I see I’ve written something more along the lines of an essay than a comment to start a thread, but, I still hope it’s useful and starts a discussion. It appears very probable we have an enormous moat around the growth of Tesla’s vehicle business the market does not yet explicitly appreciate. The combination of critical elements that appear to be creating this massive moat may actually very well be unprecedented in business history. That likely being the case, it’s not surprising it has barely been hinted at in the financial media, despite its enormity. I believe appreciating this moat sheds considerable light on both the rarity of the long term growth opportunity Tesla has (and the investment opportunity the stock offers as long as it does not get well ahead of itself), and toward understanding the decisions Tesla and the other automakers are making today, and their unfolding decisions coming for the next decade. I call this competitive advantage Tesla has the “fractured tipping point moat”, or, the “FTPM.” I believe the tipping point for the majority of global vehicle demand to prefer long range EVs (200+ miles) over ICE vehicles and the tipping point for the majority of global vehicle supply available to be long range EVs will be two distinct events. I believe these events will be at least a decade apart, and I believe this creates a tremendous moat for the growth of Tesla’s vehicle business. That’s what I refer to with the term FTPM, here are the details: 1 Tipping Point for the Demand for Long Range EVs Forecast: 2020-2022 I see three remaining attributes of vehicles that one could still use to make a case for ICE cars over EVs (unless stated otherwise, by EVs I refer to 200+ mile range EVs): price, recharge time, and range. Every other attribute of a car looks already to be in the favor of long range EVs. Given falling battery prices, and Tesla’s ambitions to rethink manufacturing, I think within 3-5 years, it’s probable Tesla could deliver a $35K base price Model 3 that delivers 300 miles of range with an ~85 kWh battery (in fact, it might be a Gen 4 vehicle for even less, see the clip of Elon looking forward toward a Gen 4 below in point 5a). Based on Elon’s tweet referring to 350 kW charging stations as a child’s toy, I think it’s likely the time to charge such a vehicle up to 80% will be under ten minutes by this 2020-2022 timeframe. When one considers fueling savings, such a car would be comparable in cost to a $30,000 gasoline car. The average price for a car last year was roughly $34,000 in the U.S.. I realize that is the average price, not median, but 1) it’s $4,000 more than the effective cost I’m forecasting for the Model 3, 2) as with the Model S and X, I expect the Model 3 will pull in buyers who would normally spend less for an ICE than they would a well done EV. Backing up these assertions that the Model 3 will be in reach of half the market, in the video I mentioned above (link in point 5a), Elon explicitly makes the point that the Model 3 was designed to be affordable to half of consumers. With those improvements, I see only one element remaining for this tipping point… consumer awareness. I think the launch of the Model 3 within a year and the Model Y in the next couple of years will take care of consumer awareness by 2020-2022. 2 Tipping Point for the Supply of Long Range EVs Forecast: Beyond 2030 Tesla’s mission is to move towards increasing the supply of EVs as quickly as possible. For the ICE manufacturers, it generally appears the goal is to move to EVs as slowly as possible. This is far from necessarily about burying their heads in the sand and digging their own graves with their short-sightedness. They may or may not be taking this approach because they are smart, but from a strictly bottom line perspective, moving as slowly as possible to EVs may actually be a very intelligent strategy for the ICE manufacturers (however one might feel about their doing the right thing or not). How could kicking EVs down the road be a smart move (strictly financially) by the incumbents? At some point, it seems very probable we will transition from ICE to EVs. For virtually every automaker other than Tesla, that transition is like being in a group of 15 on a cliff 50 feet above some rocky water. If you all jump, something like half of you will make it, something like half of you will hit the rocks and be done. The rocky water, of course, is the treacherous path of winding down your ICE business that is generating profits, while you use those collapsing profits to finance the build up of your EV business. All while having told all your potential customers that the ICE product whose sales are needed to pay for this transition is an outdated technology. When plainly obvious to the public that ICE are being phased out by the incumbents, more and more people will hold out from buying another ICE, and instead keep their old one until there’s an available EV. It’s not hard to see how uninviting it is to the ICE makers to jump into those rocky waters. What’s possibly unprecedented here, is that those 15 or so automakers have the opportunity to say, “no, let’s table jumping off that cliff for a decade and just keep making profits selling ICE.” But, how can they ignore Tesla’s success? The global auto market last year was roughly 88 million vehicles. It’s quite broadly expected to grow to about 100 million by 2020. Tesla’s aim is to reach 1 million in annual vehicle sales in 2020. Thus, the rest of the automakers can grow from 88 to 99 million units essentially ignoring Tesla and continuing to build ICE almost exclusively. By 2025 perhaps Tesla gets to 3 million vehicles sold annually. Even if the market stays flat at 100 million, do you stay up on that cliff with a 97 million vehicle market to split