Disruption

Investment Analysis Clubs Saul’s Investing Discussions
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A post from Stock Advisor by Smorgasbord1, this captures a LOT of what we’re looking for with investments. Not ALL investments, certainly, but for the investments that will be the portfolio transformers… and the business icons of the future:

https://www.youtube.com/watch?v=2b3ttqYDwF0

Partial slide deck (video has more): http://www.catc.ca.gov/meetings/Forums/Disruption_of_Transpo…

If you don’t believe Tesla’s energy business is going to be big, you should spend an hour and watch Tony Seba’s presentation.

Seba starts off with the well-known to this board example of cars replacing horse & carriage in only 13 years, and how Kodak went from having its best year ever in 2000 to filing for bankruptcy in 2012. He brings up an example of AT&T in 1985 asking McKinsey what the adoption for cell phones would be in 2000. McKinsey’s answer was 900K phones. It actually was 109Million - so they were wrong by 2 orders of magnitude. His point? That experts and insiders not only don’t get the future right, they miss it by a large margin.

I won’t go into the TaaS (Transportation as a Service) aspect, since we’ve discussed that in other threads here, but it’s also interesting to point out some of the other disruptive changes that have happened. For instance, in 2000 the world’s first TeraFlop computer (ASCI Red) was built at a cost of $46Million. Today, you can buy an 8 TeraFlop board from Nvidia for $600, intended for use in Autonomous Cars (Tesla has a stripped down version in Model 3, btw).

On the energy side, Seba gets into solar energy and battery storage costs, and predicts big changes there as well, pointing out that for islands solar is already cheaper than the current most used generation technology - diesel generators - and so the shift is already happening there.

I think best argument that Tesla Energy bears have is that Tesla will have serious competition fighting for these energy dollars, and that the competition won’t be a lame as the entrenched automakers have been thus far. And that’s a fair argument. But, to me that doesn’t rise to the level of Tesla’s Energy business not being worth anything at all, which is the view of some Tesla bears today.

Rob
He is no fool who gives what he cannot keep to gain what he cannot lose.

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If you don’t believe Tesla’s energy business is going to be big, you should spend an hour and watch Tony Seba’s presentation.

Investors are more interested in very profitable.

When half of Fooldom was GAGA over SolarCity I predicted it would be a failure. So Musk bailed out his relative (or was it his investment he bailed out?). SolarCity is not the kind of business I want to invest in and Musk is not the kind of manager I want to invest in.

Who knows, maybe Tesla’s bankruptcy will set records… :wink:

Denny Schlesinger

6/22/2016: "I’ve been negative on SolarCity from day one "
http://discussion.fool.com/i39ve-been-negative-on-solarcity-from…

1/4/2014: "In my view, the biggest risk at SolarCity is the spread. They guarantee to the customer electric power at 10% or so discount on the utility company rate for a period of 20 years. Since they don’t have the capital they borrow to build their installations. Forget the electricity for a moment and think of them as a bank. They borrow money to build the installations and lend it to their customers. This is great as long as their cost of money is less than what they charge the customers. But what would happen if interest rates go up and fossil fuels go down? In effect they would be in a spread squeeze like the one that broke the S&Ls.

I’m not saying SolarCity won’t make it. I’m saying I’d put my money elsewhere."
http://discussion.fool.com/in-my-view-the-biggest-risk-at-solarc…

Two and a half years later Musk “saved” SolarCity.

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When half of Fooldom was GAGA over SolarCity I predicted it would be a failure.

I also was not a proponent of Solar City and did not invest in the company.

It would be wrong, however, to equate Tesla’s energy business as just Solar City with a new label. Everything from the business model to the actual product has changed, not to mention the synergy of having the entire energy generation → storage → consumption line.

Solar City sold panels. Tesla is selling solar roof tiles that look like nothing else out there.
Solar City sold door to door. Tesla has completely stopped that sales model and now uses only online and Tesla stores.
Solar City was just the panels, Tesla energy is roofing, storage, and even a car - all sold from premium high-traffic locations.

