How Tesla Has Shaken (Not Stirred) Established Carmakers
“What’s behind you doesn’t matter.”
These famous words coined by Enzo Ferrari apply far beyond racing. Woe to the defeated, sort of.
In many ways the competition between Tesla and the “automotive establishment”, Volkswagen, for instance, seems to follow similar rules. Like a reflex, people tend to look at those companies and their leaders like they were opponents in a race against each other.
And in many ways, they are. This kind of narrative certainly never gets boring. On the one hand, you have the e-mobility pioneer Tesla who, led by their self-proclaimed technoking, have shaken-up an entire industry. On the other, a long-established German automotive giant, founded in 1937, that periodically switches places with Toyota in the ranking of the largest carmakers in the world (currently Toyota has a narrow lead). After the recent VW “Power Day” which lead to a surge in the VW share price, the FT even went so far as to claim “Volkswagen is the new Tesla”.
All the more reason to look at some numbers that can help give some insight as to who is better positioned to claim the throne of tomorrow’s largely electrified automotive industry.
In 2020 VW sold 9,3 million cars, more than 230,000 of those being battery-electric (3x more than 2019), generating operating profits (before special items) of EUR 10,6 billion. And then there is Tesla, founded in 2003, that in 2020 – for the first time in its history – managed to close a financial year with net profits of USD 721 million, selling ca. 500,000 cars.
Looking at those numbers alone, sales and revenue, VW is far out in front of Tesla.
But wait: in February 2021, Tesla’s market cap was upwards of 4.5 times that of VW’s (~710 billion and ~160 billion respectively) and more than the combined valuations of VW, Daimler, and BMW. This speaks volumes and will be re-visited further down – as it appears things finally took a turn in March 2021.
Still undecided as to whether VW is the new Tesla, or vice versa?
Here’s another question: does it really matter?
Not so much if one looks at the larger picture. From a macro perspective, entirely different questions take centre stage.
For instance, which external factors ultimately enable the rise of a company like Tesla and, as a result, shape and drive an industry transformation? Or what are the different roles of newcomers and longstanding players in that process?
First of all, Tesla’s story can be seen as another prime example of how the US, arguably more than any other region in the world, still seem to provide more fertile ground for truly disruptive innovations which shake up entire industries.
The sheer market size of the US, combined with low regulatory barriers for newcomers to bring their solutions to market, test and refine them under real-world conditions certainly help tremendously. This has been shown to be very true in the case of Tesla.
Another particularly important factor is the abundance of available funding for growth stage start-ups in the US.
Take Tesla in its pre-IPO days. In early 2009, when it had sold less than 200 cars, Tesla had already raised almost USD 200 million from prominent VCs and private investors, including Musk himself but also Google co-founders Sergey Brin and Larry Page as well as former eBay president Jeff Skoll. That same year, Daimler made an equity investment of USD 50 million, followed by the US Department of Energy providing Tesla a loan of USD 465 million as part of its “Advanced Technology Vehicles Manufacturing Loan” Program, all of which helped pave the way to today’s success.
Even the COVID-19 pandemic has not slowed down start-up investments in the US. On the contrary, VC funding rose by 14% in 2020, reaching a new record of USD 130 billion. While VC activities in Europe, Germany included, have also increased year over year to USD 46 billion (as of mid-December), they still represent only a fraction of the amounts seen in the US. Plus, it must be noted that many of the growth-stage funding rounds in Europe, Germany included, are still dominated by non-European investors. Measures like the German “Zukunftsfond”, a government-led innovation fund with a volume of up to EUR 30 billion, could prove to become a valuable instrument for Europe to catch up in that respect.
The still existing gap in financing breakthrough innovation all the way to mass-market scale also shows in the number of IPOs through SPAC mergers in the mobility sector last year. Out of the 26 companies that started or completed an IPO through a SPAC in 2020, 16 came from the US and only 3 from the EU.
What also deserves close attention is the regulatory push toward electrification – to the great benefit not only of Tesla but also established carmakers with growing e-fleets like Volkswagen.
This push has come in various forms – from CO2 emission caps for passenger car fleets, like the maximum of 95 g of CO2 per kilometre in the EU, to purchase price subsidies, tax exemptions, technology advancements, and infrastructure development.
