- In just a few years, Tesla has gone from operating one factory in California to running or building plants in other US states, China, and Europe.
- Combined with Tesla’s dominance of the still-small EV market, this new manufacturing capacity could ideally position the company to compete in countries where growth is expected to be substantial.
- The key advantage to “local manufacturing” is the ability to make vehicles that fit with regional demand, such as compact hatchbacks in Europe or pickup trucks in the US.
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Tesla has minted a staggeringly high market capitalization for a carmaker that’s on track to sell just a half-million vehicles in 2020: nearly $550 billion.
That makes Tesla not just the world’s most valuable automaker but one of the planet’s most valuable companies, period.
By the standards of its currently modest annual revenue and fairly slim profits, Tesla is by no means worth over a half-trillion in the context of the here and now. The carmaker’s wildly elevated stock price is a bet on the there and later. And that’s been a rewarding bet, historically. Tesla is up over 10,000% since its 2010 IPO.
Because there’s so much speculative value tied up in CEO Elon Musk’s company, it’s harder for Tesla’s actual business to hide. But while in the past the business has been iffy — Tesla has routinely failed to meet expectations for promised technologies and delivery targets, and at times has struggled to simply build cars — the automaker is poised to vindicate investor confidence over the next decade.
It isn’t about the cars
The reason? Well, it isn’t cars. The cruel reality of the auto industry is that, with notable exceptions, all cars are basically the same. This holds as true for electric vehicles as it does for those that run on gas. Four wheels, some doors, windows, and so on. Repeat.
Swapping out the internal-combustion drivetrain for an electric one, in fact, intensifies the uniformity. As my colleague Kristen Lee likes to say, all EVs drive that same. I agree, for the most part. But electrification also produces a simpler assembly process. So in theory, assuming the EV is effectively a commodity, albeit a complicated one, what should set competitors apart is the ability to scale manufacturing to meet demand and the capacity to locate that manufacturing where demand is most robust.
The tricky thing here is that different markets want different products. Full-size pickup trucks, for example, are the yearly bestsellers in the US. But they aren’t popular in Europe at all. Meanwhile, the Chinese market is turning into a hotbed for EVs, with the government backing electrification and numerous local carmakers stepping up to provide consumers with abundant choices.
To address this issue, Tesla has built or is building three new factories on three continents. The company’s Shanghai plant is cranking out Model Y crossover SUVs, while a facility near Berlin should within about a year do likewise. A new plant in Texas is expected to produce the futuristic Cybertruck.
Compacts for Europe, pickups for the USA
At an event in Europe last week, Musk said that Tesla could design, engineer, and manufacture a compact vehicle for that market, where small hatchbacks remain popular. Making such a car in the US and exporting it to Europe doesn’t make sense because of currency exchange rates and shipping costs, not to mention assembling a vehicle with different mechanical specs, would eat into Tesla’s profit margin for what would be a relatively low-profit car.
With a German factory, Tesla could use its dominant position, controlling much of the still-tiny global EV market, to build directly into local demand. The game plan for China could be the same, although to meet demand there, Tesla is likely to need additional plants. In the US, the second factory in Texas would serve the eastern half of the country, while the existing California plant would handle the western half.
If you drill down into this strategy — in a nutshell, you build where you sell — you can see how Tesla could grow its relative monopoly on EVs and justify its elevated current market cap. It ends up being about where you put your production and how you organize it.
This is why Musk keeps talking about Tesla revolutionizing manufacturing and why that, not some cool electric cars, could be Tesla’s largest contribution to industrial history. A few years back, critics were right to be skeptical that Tesla could pull it off. But now, the company is on the verge of going from a one-factory company, selling most of its vehicles in the US, to being a four-factory company, selling in the most important markets. (And for the record, I’m not even counting Tesla Nevada battery factory in that total.)
Other automakers, of course, have factories in Europe and China. But almost none are completely optimizing for electric production. Tesla is, and that’s why it couldn’t be more ideally positioned to extend its dominance.