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It would be wrong, however, to equate Tesla’s energy business as just Solar City with a new label. Everything from the business model to the actual product has changed, not to mention the synergy of having the entire energy generation → storage → consumption line.

Analyzing Solar City by itself was easy, Tesla’s “package” is much more difficult to evaluate but

  1. Cars are commodities
  2. Batteries are commodities
  3. Electricity is a commodity

Tesla is taking on three industries singlehandedly.

Denny Schlesinger

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When it comes to commodities supply and demand is almost everything.

Perhaps the rest of the world thinks that Tesla’s plans are so egregiously in error that real competition will not spring up until it is too late to stop shareholders from profiting wildly.

As things stand now there still is no real competition in electric cars. It is the iPad vs. everyone else’s tablets. I don’t even think that is analogous, but is exactly accurate. A Tesla is to an iPad as every other electric car is to every other tablet out there, and some of those are awfully nice tablets. Doesn’t matter.

I can see that happening, this supply and demand mismatch that could take a lot of time for competitors to try to catch up with. That can create tremendous scale for Tesla making true competition ever more difficult.

As such, there is even hope in the energy business. The car business, I believe I am quite accurate in my comparison. And I can say that Samsung creates wonderful products that in most ways, head to head, are superior physically to and iPad. Doesn’t matter.

True, true, iPad sales are on the decline lately. Why? Disruption from above and below. The iPad is not as good as a laptop but is nearly as expensive (and in many cases is more expensive), meanwhile for most people a large phablet phone accomplishes all they would want a pad for.

Thus, even that analogy may be apt, there needs to be some disruptive sort of vehicle or business model.

Tinker

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https://csimarket.com/Industry/Industry_Profitability.php?in…

Gross Margin:

Ford/GM = 13%
TSLA = 20%+

If Tesla can take significant market share, with greater efficiency (no dealerships, no pension debt), and with a greater net profit (after build out of factories)…

HP

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When it comes to commodities supply and demand is almost everything.

The low cost commodity producer wins.

iPhone vs. Tesla: it’s far fetched to compare an under $1,000 consumer electronics product to a $50,000 one. The issues here are the willingness and ability of incumbent car makers to disrupt their cash cow models and the cost of electricity falling faster than the cost of fossil fuels. The electric drivetrain has a sure advantage over the ICE drivetrain.

But Tesla, the car, is only one part of the puzzle.

Denny Schlesinger

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Note that Rob’s intent with forwarding my post was not so much to talk about Tesla specifically, but to talk about how disruption changes the world.

For instance, take AT&T hiring McKinsey to tell them how many cell phones will be in use 15 years from then. McKinsey’s answer was wrong by two orders of magnitude. I don’t believe this is a unique example of experts failing to see the coming disruption.

Even when the disruptive product is available on the market, people often don’t see how it changes things. There’s Balmer’s famous laughing off of the iPhone in 2007, but perhaps even more interesting is how Nokia and Sony and Blackberry, which already had big screen smartphones, got blindsided anyway. Heck, I even owned a Sony P800, which was completely touchscreen.

When iPad first came out, many were dubious it would be successful. “Just a larger iPod Touch” was a common dismissal. And yes, people dismissed not only the Tesla Roadster, but Model S as well.

In all these cases, the “new thing” was lacking something the old thing had - whether that be a keyboard or a multi-process operating system or a way to quickly refill a tank. But, the new thing had other benefits that out-weighed what was missing, at least for some applications, and so the companies were able to build upon their successes, and the new things just got better and better.

It’s not just things. Look what Salesforce did to SAP, Amazon to Borders and then almost all of retail, Netflix to Blockbuster - the list of disruptions is surprisingly long.

In this particular case, Tony Seba is predicting that EVs are not the final disruption in transportation. In his mind, EVs have already beaten ICE vehicles. Now, he sees that when AEVs (Autonomous Electric Vehicles) are ready, the very model of individual car ownership will change. It’s no longer that people will buy Teslas instead of Toyotas, it’s that people won’t be buying cars at all. Between the mileage longevity and lower costs per mile for EVs and lower insurance rates from autonomous driving, it will be practical to run what might be described as Uber with robot driven vehicles. Call a small car to take you to the mall, hours later call an SUV to take you and your purchases home. Call a car to pick your kid up at school (only his/her smartphone unlocks the car) and take them home or to soccer practice. Seba predicts this will save the average American over $5000 a year, so the change-over will be swift.

