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Maintain control, dictate the pace, keep competitors at bay. Tesla’s agenda is and always will be focused on innovating at the double. The California group is well aware that its “first mover” advantage in the electric vehicle market will not last forever. In fact, its rivals are preparing for battle. But it’s true that Tesla has truly mastered its industry thus far. Driven by excellent sales of its critically-acclaimed Model 3 saloon, the company has launched its brand essentially everywhere, including in markets that traditionally were loyal to European manufacturers. According to a McKinsey report published in July, Tesla increased its domination of the global electric vehicle market in 2019. Its market share is now 16.2%, up from 11.8% last year. Behind Tesla are Chinese companies BYD (10.0%) and BJEV (7.1%), followed by BMW (5.9%) and Nissan (3.9%).
In order to keep its top spot, Tesla is playing up its strengths as much as possible. Here are at least three of those advantages.
It’s the battery, stupid
This is what really sets an electric vehicle apart from the rest. The battery is the keystone that everything else depends on: driving range, charging time, powerto- weight ratio and a substantial percentage of the vehicle’s manufacturing cost – between 30% and 40%, according to estimates. Tests conducted by car magazines have shown that Tesla has a bit of a head start in this domain, as its vehicles offer a particularly high driving range compared to other brands. How is this possible, you may ask? Although Tesla works with external suppliers of battery cells, such as Panasonic (Japan), LG Chem (South Korea) and CATL (China), it handles all the assembly internally. That strategic decision, coupled with high-performance software management, plays an important role.
But Tesla hopes to go a lot further than that. On 22 September, at “Battery Day” – a tech event aimed at investors – Elon Musk gave a preview of the brand’s future products. He focused on two major objectives, boldly scheduled for 2022: completely autonomous battery production and a reduction in manufacturing costs of over 50%.
This desire to be freed of traditional battery suppliers isn’t unique to Tesla. Several manufacturers, including BMW, General Motors and PSA, have announced similar strategies over the past few months. But as usual, Tesla is the one leading the pack and dominating media coverage, thanks to its eccentric CEO and his 39 million Twitter followers. As a comparison, BMW has just over 2.1 million followers.
And Tesla wants to move fast – very fast. Its goal is to reach an annual production capacity of up to 100 gigawatt hours (GWh) in the next two years, and then increase production to 3,000 GWh by 2030. To put things into perspective, LG Chem, currently the world’s largest battery supplier, has planned to increase its production capacity to 100 GWh by the end of this year, which is enough to equip approximately 1.7 million electric vehicles.
During his presentation, Musk promised a 54% increase in driving range with future Tesla batteries, a spectacular feat due in part to new cells that are larger and more energy- dense, but also a complete rework of the composition of the batteries and how they are integrated into vehicles. Charging time will also be drastically shorter. The much-heralded reduction in costs will be the result of no longer using cobalt, a very expensive element.
However, Musk said himself that the new cells are still in the prototype phase, and much work remains to be done before large-scale production is reached. In the aftermath of the conference, many experts were disappointed at the lack of technical information. The markets also reflected this oversight.
Two days after the event, prominent engineer Venkat Viswanathan, professor at Carnegie Mellon University in Pittsburgh, said that he still had not fully digested all that Musk presented and it would likely require a range of battery experts to analyse fully.
More broadly, much criticism was given to the seemingly very optimistic time frame Tesla presented, but there was little pushback on the company’s ability to carry out the project. “What’s very impressive is Tesla’s ambition to manage the entire process, from the complete design of batteries to mass production,” says Ferdinand Dudenhöffer, a renowned expert in the automotive industry and director of CAR-Center Automotive Research in Duisburg, who followed the video conference live on 22 September. “Such integration would give Tesla a huge advantage over its competitors.”
Is this the key to offering an electric vehicle in the near future that is cheaper than a combustion vehicle with equivalent performance? Musk didn’t hesitate to bring up price on Battery Day, announcing a future model at $25,000, but with no further details on an exact date.
To mark the occasion, the company found yet another way to flex its muscles at the event, unveiling an ultra-sporty version of the Model S, called Plaid. Sales will begin in 2021 at a base price of $140,000. It delivers 0 to 60 mph (96 km/h) in less than 2 seconds, a top speed of 321 km/h, and an almost indecent range of 830 km.
Building factories, video game style
Tesla decided to build its Gigafactory 4 near Berlin, in a leafy location in the Grünheide forest. The new factory will make it possible to manufacture and sell the Model Y, the brand’s new mass-market SUV, in Europe. After being delayed by various objections, in particular due to its environmental impact, this spring the project underwent the double setbacks of the pandemic and the discovery that the ground was looser than expected, which delayed the laying of the building foundations as initially planned. Would this significantly hold up the opening of the factory and the manufacturing of the first Teslas made in Europe? Not really..
In fact, the US company is surprising everyone by sticking to its original schedule, and the building is taking shape unconventionally quickly. Tesla announced that production would begin as planned in July 2021, just over one year after construction began. In comparison, it took two-and-a-half years for the first Mercedes-Benz vehicles to roll off the assembly line at the company’s new facility Factory 56 in Sindelfingen, which began production in September. And there weren’t even any delays.
