Tesla: First-Mover Advantage?

Tesla

Toyota Motor Corp. announced on December 18, 2017, that it will release more than 10 battery powered cars by 2020, and that by 2025 every model in its line-up will be available as a fully or hybrid electric variant. On October 2, 2017, General Motors declared that it “believes in an all-electric future”, and that it will launch at least 20 all-electric vehicles by 2023. And on November 17, 2017, the CEO of Volkswagen stated that he was “laying the foundation for making Volkswagen the world’s number one player in electric mobility by 2025”.

 

The first-mover advantage is a foundation stone of management science. Moving first in business, as in chess, can make or break a company. This is particularly true when there are significant network effects, such as with Facebook and social media. Or where there is intellectual property to be developed and patented, as with drug discovery. When it comes to electric cars, Tesla is the clear first-mover. As the David-esque insurgent in the automotive industry, Tesla has beaten the odds to develop the highly-rated Model S, and is now looking to leverage that success into a broader portfolio of automotive and battery products.

 

So how much of an advantage does Tesla’s head start confer? Tesla’s stock is certainly implying that it does a great deal. Trading at over 30x forward ebitda, Tesla is significantly more expensive than traditional automotive metal-benders such as GM and Ford, which are trading closer to 3.5x ebitda.

 

However despite its stratospheric valuation, a closer look under the hood reveals no lasting competitive differentiation at Tesla. Tesla’s primary partner in the production of lithium-ion battery cells is Panasonic, with whom Tesla has a long-term supply contract. The same Panasonic has recently signed an agreement with Toyota for the establishment of a joint automotive battery business. In fact, Tesla itself expects battery cells to be commoditized over time and has designed its battery packs to flexibly accommodate different cell chemistries and form factors, so that it may choose from an array of third-party vendors in the future.

 

Tesla’s autonomous driving features also offer no enduring competitive moat. Several others in the automotive and tech industries have functioning self-driving technology. With a Manhattan Project’s worth of intellectual-property in artificial intelligence, Alphabet Inc. is best positioned to advance self-driving functionality, and it has done exactly that through its Waymo subsidiary, whose cars have self-driven more than 4 million miles on American roads. General Motors has also achieved autonomous capability through its purchase last year of Cruise Automation, a startup in the field.

 

In fact, Tesla itself tacitly acknowledges that its first-mover status does not translate to an intellectual-property advantage. Tesla’s CEO, Elon Musk, stated in 2014 that “Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use [Tesla’s] technology”. It is possible that Musk’s patent sharing is driven by his altruism in advancing a low-carbon future. Nevertheless, it means that Tesla must compete with the automotive heavyweights on their own terms, where the deck has historically been stacked against new entrants.

 

As noted above, all three of the largest global automakers have now explicitly embraced an electric car future. The global majors have moved only slowly in this direction, not because of ineptitude or lack of imagination, but because of hard commercial logic. Toyota, Volkswagen, GM and others have long known the regulatory and technological uncertainties associated with electric and self-driving automobiles, and they have a tremendous amount of sunk capital in the internal combustion engine. Therefore, it has so far behooved them to continue squeezing out production from their existing factories, and to let some idealistic pioneer lay the groundwork for a future in which they can be fast followers.

 

The question now is whether the automotive incumbents can indeed follow through and deliver on the electric promise. Capital will certainly not be a bottleneck; Volkswagen alone has earmarked €34bn for the cause. Neither will technology, where third-parties such as Alphabet Inc. will gladly provide the necessary knowhow. The only remaining ingredient is the urgency for change, of which Mr. Musk seems to have gladly provided a generous quantity.

 

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