As Tesla stock has rocketed off the past few years, a lot of people have been trying to figure out why so many analysts got the stock picture with Tesla so wrong … and so have I! I’m digging into some of my past experiences to see how Tesla did things differently than everyone else, and why that gives retail investors an advantage.
In part one (published over a month ago — sorry about that!), I discussed how closely Tesla follows its mission, while analysts are used to companies that use mostly meaningless mission statements.
Today, I’m going to look at how the company culture of Tesla differs greatly from legacy auto, and how I believe auto industry analysts misunderstood Tesla due to a fundamental misunderstanding of the value of legacy auto’s culture.
In many of my earlier articles, I’ve mentioned I have previously worked in a financial position for a company that was publicly traded. When I was there, I held a financial position that allowed me enough insight into the company’s records that I was actually restricted from buying or selling company stock in the open market, as it could have been considered insider trading.
The company I worked for was in dire financial straights — about 10 years prior to my position starting, the company had bought a competitor, merging the two companies together by taking on a massive amount of debt. Interest payments for the financing of the merger were larger than the company had ever made in a year, and after nearly 10 years of telling Wall Street that profitability would come, the company was at the point where banks were threatening to stop loaning us money unless they started to see improvement.
Corporate management underwent a large shakeup, and they brought in external consultants to try to examine the business from an outsider’s position. I was brought in to work with these consultants on the inside, tasked with finding underutilized resources and adding efficiency to them. The company was unsure of how this would work, so they only added internal consultants to a few locations.
I was trained by the consultants and they drilled into me how finding small amounts of money to save in a large company can add up incredibly fast. Find a dollar of savings an hour? That’s $8,760 a year in savings. Find a way to eliminate a nickel of cost on a task that’s done 100,000 times? That’s $5,000 a year. Find just one item like this each week, and you’ll find a quarter of a million dollars in savings a year.
If this is giving you deja vu, note that Elon Musk often makes the same statements about finding ways to improve efficiency in emails sent to the team. Our own Chanan Bos even created a graphic on this topic — saving even pennies or seconds in very frequent tasks, with the latter concept coming from a CleanTechnica interview with top seat production execs at the company.
The larger a company is, and the more ingrained leadership is, however, the more that you’ll hear that this is impossible because this is “the way we’ve always done it.” Inefficiency has inertia. The company I worked for had a lot of inefficient inertia, and instead of being looked at as a positive when I would show up to try to determine how we could improve things, I was met with resistance. The company culture was aimed at celebrating the ingrained management, not rewarding risk.
My location had this ingrained even more than most of our locations, as we had traditionally been the most profitable location in the company, so instead of excitement about getting to look at and improve our operations, upper management instead saw my position as a threat. Would their past leadership be scrutinized if significant savings could be found in the areas they were in charge of and they hadn’t found those savings themselves?
Even with this built-in difficulty, with the backing of upper management, we made incredible strides at our location. Three years after I had started, my location had decreased expenditures more than 5% — saving over one million dollars! That was at the same time as we were increasing revenue and customer satisfaction scores across the board. Our other locations, which had added internal consultants like me that I helped to train, experienced similarly massive shifts. For the first time in years, the company was on track to start making a serious dent in the massive debt we had been burdened by.
There was a light at the end of the tunnel … but never underestimate company culture. Remember the outside consulting company I mentioned that created my position? The success meant their contract was complete. Within a month, my location promoted one of the department heads that had been the most concerned my changes made him “look bad” to supervise me, and his first move was letting me go. And, lest this seem like it was just a single-location issue, within the next 6 months, the position companywide had been reduced from “internal consultant” to “person who runs reports when asked by department heads.”
A year later, the company was back to losing millions of dollars and was forced to declare bankruptcy.
It took me a few years before I understood that the real goal of my position was to shift company culture. We did our best — when I would work together with area managers and we found efficiencies that we could implement, the area managers were given the credit. When we tried something that didn’t work, I would take the blame for any short-term dips in customer satisfaction that may occur. I had become very popular among these managers, but the department heads above them remained concerned that these innovations would lead to their past leadership being questioned, so instead of embracing a new company culture, the company bounced back to what it had been. Since it has emerged from bankruptcy, it has remained on shaky ground.
In retrospect, it’s clear to me that the failure of that company resulted in large part because upper management never bought into the improvements we were making. It was only enforced with me by watching one of our main competitors during the same time, which found themselves in an incredibly similar financial situation but started their response by bringing in a new CEO who was known for embracing innovative ideas within the industry. In the same period that the company I had worked for declared bankruptcy, they tripled their market cap.
If you’ve read this far, I don’t blame you if you’re confused about what this has to do with Tesla, but I feel like it hits at the heart of the misunderstanding that many traditional auto analysts have had about Tesla’s major advantages.