The RBB, the leading public media covering the Berlin region, took a close look at Tesla’s construction, offering a better understanding of the goings-on behind the scenes of the operation. The US company’s strategy is to complete all the work simultaneously. Even before the final authorisations were signed, dozens of excavators were on site, ready to dig. And even as construction vehicles were still removing tree trunks from the site, blast furnaces were already warming up. The two companies that typically build large warehouses for DHL and Amazon welded and cast hundreds of wall and roofing components at their own production sites. The parts were then transported to the Tesla site to be assembled Lego-style in just a few weeks. The chief construction architect even tweeted his admiration for the project as well as the management in August: “They call us every day from the United States for a very detailed update. It’s impressive.”
“Such a fast construction speed is made possible by Tesla’s internal structure,” says Dudenhöffer, director of CAR-Center Automotive Research. Since the entire structure revolves around Elon Musk, important decisions can be made extremely quickly, whereas in more traditional companies, decisions take much longer.
The process seems to be well established, as evidenced by Tesla’s simultaneous construction of another Gigafactory in Austin, Texas, which began in July 2020 – and Elon Musk teasingly let slip during Battery Day that construction on the Austin site was advancing quicker than in Berlin.
Software engineering at work
During the World Artificial Intelligence Conference (WAIC), held virtually in Shanghai in early July, Elon Musk made a few announcements. By the end of the year, he said, Tesla vehicles would be equipped with a 100% autonomous driving mode – i.e. level 5 autonomous driving, the highest level under the standards drawn up by the Society of Automotive Engineers. It’s a landmark development, and of course it’s one that is partly symbolic due to legal limitations of using such a system on the open road. But it solidifies Tesla’s role as a technological pioneer in the industry. While the major German manufacturers already have similar prototypes (see Swissquote Magazine no. 4 /2020), none have progressed as quickly in terms of driving assistance technologies.
Musk is well aware of this and used Battery Day on 22 September to drive his point home: “[In terms of] the probability of injury, [our priority is to be] 10 times better than the industry average,” he said, praising in particular the ability of Tesla cars to avoid crashes.
The reasons why Tesla is so advanced in this field lie in its unique approach in the automotive industry. The company develops its own technical solutions where other manufacturers depend on specialised external suppliers, particularly for electronic control units (ECUs) and the software component.
“Such a level of integrƒtion will not be available from traditional manufacturers until 2025”
Media outlet Nikkei Business Publications had a learning experience in February, when it completely disassembled a Tesla Model 3 in the presence of engineers from major automotive brands, including Volkswagen and Toyota. Regarding the vehicle’s central control unit, a module that Tesla calls Hardware 3, one of the participants summed up the situation by saying: “We cannot do it.” The module in question, designed internally, is made up of two AI chips linked to a software program that manages autopilot and infotainment features.
Using artificial intelligence helps to constantly improve assisted driving performance. This learning process is based on real driving situations, transmitted by Tesla vehicles to a computer that processes the data with help from the company’s human engineers.
According to the specialists interviewed by the Japanese publication, such a level of integration will not be available from traditional manufacturers until 2025. “Tesla has an enormous advantage in terms of electronic components and software,” says analyst Nevine Pollini of UBP, who is nevertheless critical of the company’s share price, believing it is disconnected from reality.
Is Tesla’s share price doomed to collapse, as analyst David Trainer, founder of the US research centre New Constructs, believes? “Tesla’s stock is traded at 159 times forward earnings,” said the analyst during an interview with CNBC in early September. “We think this is a big, big – one of the biggest of all time – houses of cards that’s getting ready to fold.”
As incredible as it may sound, the current capitalisation of the California manufacturer is higher than the combined capitalisation of the Toyota, Volkswagen, Daimler and BMW groups. In other words, Tesla’s capitalisation is five times higher than Volkswagen’s, even though it sells 20 times fewer vehicles. It’s rather flattering for a company that’s been said to have recorded a loss of $862 million last year.
How does such a market anomaly happen? “Tesla has become a cult stock,” says Nevine Pollini, an analyst at Union Bancaire Privée (UBP). “Young private investors, who are increasingly looking to make stock market investments, are quite fond of this type of tech leader. What’s more, the stock ticks almost all the boxes in terms of environmental, social and governance (ESG) criteria. Tesla can be found in all ESG funds. More broadly, the post-pandemic environment is very favourable for electric vehicles. There’s enormous media hype and governments have massive recovery plans.”
But like Trainer, the UBP analyst agrees that Tesla’s valuation is based on margins and volumes that do not reflect reality. “The market is based on what could happen by 2025, or even 2030, in the most optimistic scenario. And the competition is quite impressive,” says Pollini. “Many underestimate Volkswagen, which is already right on Tesla’s heels with the Porsche Taycan, Audi e-tron and VW ID.3 and ID.4. With an R&D budget of $91 million over five years, the German group clearly has the funds to be a contender. And Chinese manufacturer BYD, which is practically a state company, has significant power.” And that’s not counting the other market giants, including BMW, Daimler, Volvo, GM, Renault-Nissan and Jaguar, as well as fiercely ambitious newcomers such as US group Lucid Motors.
It goes without saying that Elon Musk’s ambition – on full display during Battery Day on 22 September – to produce 20 million electric vehicles per year in 2030 leaves many experts sceptical. In comparison, Volkswagen produced a total of 10.8 million vehicles last year, whereas Tesla barely reached 365,000 units.
So the American group is facing a massive challenge, but it has many supporters. To sum up analysts’ positions, half currently recommend holding shares, one quarter recommends selling and the remaining quarter advises buying Tesla shares. After all, while the brand is known for its over-the-top optimism in terms of sales volumes and timelines, it also has the reputation for delivering what it said it would in the end. One thing is certain: very few companies are as divisive as Tesla at the moment. The year to come will be fascinating.