sleepyhead
Active Member
Yep, the ICE auto market being disrupted by Tesla is like a slow motion train wreck. And we’ve got front row seats.
I wouldn’t make too much of Morgan Stanley’s low 2020 estimate (220k Gen3 and 150 Model S/X). Yes they might have to boost their estimates with this gigafactory announcement but probably won’t do so for a long time. Also, Tesla has thrown around the 500k figure by the end of the decade. DB’s latest report forecasts 450k cars in 2020.
Yep, here’s how I look at it. The Gigafactory is costing far less than most of us expected, especially with Tesla only contributing $2b out of the $4-5b necessary. I have some ideas on how they’re arranged that but I’ll save that for a later post.
But the point is that Tesla will be able to scale Gigafactory to many Gigafactories relatively easily since $2b is really not that much money.
Also, JB Straubel’s Stanford talk last year mentioned 700k vehicles in 2019
(Articles/megaposts by DaveT - Page 17), which would mean probably over 1m in 2020, or 2021. Then scaling more from then.
So, in order to meet 700k demand in 2019, they need to start building Gigafactory #2 in 2016 (assuming it takes 3 years to build). Where do you think they’ll build it? China makes the most sense. So it will be an auto factory with a Gigafactory next to it.
But that won’t be enough since in 2020-2021 they’ll likely be able to sell more than 1 million cars (according to JB Straubel’s slide showing 700k in 2019). So, they’ll need Gigafactory #3 online by 2021. That means they need to start building Gigafactory #3 three years earlier, 2018. Where should they build it? Europe probably.
So, here’s how Gigafactory rollout looks like:
Gigafactory #1: U.S.
2014 - start building
2017 - comes online
Gigafactory #2 and auto factory #2: China
2016 - start building
2019 - comes online
Gigafactory #3 and auto factory #3: Europe
2018 - start building
2021 - comes online
Then, from 2019-2020 they might need to start building a new gigafactory every year (or at least 500k capacity of factory for both battery and auto).
Now, some might think this sounds overly optimistic.
But Elon and JB have mentioned in the past that technology adoption usually starts off slower than people think but when it moves from early to mass market adoption, the adoption rate is much faster than most people realize. Meaning, Tesla’s challenge is going to be meeting the steep demand curve for Gen3 (and maybe Gen4) where we see demand really scaling like a hockey stick. This is the only way over 50% of new vehicles sold will be electric by 2030 (Long-Term Fundamentals of Tesla Motors (TSLA) - Page 32).
So today’s announcement that one gigafactory supplying 500k cars with batteries only will cost Tesla $2b provides us with a clear roadmap on how Tesla is going to scale to millions of cars. 5 million cars/year sold by Tesla by 2028 means they need 10 gigafactories (if each one has 500k battery pack production capacity). I think it’s doable.
Morgan Stanley estimates Tesla to sell 1.1m cars in 2028. I think they’re off by about 4 million.
I’ll explain a bit more what I mean by ICE auto makers are in for a slow motion train wreck.
First, as battery costs comes down EVs become increasingly more compelling and take away sales from ICE auto makers unless they’re able to make EVs that can compete with Tesla in price and performance. As the cost of batteries continue to decrease (7-8% annually), EVs will overtake ICE cars in new car sales by the year 2030 (according to Elon who think it could happen a few years earlier than this).
The problem ICE auto makers face is that every sale of a Tesla means one more person has decided not to buy an ICE car and instead has decided to buy an EV. That person is not coming back (in most cases) to becoming and ICE customer. In the auto industry, when a customer buys a different brand car it’s called a “conquest” because that person has switched from his old car brand to a new brand and this is actually more difficult than it might seem as people are quite loyal to their cars.
In order for ICE auto makers to compete with Tesla they need to compete in two main areas: performance and price. Performance increase handling/acceleration/etc and also battery range. ICE auto makers must make EVs that compete favorably with Tesla in terms of price and performance/range. Currently there’s nothing on the market that competes with the Model S in these two areas as an EV.
Some say that ICE auto makers will eventually release models that compete with Tesla and then Tesla will be overwhelmed by competition. However, in order to compete with Gen3 other ICE auto makers need to get down the cost of the battery to the same level as Tesla does. But in order to do that, they will need to build battery Gigafactories as well. However, in order to build a battery Gigafactory there needs to be significant demand for the EV car you’re making. But how can you have significant demand when you’re the price of your EV car is much higher than Gen3 (or has much less performance/range).
Thus, ICE auto makers will be hesitant to making huge battery Gigafactories until they see large demand for their sub-par (when compared to Gen3) EVs. They might be waiting for a long time. And what will probably wake them up is when their ICE cars sales start to decline, and by that time the slow motion train wreck is already in full motion. As car sales decrease, these ICE auto makers immediately feel the pinch and they can start seeing losses. Even a 10-20% drop in ICE auto sales can have serious negative effects on these businesses and they will be hit with losses, be forced to lay off workers, and close plants. As ICE auto sales drop even further, many of the assets of these ICE auto makers become liabilities as they’re forced to keep old plants running supporting a declining technology (ICE).
Now, I don’t see this happening within the next few to several years. That’s why it’s a slow motion train wreck. It won’t be until the 2020s sometime where ICE makers notice declines in sales due to increasing EV sales. And then it probably won’t be until another several years where we see the auto industry massively change as companies restructure, go bankrupt, merge or get acquired.
In the future (15-20 years) I see the auto industry consolidating much like the cell phone industry consolidated when it was disrupted by Apple and also Google. In the auto industry, I can it largely dominated by 3-4 massive players with man smaller players disappearing through a series of mergers, acquisitions and bankruptcy. Tesla (at this rate) will likely be the dominant player with high gross margins and operating profit. There might be 1-2 other players who are a result of consolidation in the ICE auto industry. And then there might be another tech company, like Google.
Great analysis as always. I like this new DaveT who just through his cautious numbers out the window.
You are going to need to raise your PT a lot higher based on this new analysis :wink:
