Tesla Motors: Built to Last
“We are not currently showing all our cards.” That was Chairman Elon Musk’s memorable comment on Tesla Motor (TSLA)’s second quarter 2014 earnings conference call. He then told investors that by the end of 2015, Tesla would be producing cars at a rate of 100,000 per year. That translates to $10 billion in annual sales with potential after-tax profits of $2 billion, if Tesla were not penalizing its profits in its bid to grow five times as large by 2020. Elon hinted at something more to come. He was true to his word. On October 9th, he announced that four wheel drive and really cool new autonomous driving technology was being added to Tesla cars, making them even safer than they already are.
We are a fan of Tesla’s business and of Elon Musk. One competitive advantage that we think will make Tesla “built to last” and all of us likely Tesla customers in 25 years, is that its competitors are being compelled to build and sell electric cars. They do not want to build such cars. As a result, they are developing electric expertise so slowly that the lead Tesla has built up through its fast growing staff of Silicon Valley engineers may soon become nearly insurmountable. Car companies don’t want to build electric cars because their existing plants that make engines, transmissions and drive trains would become “stranded assets.” Their unions don’t want electric cars since they are simpler to manufacture than cars with internal combustion engines (ICE), which means fewer factory assembly workers. Dealers don’t want electric cars, either. Tesla bypasses franchised dealers to sell its cars directly to consumers. Franchised car dealers also make a lot more money servicing cars than selling new ones. Tesla cars need less service than ICE cars. A standard ICE automobile has more than 2,000 moving parts. Tesla cars have 18 moving parts!
Tesla’s culture is far different from that of other car companies. Tesla’s mission is to build the planet’s best AND safest automobile. Tesla’s car also happens to be best for the environment. The following says all we need to know about Tesla’s culture and why the best engineers in Silicon Valley want to work there. When Tesla began to manufacture its cars, its inspection process was not as strong as it needed to be. Elon then conducted line inspections personally until his fellow workers understood exactly how he wanted the process to work. Elon next moved his drafting table to the middle of the manufacturing floor to write software with his engineers. That was to make sure everyone knew how important the quality of the product was to him. Our kind of chairman, that is for sure. Our kind of culture, in which every employee does whatever it takes to provide Tesla customers with the best product possible.
From Ron Baron (Trades, Portfolio)’s Q3 2014 Shareholder Letter.
