and public economic activity as complementary: fruit trees and shade trees, as it were. We need both and at the moment the bias is against public economic activity. I was wondering here if the money used by Tesla would not have been better spent directly on sustainable transport instead of on luxury private cars.

  5. Sorry, it seams that I haven’t made myself clear. I didn’t mean you – your irony (and your point on public transport) was well taken.

  6. The larger point is that Musk wants to drive down the price of batteries. This will be a game changer as far as how we consume energy in any number of spheres. We have already seen this with solar cells, China’s decision to weigh in on their production bringing enormous economies of scale, driving down their cost to something like 10% of their previous price and sparking an enormous worldwide boom in demand. The missing part of the solar energy equation is storage.

    In the USA, that bastion of energy economy, people living in rural areas can on the odd occasion suffer electricity supply issues such as blackouts or brownouts (reduced supply). The solution reached by some enterprising folk has been solar cells trickle charging old truck batteries. Whilst this solution won’t keep the washing machine running for days, it does at least run a few LED lights at night, stop your freezer from defrosting, and keep Junior’s iPad charged so he doesn’t become a pain in the ass. And it’s cheap.

    Conversely, the current UK Conservative government has a frankly appalling record on renewable energy, slashing subsidies left, right and centre in the name of austerity. One such cut subsidy has been the Feed In Tariff, whereby people offset the cost of installing solar cells by supplying energy to the National Grid at a fixed price. This had the effect of lengthening the time a typical solar installation will take to pay back its own cost from eight to 16 years. But who stays in the same house that long these days? As a consequence of this government interference in a hitherto secure investment, the UK solar installation market collapsed overnight. Their friends in big energy must be pleased.

    The solution to both problems is cheap at-home energy storage. This is another of Tesla’s big long term plays, recently launching the Powerwall and Powerpack. These are currently expensive units for sure, but that cost will inevitably decline with time. Make home batteries cheap enough and the government set Feed In Tariff subsidy becomes a reduced part of the economic equation, as homes create and retain the larger proportion of their own energy supply.

    Where the home energy storage market will really lift off however is when significant numbers of degraded battery packs start hitting the market. At best a solar cell has an energy conversion rate of around 20%; link that to a power pack with a retained charge of 40% of original capacity and you are still converting and storing a huge amount of energy – energy that, let’s remember, every day literally falls from the sky. That we aren’t doing it already is purely down to economics. But the tipping point is coming, and soon.

  7. A while ago, someone made the point that a company like GM wouldn’t be looking at Tesla’s technological success and cursing themselves for not having done it themselves, they’d just be biding their time until all the problems had been ironed out. Elon Musk is unlikely to be the sort of guy who’s always wanted to run a car company – anyone rational would run a mile from the prospect. So it’s not unreasonable to assume that he’s just looking at the cars as something to showcase his batteries and charging network and, in 5 years time, he’ll be happy leaving the field to the old players to fight for market share over.

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