between the group of you, or take the 50/50 chance of surviving jumping off that cliff to chase the very slim rewards of competing with Tesla and everyone else for some of that extra 3 million vehicles sold? But, that’s not how the free market works, you can’t put a hold on innovation, right? In respect to this transition, the incumbent automakers effectively have the opportunity to act as an oligopoly. This is not necessarily a matter of explicit acts of collusion. Rather, the barriers of entry are so large, the number of players small enough, and the process of developing new vehicles so time and capital intensive, that all these incumbents can see what each other is doing. As long as no one else is jumping off the cliff (i.e., getting board approval to build a few gigafactories), that’s it, we’re all hanging out here up on the cliff for another few years making profits selling ICE vehicles. What about newcomers forcing these guys to jump off the cliff? The barriers to entry are extremely large and the timeline quite long. Had Apple or Google made a real move into EVs, it would have had an impact. The current crop of startups, however, are unlikely to sell outside of China more than 100,000 vehicles combined by 2020 and 1 million combined by 2025 assuming they grow at a rate similar to what Tesla has. I did carve out China from that last comment. Within China things may be different. With the possibility of a rapid move to EVs within China by Chinese companies, perhaps the incumbents will make EVs in considerable volumes for sale in China through their partnerships with Chinese manufacturers (a convenient cover for limiting this move to EVs to China). If so, I find it very unlikely that those incumbents change their rest of world strategy based on what they do in China. Eventually (perhaps in a decade or so), Chinese automakers may begin to gain credibility and meaningful sales in developed countries. That could be a substantial contributor to the incumbents jumping off the cliff, but I find it very improbable it would happen fast enough to push them to jump soon enough to get us to 50+% EV production before 2030. 3 Evidence we’ve already seen for the Cliff analogy Elon recently singled out VW as the one automaker he sees as perhaps making the kind of effort to move to EVs he’d like to see (I believe this was on the last quarterly conference call). The target VW has cited is EVs making roughly 25% of their sales in 2025. That’s often misrepresented in the media as VW seeing 25% of the auto market being EVs in 2025, but it’s a VW target, not a forecast on their part about the rest of the auto market. The rest of the automarket? Just pay attention to the details. First and foremost, pay attention to the so-called flood of Tesla killers. How many are there actually in total compared to the roughy 200 ICE models on the market? How many are priced below $40,000 (through the end of the decade perhaps we see 4 including the Bolt). Next consider the production plans. The Chevy Bolt? 20,000 to 30,000 units per year. Ford coming out with 13 electrified vehicles? Key word is electrified… the first seven have been announced and only one is an EV. Outside of the Model S/X part of the market (which I address below), we see mostly plug-in hybrids as the incumbents electrification plan. 4 A moat around a moat Here’s the last aspect of why I see the supply not tipping to EVs before 2030- even if the automakers had the will, they don’t have the money and it is a gargantuan logistical undertaking to transition to EVs. Based on Tesla’s original plan for GF1, a $5 billion investment that would create the battery supply enabling the production of 500,000 long range EVs per year, it would take $1 trillion and 200 GFs to create the battery supply to make all new vehicle production EVs (or $500 billion to cross that tipping point). Granted, GF1 plans have changed, and it might take less money and more like 70 GFs (each triple the size of the original plan). According to Yahoo Finance, the king of the incumbents, Toyota, has $46 billion. I doubt if all totaled together the incumbents have $200 billion. By gargantuan logistical challenge I’m referring to building either 200 GFs (factories larger than any of any kind on the planet) or 70 GFs triple the size of the smaller ones. Even Elon is waiting far through the process of building GF1 before starting GF2. How probable is it that any business would take tens of billions of dollars to dive in and build 5 GFs all at once on their first attempt. Granted battery maker partners, quite possibly including Tesla, could help this process, but it will be a slow motion version of other consumer product disruption just by the nature of the massive size and cost of the automobile as a product compared to something like a cell phone. That tremendous difference in scale compared to every other consumer product applies also to making the factories that produce the product. This is a basic ingredient in the likely unprecedented nature of Tesla’s strategic position, we’ve seen disruption before, but not the slow motion this disruption will occur at even when the will to do it emerges. 