I received intense follow-up on the two articles I wrote about Tesla (TSLA), the first one countering the bear arguments of the stock and the second one attempting to value the company. Most of the intense arguments hinged on the assumption that the auto industry will not stand still as Tesla marches forward and by the time the Tesla Gen III launches, it will have intense competition from the rest of the auto industry. While that is possible and something that I would really appreciate at a personal level, the state of innovation in the auto industry indicates otherwise.
Let's start from an analysis of the user point of view about the improvements and innovations from the auto industry and how many of those actually ever hit the market or became affordable. Here is a graph of land speed record (these are for jet powered cars)
50 years ago we had a car that hit 404mph. Is 50 years enough time to give us a car that we can buy that can go that speed? What about production cars?
50 years ago in 1963, we had the top speed of a production car at 161mph. Is 50 years enough time for an industry to move features from a super-car to a mass market car? Can your car do that? There are a few cars that reach that speed but most of them are luxury cars (e.g. Cadillac CTS-V).
How about fuel economy? Here is a chart extracted from a 2012 EPA report:
It looks like the auto industry was either unable or unwilling to improve fuel economy for about 20 years from the mid-80s to the mid-2000s (launch of hybrids). Again not particularly a sign of innovation.
What exactly was the auto industry innovating on all this time? The simple answer is perception of speed. The only thing auto manufacturers were able to improve on that mattered was 0-60 times to those of 50 year old supercars. The Lamborghini that had the 1967 record of top speed of 171mph also had a 0-60 time of 7 seconds
Looking at the above chart it looks like the fuel economy innovation in the 70s was mostly a side effect from dropping car weights.
Next, what about price? The below graph is from the department of energy:
Last but not least, let's look at safety. Here is a chart of fatalities/100,000 in population in the United States:
This is a chart that shows some improvements, most associated with government regulation such as seat-belt laws, brake light laws. If it were up to the auto industry air bags and seat belts would be optional equipment. There are still some auto makers who cheap out and make turn signals and brake lights in the same color. Notice the lack of improvement from 1991 - 2005. Only recently have automakers even begun to look at safety with things like traction control, adaptive cruise control, lane departure warnings etc.
From the above here is the state of innovation from the auto industry:
- Game changing improvements (jet cars, flying cars, self driving cars, affordable super cars): no such luck
- Speed Improvements: Top speeds of most current production cars less than or the equivalent of 50 year old super cars. Average 0-60 speeds slower than the super cars of the 60s.
- Price: I have no expectation of the price of cars to go down because there really is no innovation in car materials - they are all still metal intensive. There has been minimal research into new materials for cars that would improve affordability. There is carbon fiber but that is a rarity and still expensive.
- Fuel Economy: Auto industry will only innovate if forced by the government or if oil becomes unaffordable. There is slight hope that they might improve if game changers like Tesla take their business. But I will not hold my breath for that.
- Safety: That so many people still die in automobile accidents and not every car gets a 5* safety rating is a black eye on the entire industry.
All this should make it fairly obvious why people love Tesla.
- Near silent with the performance of the best cars of today
- Price competitive with the cars it competes with. Promise of the new Gen III which will make the technology affordable
- More than triple the average fuel economy and at least double of any other car in it's class which would make the Gen III competitive with non-luxury cars in affordability
- 5* safety rating in every category
In conclusion I would say that there is hope that Tesla and indirectly Google (GOOG), thanks to it's self driving car will change the industry in unexpected ways that they will not be able to keep up with. For the foreseeable future, the car industry is likely to just play catch-up.
Additional disclosure: I plan on taking partial profits in TSLA at 200 and buying more if it hits 100. These plans may change.