Elon Musk’s master plan for Tesla (TSLA)

Last week, Elon Musk issued his second master plan for TSLA as a blog post on the company website.

The plan has four parts:

autonomous driving, with the goal of making self-driving cars 10x as safe as those operated by human drivers.  The main issue here is, according to Musk, compiling enough safety date to convince governments to allow autonomous driving on public roads

expanding the product line, to include pickup trucks and compact SUVs, plus heavy trucks and urban buses.

Although what he writes on this topic is not 100% clear, one goal under this heading seems to be to reinvent the auto manufacturing process in a way that the new/improved factory is 5x – 10x as efficient as current ones.  One ambiguity I see is whether this means 10x the efficiency of, say, a Toyota plant, or 10x the efficiency of the current TSLA operation.  I presume he means the former.

Another is exactly what “efficiency” is.  I’m taking it to mean that Musk intends to create factories that, for the same capital investment, will produce 5x – 10x as many cars in a given time as current factories do.  My cursory inspection of auto 10Ks (other than TSLA, I don’t think I’ve owned an auto stock since the 1980s) tells me this won’t mean a huge jump in unit profits for any auto firm, including TSLA, since most of the costs of making a car are in materials and labor, not capital equipment.  Greater efficiency would boost overall profits, however, as well as allow TSLA to dramatically increase its vehicle output.

sharing.  Musk thinks that in an era of autonomous driving, some people won’t own cars themselves anymore.  They’ll simply call for one from a sharing service when they need it.  Other people will own cars but will allow their vehicles to be used in a sharing service when they don’t need them.  TSLA intends to organize sharing services for its vehicles.

This is a much more revolutionary statement than it seems.

The average car is used only 10% – 15% of the day, according to Musk.  If sharing boosted that usage figure to, say, 30% in highly populated areas, then those regions would need only half the cars they do today   …maybe fewer.  At some point, this would mean an implosion in demand for new autos–and the end of the car manufacturing industry as we know it.

merger of TSLA and SolarCity (SCTY).  In his Master Plan, part deux, Musk says he wants to create a “smoothly integrated and beautiful solar-roof-with-battery product that just works, empowering the individual as their own utility, and then scale that throughout the world. One ordering experience, one installation, one service contact, one phone app.”

He says this can’t happen while TSLA and SCTY are separate companies, something he describes as “an accident of history.”

I’m not sure I buy this.  I do think that Musk created clear economic superiority of TSLA over SCTY when he decided to place the Gigafactory for solar batteries inside TSLA.  To my mind, that makes SCTY radically dependent on TSLA today.  Merging the two companies would put SCTY back on an even footing.  For TSLA shareholders, arguably the main benefit of the combination is obtaining SCTY at a cheap price.

“To the People of New Jersey”: from Elon Musk

Elon Musk, CEO of Tesla, wrote a blog post last Friday giving details of the circumstances of the revocation of Tesla’s licences to sell cars in the Garden State.  The post was apparently also sent to every New Jerseyan on the Tesla mailing list.  It follows a post three days earlier by Mr. Musk, “Defending Innovation and Consumer Choice in New Jersey,” in which he alerts readers to an about-face by the Christie administration.  After months of negotiations, during which Tesla believed the question of its licences would be put to legislative vote, Musk says the governor decided to have the Motor Vehicle Commission declare that cars in New Jersey can only be sold through third-party dealer networks.  The rationale?  …”consumer protection.”

Musk is considerably less than amused by this development.  At one point in his long post on the 14th, he manages to allude to mafia influence and to the traffic obstruction scandal Mr. Christie is embroiled in, both in the course of a sentence or two.

Musk also derides the notion that anyone would consider car dealerships to be paragons of consumer protection.  He points out as well that the MVC is “protecting” citizens against the vehicle that has achieved the highest ratings Consumer Reports has ever given to any car.  He also cites business publication polls in California, North Carolina and Texas in which overwhelming majorities favor the direct car sales over sales through dealerships.

More substantively for investors, Musk also outlines the difficulties Tesla would face in trying to sell through third-party dealer networks.  This model calls for dealers to sell large numbers of cars, and to make the bulk of their profits through (expensive) aftermarket services.  Tesla’s electric cars don’t require much servicing, however.  At least some of that can be done through software updates over the internet.  In addition, the fact that Tesla will likely sell only 35,000 cars worldwide this year (that would be 0.25% of the US car market if they were all sold here) means Tesla can’t be a significant part of any dealer’s business.  So the dealer might use the Tesla name to get customers onto his lot, but he’s likely to try to steer the client toward more profitable brands.

It’s also striking that, as Musk points out, every independent electric car maker who has tried to sell through existing third-party auto dealers has failed.  Musk says the last successful independent in the US was Chrysler a century ago,

On to Ohio, where the next Tesla vs. dealers battle is being fought.