Legacy Auto vs. Silicon Valley
While the job I worked in had nothing to do with transport, I have found the parallels with legacy auto to be extremely poignant. I was recently listening to an interview with Elon Musk, and he was talking about the inefficiencies that management structures can bring about. In particular, he called the modules in the Model 3 battery pack an artifact of an earlier time when the Roadster had 16 modules — if one went bad, they could replace it — but that the Model 3 has no way to replace a module, so there’s no reason to keep them there.
But the fact that the modules are there and Musk sees that as an issue highlights an important point. Musk comes from a Silicon Valley startup mentality, and in Silicon Valley the celebrated method is to “move fast and break stuff.” The culture of Tesla is to find efficiency improvements and implement them as quickly as possible.
Perhaps no one better encapsulates this than the excitement that Sandy Munro has for the company. Munro consults with many auto companies, and if you watch a lot of the interviews that he gives, you can tell that he is used to often not getting much traction with those companies. Munro often celebrates how quickly Tesla moves and the innovations it creates. He was practically giddy when he shared this information on the Octovalve in May 2020:
By August, Munro had noted that the Octovalve had already received 13 unique design changes to improve the design further. To put it mildly, Munro is not used to companies that make changes like this.
Neither are stock analysts that cover the auto industry. We saw a lot of articles, especially a few years ago, explaining that Tesla’s refusal to adhere to the structure that legacy auto did would be a huge disadvantage, with little real reason to say why it wouldn’t work other than “but that’s the way it’s always been done.”
Meanwhile, without years of experience covering an industry with over 100 years of ingrained culture, retail investors looked at Tesla’s relentless innovation with fresh eyes and were excited by it. Instead of feeling like what Tesla was doing was reckless and scary, retail investors saw Tesla as innovative and daring.
Auto industry stock analysts, who would have had years of listening to executives explain the benefit their companies derived from being slow to change would have been additionally predisposed to believe that Tesla would soon be another failure. Besides, hadn’t all the other upstart automotive companies in the last 50 years died?
Put simply, auto industry stock analysts had developed the same biases that the legacy auto companies had developed, and were therefore loath to change them. We still see a bit of this today, where a Tesla bear will highlight the price-to-earnings number that the auto market had used for years before noting that Tesla is vastly overvalued because of how far outside Tesla’s number is from the traditional metric. (As noted in an article yesterday, Tesla is now valued at 1,000× trailing earnings.)
Once again, we’ve got a situation where the lack of experience that retail investors had created a significant advantage for those investors to look at the company through clear eyes. Many retail investors, myself included, saw the rapid rates of innovation as a huge positive.
I’ll give auto industry stock analysts a bit of credit here though — none of them have lived through a major disruption in transportation, so identifying one would be extremely difficult. If modern stock analysts existed at the dawn of the 20th century, I imagine they would find a hard time justifying giving a company like Ford a premium over the well known horse and buggy companies of the day. After all, those companies were established and had been around for ages, and it would be difficult to understand how quickly and easily they could be supplanted by a new competitor.
But I think the disdain with which many of them looked at the pace of innovation of Tesla is inexcusable. It portended a company willing to move quickly to not just compete, but to stay ahead of its competition.
It seemed that both the financial press and retail investors agreed that the Model S was the best electric vehicle ever made. The difference was that where retail investors saw a company culture of constant innovation that would give Tesla the edge in future electric vehicle development, auto industry stock analysts saw it as a starting point that would quickly be eclipsed by another company, since the culture of legacy auto has never been to innovate quickly, even when they know it’s what creates better sales.
(As an aside, in the future I want to dive into a book from 1995, Comeback: The Fall & Rise of the American Automobile Industry, which detailed how the same issues that threaten legacy auto today threatened them in the not-too-distant past too. But that’s for a different time!)
Next Time On …
At the end of part 1, I said that I’ll be discussing the way companies often give analysts information, how companies use that method to benefit themselves as well as analysts, and how Tesla does things wholly differently… once again giving retail investors a huge benefit. And then I sort of took this side track. So, next time — which I promise will be in less than a month — I’m going to actually cover that!
*Disclaimer: I am a Tesla [NASDAQ:TSLA] shareholder who has purchased shares within the preceding 12 months. Research I do for articles, including this article, may compel me to increase or decrease stock positions. However, I will not do so within 48 hours after any article is published in which I discuss matters that I feel may materially affect stock price. I do not believe that my voice could or should influence stock price by itself, and I strongly caution anyone against using my work as your sole data point to choose to invest or divest in any company. My articles are my opinion, which was formulated using research based on publicly available data. However, my research or conclusions may be incorrect.