Will Tesla do it alone?

There is an assumption many make that it will be impossible for one company to electrify our transportation system alone. It is accepted as common sense that at some point the legacy auto makers will jump in to close the gap. It is presumed that eventually, once electric cars can better compete with gasoline powered vehicles, that the automakers will hit some magic switch and start making electric cars enmass.

I admit that at one point I found the argument compelling. But with the cost of electric cars dropping rapidly and the the legacy manufactures still not making any substantial moves, I’m no longer sure we should be assuming this will be the case. What I am slowly beginning to suspect is that most of them may simply not be financially able to make this transition.

What Tesla is making increasingly clear is that building an electric car is different than building a gasoline powered one. It requires a different supply chain and different production lines. In particular it requires a huge up front investment in battery and electric motor production and software. There is some overlap in things like car interiors and body panels, but that is not where most of the value lies in any vehicle – electric or otherwise.

Production lines for these things requires more than just big buildings. It requires new tooling and hiring staff with specialized skills. Indeed trying to retrofit existing plants may actually be more expensive than building new facilities. Needless to say all of this is highly capital intensive. It will require either borrowing loads of money or selling tons of new equity.

Here is the problem. Many automakers are already up to their eyeballs in debt. Debt that was borrowed with the intent of paying it back with the profits from gasoline powered vehicles. Indeed many of the automakers are not even using current profits to pay back debt. They are using it for dividends and share buybacks and are borrowing even more money to fund current operations. Operations that will soon be mostly worthless.

The only automobile profits that will exist in the near future will mainly come from selling electric cars. But the legacy automakers have yet to even start acquiring the capital to build electric cars. Perhaps we should consider it is because no one will give it to them.

Remember electric cars won’t add to the bottom line of legacy manufactures. They will at best just replace current revenue. This means that the future profits from new electric cars will not just have to pay back the new investor capital needed to build these things, it will also have to payback the billions currently owed. Debt that will typically have to be paid off ahead of the new investors.

In other words, if you had substantial money to invest to build electric cars would you give it some someone like Ford who already owes huge sums and who will soon have to make huge write-offs on things like internal combustion engine plants? Or would you rather give it to someone like Tesla who has proven they can build great electric cars and who have none of the overhead of soon to be worthless legacy assets and the debt that was used to acquire them?

I agree that over the long run Tesla probably won’t be the only company who will produce electric cars in the future. But I expect the others will more likely be new companies built from the ground up than a current manufacture of gasoline powered cars. Indeed I’m no longer convinced legacy manufactures will survive long enough to even face a Tesla competitor.

Perhaps one or two legacy manufactures have enough capital on hand to pull this off along with the guts to write off almost their entire current asset base. But if they exist, I have yet to identify them.