Anyway, the larger point here is to think about what Disruption really is and how to identify it. Disruption often gets dismissed as a joke on HBO’s Silicon Valley, but it really is a thing to which we should be paying attention, as it causes teutonic shifts in which companies thrive and which die.

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…it causes teutonic shifts in which companies thrive and which die.

That obviously should be tectonic shifts. Disruption is obviously not limited to Germany.

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  1. Cars are commodities
  2. Batteries are commodities
  3. Electricity is a commodity

3 - yes, though electricity source determines pricing
2 - sure. the main issue in the short term is availability
1 - not quite. Tell that to BMW. If it were true we’d all be buying the Amazon Basicsmobile. At this level fashion comes into play.

Graham

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The issues here are the willingness and ability of incumbent car makers to disrupt their cash cow models and the cost of electricity falling faster than the cost of fossil fuels. Not the cost of electricity but the cost of BEV - maybe that is what you meant. Electricity cost is semi stable because utilities have mostly fixed costs and make long term contracts. As we all know gasoline prices fluctuate. Historically they stay between fairly narrow ranges for years then suddenly explode one way or another. Which way and when? Who knows.

I don’t think that there is any doubt that car companies need their ICE cash cow (they have large debt loads) or that they are spending billions on their ICE cars , keeping up with regulations. Or that the cost of BEV is falling faster than the cost of ICE.

For several reasons I suspect Tesla is and will be the low cost producer of BEV.
And yes even at tens of thousands of dollars, branding counts. Look at the old NUMMI plant, it made virtually identical Chevy and Toyota on the same line. Yet both new and especially used you could get the Chevy for much less. (Been there done that)

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why does everyone ignore the Nissan Leaf as the low cost competitor of the Tesla 3? Seems like Nissan has produced over 200,000 Leafs worldwide. Price is ~$30k. New sportier Leaf 2 design coming next month. Why is Tesla the automatic winner of the low-cost EV race? Nissan has three operating factories that can produce 250,000 Leafs annually (in three different countries)? These factories are already producing Leafs at a rate consistent with demand. Did someone say “competition”?
Art

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<<<why does everyone ignore the Nissan Leaf as the low cost competitor of the Tesla 3? Seems like Nissan has produced over 200,000 Leafs worldwide. Price is ~$30k. New sportier Leaf 2 design coming next month. Why is Tesla the automatic winner of the low-cost EV race? Nissan has three operating factories that can produce 250,000 Leafs annually (in three different countries)? These factories are already producing Leafs at a rate consistent with demand. Did someone say “competition”?>>>

Art,

There are reasons to ignore the Leaf (and I don’t believe I have in my analysis).

First, I personally know the Tesla S and the Leaf. In fact I leased a Leaf simply for the tax credits. I was tempted to simply lease 3 or 4 of them just for the tax credits and just park them. Georgia, however, has now wiped out the tax credit, and the leasing company usually keeps the Federal tax credit.

The Leaf is an awesome and fun car to drive. I loved having it for in-town driving. Not only is it fast, roomy, and reliable, and I got the highest end Leaf with the leather seating and what not (not gonna sit on cheap cloth like most Leaf buyers) but it has a luxury like ride for in-town driving. It simply puts less wear and tear on your body with all the stop and going that happens when driving in-town.

It is also an awesome car on the interstates. Great acceleration, easily holds 80, that sort of thing.

The problem with the Leaf is that its battery is range limited. Drive it on the interstate and watch the battery drain rapidly. It uses huge chunks of battery when driving on the highway.

In town you get about 80 miles.

You simply cannot justify paying ~ $35k for a car that is range limited like this. It is only with the tax credit that I justified it (frankly I needed the credits and the value of the credits were greater than the cost of the car, and I got to pay the car over the course of the lease while using the credits immediately).

As a value proposition, a high end Camry was less expensive and offered much more utility. The Leaf cannot be used as your sole automobile unlike a Camry, that will also be larger and come with greater features and of course unlimited range.

