Wednesday, March 28, 2018

Tesla Crash

Investing in high tech stocks is not for the faint of heart.  Certainly not for me!
FLW certainly invented the penis-shaped car!

Imagine a world where the utility companies are out of business - as are the oil companies.   People charge their electric cars from their solar roofs.  Factories run on solar power.  The world is a clean, green garden and the air is safe to breath.   It is a wonderful dream.  And dreams are great.  But reality is what it is.

Tesla is trying to ramp up to making 5,000 cars a week (about 250,000 per year!) at the old NUMMI plant in Fremont California.  Where once Corollas - and before that, Sevilles - rolled off the line, now the Model-3 is set to change the world.  Problem is, the cars aren't rolling off the line, and the company may run out of money before they do.

Bear in mind that the largest and most productive plant in the United States is the Ford plant in Kansas City, which cranked out 300,000-some-odd cars in 2012.  Bear in mind that Ford invented the assembly line and moreover has been making cars for over 100 years now.  Tesla hopes to do, within a year or two, better than that.

And the car is far more complicated to make than a Focus.  Tesla saw some initial success with the Model-S, as it was sold as an expensive, hand-made luxury car.  We saw them parked in front of exclusive restaurants and hotels, next to Porches and Mercedes.   People were willing to pay top dollar to be "early adapters" and also have a lightning fast electric car.   Whether this can translate to mass-production and mass-sales remains to be seen.  Will driving a Tesla have the same status level once the model-3 is ubiquitous?  Money-losing model-3 sales may kill off profitable Model-S sales.

According to some sources, there are nearly a half-million "reservations" for the Model-3.   If this is so, and Tesla is able to meet its 5,000-car-per-week goal, it could satisfy all of those reservations in two years.  Will people continue to buy the cars after that?   This is assuming that Tesla can build all these cars before it runs out of money, of course.

The problem for the electric car is cheap gas - as I noted before.  Every time someone buys a Prius or a Tesla, their consumption of gas declines, and this drives down demand ever so slightly.   As demand drops, so does price.   And as gas prices drop, the economic advantages (if indeed there are any!) decline further.  It is the Ouroboro - the snake chasing its own tail.  The electric car, when successful, it is its own worst enemy.

The problem for the electric car is that we are trying to create a transportation infrastructure using government tax incentives and a top-down economic system.   The gasoline-powered car had no such plan, but rather developed organically over time.   Rockefeller developed his "Standard Oil" not to make gasoline for automobiles, but to make lamp oil.   Up until that time, we burned whale oil - until we started running out of whales.   Oil was discovered in Pennsylvania, and a new source of oil - kerosene - was developed.   Gasoline was a waste product of the refining process.

And some unscrupulous vendors would "water down" their kerosene by putting gasoline in it - which tended to cause kerosene lanterns and stoves to explode.   Hence the name "Standard Oil" - a reassuring trademark to consumers that the oil they were buying was safe and regulated.

Of course, the electric light came along, and the demand for lamp oil diminished.   But at the same time, the internal combustion engine - running on gasoline - was developed.  Actually, IC engines can run on a number of fuels.  My 1941 Ford tractor had an option to run on kerosene.  You would start it on gas, and once it vaporized enough kerosene in a heater attached to the exhaust manifold, you could switch over to "cheaper" kerosene use - because by 1939, kerosene was cheaper than gas, which was no longer a "waste product" of the refining process.

Economics drove the gas engine, not government policy.  Oh, sure, governments subsidized road construction and whatnot - but roads are roads, and you can drive any kind of car on them, regardless of its power source, whether it is a 1919 Baker electric or a 2019 Tesla Model-3.   Some might argue that the oil industry itself is subsidized, with cheap leases for oil exploration and whatnot.  But you could make the same arguments about cattle grazing or various forms of mining as well.  Governments got ahead of the parade, when it came to the IC engine, they didn't lead it from the get-go.

Now, don't get me wrong.  I think the dream of solar-powered electric cars is a wonderful one.   But I don't invest in dreams, as they are based on belief and not rational thinking.   What is keeping the price of Tesla stock higher than a Space-X rocket can fly is not rational thinking, but a lot of small investors who want to believe in this wonderful dream.   But the reality is, there are no profits, no cash-on-hand, and no realistic expectation that this 5,000-per-week production schedule will be met before the money runs out.   Banks are already downgrading Tesla bonds from "junk" to "junkier".

The nail in the coffin, I think, is Trump.   The current coal administration is hostile to solar power and electric cars.  The tariffs slapped on solar panels will essentially kill off that market in the US - a market that made solar "affordable" by using cheap Chinese panels and generous payments from the utility companies - the latter of which died off last year.  Home solar installs have dropped to nearly nil - and no one is talking about this, yet.

Subsidies for electric cars will likely be next on the chopping block.  Or perhaps the lithium-ion batteries that are the heart of the electric car will be the next victim of Trump's trade wars.  No matter how you slice it, Elon Musk has an uphill battle ahead of him.   Even success could spell failure, in the long run, at least for his company.

But then again, first to market is often last in the marketplace.  The failure of Tesla might not spell doom for the electric car, but pave the way for the next competitor - who will have an easier time of it.

But invest in Tesla?   Uh, no thanks.  I can't risk my livelihood on someone else's dream!