One important element of that has been many countries’ move toward banning internal combustion engines entirely – most of those being in Europe. Norway for example, will start with a ban as early as 2025. The initiative is already showing great results, with BloombergNEF reporting that EV sales in Norway reached 69% in Q1 2020, signalling that the phase-out of ICE cars is already in full swing. Several other countries such as Denmark, The Netherlands, Slovenia, and Sweden will implement their own bans in 2030. At the same time, subsidies and tax exemptions are also rolling out. In Germany, for instance, a subsidy of $10,000 per battery electric vehicle is possible, which has led to an all-time high in registrations of full-electric cars.
Therefore, when the coming years finally usher in the long-awaited breakthrough of e-mobility, it will largely be thanks to the timely convergence of several factors – those being sustainability, technology advancements, corporate commitments, and the truly transformative character of forward thinking regulations.
With great anticipation and hope – similar to the EU’s Green Deal – the Biden administration has announced a USD 2 trillion infrastructure package, including USD 174 billion worth of tax credits, rebates and other incentives for people to switch to electric mobility. This is set to create a ripple effect, pushing more drivers to opt for zero-emission vehicles.
Tesla started building electric vehicles when the market was still sleeping – like only a start-up can, free from the typical boundaries more established companies face. These factors – from existing business models, supply chains, sales networks or cultivated brand images – can all present themselves as barriers to truly disruptive innovation. Thankfully, for the sake of the mobility transition overall, the entire industry has woken up and will help new technologies to scale – like only they can!
In the last month(s) alone, there have been major announcements from nearly all the big players:
Also, the traditional automakers increasingly recognize and leverage the advantages in securing the supply chain and more recently have become savvier at realizing the business opportunities across the value chain.
Again, VW is quite exemplary for this coherent approach. At its recent (March 15th) VW ‘Power Day’ event, the company stated that “Power will become a core competence of Volkswagen”. This is a bold statement coming from a ‘car company’. To back this up, they plan to operate six battery cell factories by 2030, add 18,000 public charging stations by 2025 (aiming for 12 minutes for a 70% charge), and will invest $35B in its EV platform.
The impact of the VW ‘Power Day’ event was felt most notably on the stock market. Now, circling back to the earlier point of the share price comparison. The shares of VW Group temporarily rose by almost 15% in one day, and by more than 50% over the next few days, to a twelve-and-a-half year high of 353€. The exact values are not as important as the trends, but if you put it all together – Tesla and several of the traditional automakers, namely VW, are now within fighting range.
What is most important: this is great news for the mobility transition as a whole! Competition, sparked by a disruptor like Tesla is creating more innovation and accelerating timelines for bringing zero-emission vehicles on the road.
One outstanding example of this, is green batteries, an innovation that has radically changed the strategies of the mobility industry in Europe. Founded in 2016 by former Tesla managers Peter Carlsson and Paolo Cerruti in Skelleftea, Sweden, Northvolt made a bold claim to develop the world’s greenest battery cells and establish one of the largest battery factories to date. At this time, many of the traditional automakers had the mindset that it would be a challenge for Europe to catch up to Asia and to also become cost competitive. But, the founders planned to leverage three critical inputs: the Nordic electric grid with its high share of renewable power generation, the region’s mining industry, and a highly skilled labour force. Long-story short, it was a ‘unicorn’ success. Part of the success was in mobilizing massive funding, such as a 350M€ loan from the European Investment Bank. In addition, the European automakers, such as VW, saw a strategic partnership with Northvolt as security for obtaining the huge number of batteries for their planned 1.5M electric vehicles by 2025.
In addition, the innovation around the battery has moved quicker than most experts predicted. BloombergNEF reported that the 2020 market average battery pack price was $137/kWh and the goal from VW is to decrease this by 50% by improving the battery performance. This would then cross the magical threshold of $100/kWh making a battery electric vehicle more economical than a gasoline/diesel vehicle.
The VW Group is securing its strategy, with consequent prioritization of electrification, strong partners, and a land-grab for the supply chain. Not to mention, the mind-blowing amount of investment in this direction.
It is clear that those who have a well-defined plan, like VW and Tesla will be best positioned in the “race” for the top spot in today and tomorrow’s car industry. What should not be forgotten, though, is that, in the grand scheme of things, it is a race towards a common goal: which is to accelerate the future toward more sustainable mobility. This is why it is key to understand the mechanisms and continuously develop the instruments supporting such a transformation. Certainly, the playing field in mobility is wide open for disruption. So, let’s continue to shake things up!