Leaf vs. Tesla S (I have not driven the 3, so assuming the 3 will have many similar characteristics).

The Tesla has both a frunk and a trunk. The Leaf only has a hatchback. Tesla is able to create excessive storage space in this manner that Nissan was not able to.

Range is far greater in the Tesla.

Acceleration - the Tesla (including the 3 from figures I have seen) has far faster acceleration.

The Tesla, despite having both a frunk and a trunk, also has even more interior than the Leaf (I am talking the 3 here).

The Tesla electronics are big screen and ultra modern. The Leaf interior is no different than your lower end compact car.

yet the 3 and the Leaf still cost the same.

I do not know what features the Leaf 2 will have. Perhaps it will add many of these features to equal the 3. If so, then reevaluation is in order.

But as the cars stand now, you can see that the Tesla is clearly superior in every single way, despite the Leaf being a great car.

Tinker

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the Leaf is a decent car but short ranged . Not really S or X competition. Will the new longer range Leaf compete with the 3?
Wait until road tests are out.
Because in theory the Bolt competed with the 3 but one has poorish sales and one has 500,000 reservations.
In any case the BEV market will eventually overtake the ICE market, did you expect Tesla to have all of it? New entrants will grow the over-all market . Maybe once a mainstream buyer can be convinced to consider or test drive a Leaf he will do the same with a Tesla

A huge differentiation - charging networks. Or lack thereof. Because without a ubiquitous true fast charge network a BEV has very limited appeal. Many of the early adapters have already bought or will be buying Teslas.

Leaf Bolt Tesla 3 - none can be described as “low cost”.

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As tinker points out almost any BEV car is a treat to drive.
They are just better. But Teslas are More Better.

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According to a report from Macquarie Bank, 88.1 million million cars and light commercial vehicles were sold worldwide in 2016, up 4.8% from a year earlier. Of these, 17 million were sold in America.

The Leaf 2 will be shown on September 5th. Can you wait for a little over three weeks before declaring the winner? After all, we aren’t comparing the Tesla S or X to the Leaf. I don’t suppose any of you have driven a Tesla Model 3, yet…

Hey, I like the Tesla - but gee, there will be competition worldwide - 71 million cars worth of competition. I’m not an expert but I’ll guess the range of the new Leaf will be roughly the same as the Bolt and Tesla 3. And recharging stations will be available at all Nissan dealerships, I suppose?

Anybody remember Kaiser-Frazer? They produced 750,000 vehicles in the late forties early fifties. They owned the Jeep brand. They went bust.

Art

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And recharging stations will be available at all Nissan dealerships, I suppose?

The history of this approach is not encouraging. Would they be available when the dealership was closed. You would think they could keep them working, but consider that their motivation is low since it is not a revenue stream. And, charger <> supercharger. If it takes a couple of hours to get a full charge, it is a built-in bottleneck.

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http://discussion.fool.com/tesla-3-chevy-bolt-side-views-3280844…

I’ll wait for the Leaf 2. Nissan produced an excellent car before. But the Chevy Bolt was made to take on the 3. Above is a side by side comparison. There appears to have been little need to wait for that comparison. That is one ugly car. Aesthetics do matter in comparison shopping.

Tinker

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1 - not quite. Tell that to BMW. If it were true we’d all be buying the Amazon Basicsmobile. At this level fashion comes into play.

Graham

I admit that my Corvette Stingray was not a commodity car but everyman’s car is – transportation.

To gain volume Tesla is downgrading from luxury status to transportation status. When BEVs take over from ICEs, if they ever do, it’s going to be 10 to 20% luxury vs. 80 to 90% commodity by volume. I don’t know if my car ownership history is common but I went from a hand-me-down to luxury to transportation over about a dozen cars I owned over 55 years.

Denny Schlesinger

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Leaf Bolt Tesla 3 - none can be described as “low cost”.

Well, a 3 yr old Leaf can be described as low cost. I see 2014 Leafs under $10K all the time.

Not sure you will see that for a Tesla.

Haven’t ever looked at Bolts.