5 Addressing likely objections to the FTPM a) What about those Audis, Mercedes, BMWs, etc.? They all look to be in the Model S/X range of the market. Tesla’s putting a lot of pressure on these automakers in this part of the market. So far, nothing has been announced from any of them remotely near breaking below the $40,000 price point. That said, the Model 3 is very likely to put pressure on these luxury makers competing vehicles in its price segment. This is probably the most likely spot the FTPM may fall sooner than I’d otherwise think. However, one, currently these luxury makers are showing plug-in hybrids as their electrification move for this part of the market. Secondly, this price segment is a minority of the market. While Tesla is a luxury brand, I’d expect the Model 3 to draw from those who normally buy considerably less expensive vehicles, much as the S and X have. In fact, in the video below Elon literally says the Model 3 was designed to be a car half of the people can afford. Thirdly, Elon has discussed a less expensive Gen 4 model down the road, also discussed in the linked video (both points made in under a minute beginning at 12:15 into this video) Finally, if these brands do move a little sooner, there’s still the “moat around the moat” (point 4 above). Creating battery supply for a few million Mercedes, BMWs and Audis, could be as small as a 5 year process once begun, but, creating battery supply for a 100 million vehicle market will still take us well beyond 2030. b) But, Tony Seba said “by 2025 all new vehicles will be electric, all new buses, all new cars, all new tractors, all new vans will be electric, anything that moves on four wheels will be electric by 2025,... globally." Indeed, Seba did say this 29:17 into the video below. I’m as confident as I get about just about anything that his statement is not correct, and not even close to correct. Even if I am wrong about the first point of this post that the incumbents will move as slowly as they can to EVs, there is that “moat around the moat”, that is, no one is sitting on $1 trillion to build all the needed GFs, and the industry is not going to build 200 small size GFs or 70 large size GFs over the next 8 years. Remember each of the smaller ones is virtually larger than any other building ever built before on the planet. I don’t see any of the boards at GM, Ford, VW, or Toyota greenlighting 10 to 20 of these each over the next 8 years, let alone all of those boards agreeing to it. Seba glosses over this hole in his projection. 16 minutes into the link below, you’ll see that while his words say that multiple companies are now in the process of building battery factories at a pace matching Tesla, the data in his own accompanying chart does not back up his words. The chart only explicitly accounts for enough additional battery capacity (50 GWh combined from BYD, Foxconn, LG Chem, and Nissan) for about 800,000 more long range EVs... 1% of the current vehicle market today, let alone the 2020 market. (fwiw, while I think Seba likely is very knowledgeable, and I have nothing against the guy, his presentation has quite a lot of other quite material misstatements. I you hear something in his talk that you want to incorporate into your thinking, I would highly recommend fact checking it carefully before you do). c) But, we are at the cusp of a major fall off in car ownership as it’s replaced with autonomous car sharing, so the market Tesla is competing for is going to shrink very substantially. Obviously, no one knows quite how the new mobility market will impact the size of the global vehicle market 10 or 15 years from now. I received this very objection to my basic thesis about Tesla’s growth opportunity in a comment I made last fall here on TMC. In response, I decided to crowdsource opinion on this question by creating a TMC thread on it. In sum, there was far more expectation that the market would be larger in 2030 than today rather than smaller. The link is below, Will the global vehicle market (all automakers combined) be bigger or smaller in 2030 and why? d) What if Tesla’s disruption is disrupted by an even better new drivetrain? I find it highly improbable that before 2030 this could be anything other than a new battery technology (it’s not going to be hydrogen fuel cell, and after over a century of ICE, I just don’t see something new coming out of nowhere to commercial application in under 13 years). If there’s a new battery technology, Tesla would be in a far better position to convert to it from there existing battery tech than the rest of the automakers would be to transition from ICE to any battery technology. More generally, in regard to any such technology, I think of the old joke about how to survive if a hungry bear shows up while you are camping with friends… outrun at least one of your friends. All the ICE makers are our friends, slower than us at outrunning that bear… if there was a new technology better than a Tesla quality long range EV, it would make ICE vehicles the third best drivetrain. Until all that ICE production was replaced by that new technology, the second best tech of Tesla would be in demand. 6) Happy times for TSLA when there is a tipping point of people appreciating the FTPM For the first time, this month I’ve seen glimmers of the FTPM being discussed in the media (see comments from various industry sources in the Forbes article below, particularly Dean Dauger, and very briefly from Cathie Woods of Ark Investments at the end of the video below). At some point I think the basic advantages of the FTPM will become widely apparent. With that, so many bear arguments are laid bare as the empty false narratives they always have been. Will Tesla's Battery Investment Win It The Inside Track Against The Germans? Ark Invest CEO Explains Why She's Excited About Tesla Summing up, we often see criticisms of Tesla based on the implicit false assumption that the demand for its EVs are limited to some sort of “kiddie pool” of consumers compared to the vastly larger “grown ups” real market belonging to ICE. It won’t be long before it’s widely apparent that there is one demand market and it is swiftly moving to preferring long range EVs, while ironically, there is something of a kiddie pool, the token/compliance car supply of these EVs from the incumbents, contributing to a massive moat around Tesla’s future growth opportunity.