Alex Potter, an analyst with Piper Sandler who has long covered Tesla [NASDAQ: TSLA], recently joined Rob Maurer on Rob’s podcast, Tesla Daily. The two discussed Tesla’s Q3 results, gross margins, the challenges facing legacy automakers, FSD Beta, and so much more. Although you can watch the full podcast in the video below, I am focusing this piece on interesting points they both made about legacy auto and the challenges of catching up to Tesla.
Legacy Automaker Challenges
The podcast opened up with the two talking about Tesla’s Q3 results and gross margins. Then they moved into the challenges facing legacy automakers. Linking the two, they noted that one key thing that is working in Tesla’s favor is the ability to vertically integrate its products.
Rob pointed out that there seemed to be a much lower fixed cost basis for Tesla compared to the other automakers, and Alex agreed.
“People have got to be bashing their heads against the wall trying to replicate this. You have all of the organization, all of this sort of intellectual heft and momentum, being consolidated down into a pretty small number of SKUs. You don’t have a ton of products. And then you’ve got a couple of energy things.
“And then, you get massive amounts of demand concentrated on that one thing, which you can build at scale, and so that’s good for gross margin, but it’s also good for OPEX because you have product development teams, you have R&D, and you can concentrate, whereas at an incumbent or any of these other companies, they’ve got dozens and dozens of different — sometimes redundant — products.
“And you have to have smart people working on all those different things at the same time, and in the end, the payoff is a couple of thousand units whereas in Tesla it’s hundreds of thousands of units or a million units.”
Alex explained that this translated to an OPEX (operational expense — a company’s day-to-day expenses) leverage, fixed cost leverage, and this is something that he’s not sure how to replicate. Rob noted that no one, especially legacy automakers, are on the same path as Tesla. He used General Motors as an example.
GM has made several announcements about the EV lineup it wants to have by 2025. “They talk a lot about 25 or 30 different models of EVs by 2025.” By then, Rob added, Tesla’s going to have around 6, while selling 5 times as many vehicles on one-fifth the amount of SKUs.
“They’re not even trying to replicate it in some cases.”
Alex agreed and pointed out that Tesla redefined what is core for an automaker.
“The thing that Tesla really did is sort of redefine what is core for an automaker in the 21st century. And contrast that versus what incumbent automakers believed was core in the last century. And you come into it, you mentioned the vertical integration downstream, but there’s vertical integration upstream. It’s so structurally dissimilar [to what you have with] General Motors, or Volkswagen, or anybody.”
Alex pointed out that VW’s CEO, Herbert Diess, is out there telling the truth about EVs, yet is being crucified for it. He’s facing a no-confidence vote after pressure from the autoworker’s worker council over his belief that VW needs to go electric faster.
Automotive News reported that at the heart of the issues lies in Deiss’ concern that VW will lose its position as a world-leading automaker unless it accelerates an overhaul to compete with Tesla. He’s constantly being criticized for this stance, and Daniela Cavallo, VW’s new works council chief, thinks Diess should focus on the chip shortage instead of social media.
In my opinion, I think it’s not so much about social media but the fact that Diess knows that Tesla is the leader and has not only recognized this but even reached out to Elon Musk to invite him to a VW employee meeting. Perhaps they feel a little bit off about that friendship. However, Diess is just doing what he thinks is best for the company in the long term. The chip shortage will be solved eventually, but will VW emerge as one of the top automakers of the 21st century? It is fundamentally a question of short-term issues versus long-term vision and focus.
Alex pointed out that Diess is the most proactive out of the legacy automakers, most of which still have their heads deep in the sand.
“Even somebody who really wants to and is trying to throw the weight of the entire or substantial part of the German economy and German policy, German workforce, behind one singular mission which is to try to replicate what Tesla’s doing, still it’s a really tough slog.”
Rob added that it seems to come across as if VW is in a worse place due to how vocal Diess is. However, the reality is that it is most likely in a better place. GM and Ford have made similar comments as Diess, but are not as vocal about it. There’s a lot of internal conflict within VW and other legacy companies. Waking up, it seems, will require more than coffee for these automakers.
Another interesting thing that Alex pointed out was just how easy it is to put a press release together. Many of these companies have shown this over the past several months, claiming that by such and such date they will have x amount of fully electric vehicles.
“‘It’s going to blow your minds, and then we’re going to have only electric.’ Okay, you publish that press release and then it’s sort of, ‘Yes, our work here is done.'”
“For a time, you really project confidence. You go and you talk. There’s product unveilings. There’s announcements with battery suppliers and you’re locking in supply or you’re doing this, you’re doing that, but then rubber meets the road and you’re starting now to get — it’s still early innings, right. […]
“You look out over the next several years and there are going to be lots and lots and lots of electric vehicle launches, which is exciting. But it’s also incorrect to assume that there have not been any electric vehicle launches over the last two or three years. And many of them when they were first conceived were billed as the ‘nail in the coffin for Tesla’ and all of this.”
There would have been no problem leading to Tesla being founded if automakers had just focused on creating clean vehicles a couple of decades ago, and Tesla wouldn’t have had a real opening if they had focused seriously on the task a decade ago. But they didn’t.
Think about it. They had the budgets, factories, and workforces. Yet it took Tesla (sorry, President Biden, it’s Tesla and not GM) to come and electrify the automotive industry.
The podcast covers well more than these topics, and I suggest you dive in and listen to it. You can do so here.