Does Tesla Deserve to be The World's Most Valuable Automaker?

Tesla is today the most valuable automaker in the world by market capitalization, beating out industry giants like general motors ford, volkswagen group and even toyota. It has achieved this impressive feat, despite a short operating history, a limited product, lineup and even relatively modest sales figures.

Compared to these much more established entities, in spite of all of these indicators, though, investors are willing to pay more than five times as much for the same stake in tesla as compared with more traditional automakers.

So what is going on here? What do investors see in tesla that a rational person might not? What is the company's, vision to truly justify being valued this highly, and could this all be a charismatic ceo, taking a pool of naive investors for a ride? Oh and of course, before we start answering these questions, we need to give the standard disclaimer that we do for all company videos, and that is that nobody on the economics explain team currently owns any tesla shares or stock options.

So, even though we would want to remain impartial either way now you know this episode of economics explained was made possible by our fans on patreon. If you would like to gain early access to these videos before they're uploaded to youtube as well as participate in exclusive q, a sessions which are now held every saturday at 9, 30 eastern standard time.

Please consider supporting our channel at patreon.com. Economics explained toyota by most metrics is the largest car company in the world. They produce the most cars they make. The most revenue employ the most people and have a long tenured history with brand recognition and a base of loyal customers that probably spans even further than they would actually like it to by comparison.

Tesla sells 130th, as many cars makes less than 10 of the revenue, and oh yeah hemorrhages money every year it operates. 2019 was actually considered a good year as far as finances go because it only lost 862 million dollars, which was an improvement from the year four.

Where it lost 1 billion, despite this, toyota has a market capitalization of just under 200 billion dollars, whereas tesla is more than double this runner-up sitting at a valuation of over 400 billion.

So the first thing to know here is that market capitalizations are sometimes a bit misleading. This number is calculated by taking the market price of a stock and then multiplying it by the total number of stocks.

There are currently just under 1 billion tesla shares in existence. So if we multiply that by the 430 market price, we get ourselves a market capitalization figure now the market price is something that can jump around quite a lot for any number of reasons that are completely divorced from the underlying fundamentals of the company.

Amateur investor hype, stock, buybacks, easy access to capital price, manipulating, tweets, [, Music ] to commit securities fraud. All that good stuff can push the share price up or down without actually making the company they reflect any larger or smaller or more prosperous.

All of these factors are common criticisms, leveled at tesla, but supporters will point to the fact that building cars is just one small part of scaling up the tesla empire. One of the most telling insights into the difference between tesla and regular automakers is to look at their subsidiaries.

Regular automakers have grown their influence by buying up other car brands. Volkswagen is a great example of this. Volkswagen group is not only responsible for the people's car, but they also own a part or all of bentley audi bugatti porsche, sia, lamborghini skoda, as well as a collection of commercial vehicle manufacturers.

Tesla, by contrast, is a company that still owns other companies, but it takes a slightly different approach to its mergers and acquisitions. Instead of buying up competitors, it owns companies within its own supply chain which allows it to not only be a car manufacturer, but also a component supplier, a dealership, a fuel station energy generator and maybe even one day, a transport provider all of its own.

Now these two different approaches all hope to achieve the same two things: increase revenue and decrease costs which results in increased profits. Business 101 right, but here's, how they do it. A company like volkswagen is investing in what is known as a horizontal integration, i.

e they are investing in businesses on the same level of the production process as their own porsche and volkswagen are companies that technically do the same thing. They take raw materials and component parts and turn them into cars before selling them off to dealership networks.

Now, just because all of these car companies do the same thing, doesn't mean that there aren't huge advantages to teaming up. Companies like volkswagen will build cars on similar platforms and share them between all of their brands.

The volkswagen tiguan audi q7 porsche cayenne, bentley bentayga and even the lamborghini urus all share the same basic chassis and components. This achieves the two things that the business wanted to do.

It increases revenue because suddenly the manufacturer can appeal to all manner of different buyers with effectively the same car. An average family gets the base model, volkswagen a wealthier family will buy a porsche or an audi and for the people that want a truly ostentatious display of wealth.

There are the bentleys and lamborghinis that cost six times as much for effectively the same car. This means that volkswagen will draw revenue from buyers that don't want to consider a car from the other end of the spectrum either because it's far too expensive or far too povo.

This technique of shared platforms also reduces costs because research and development, as well as manufacturing overheads, are shared between all of the brands. It would be cost prohibitive for a boutique manufacturer like bentley, to invest the same amount of money into developing a new drivetrain.

Modern cars require huge teams of engineers, designers and lawyers to make sure that cars comply with all the various road laws around the world, while also being a good car. And yes, yes, i know there are boutique manufacturers out there that do pull this off without being beholden to some corporate overlord.

But just remember those cars tend to be extremely expensive, even by bentley and lamborghini standards, and they probably lack the day-to-day reliability as well. I mean i don't, know patreon.com, so maybe one day i can find out now tesla takes this expansion concept and turns it on its head.

Literally, it does what is called vertical integration where, instead of buying up competitors in the same step of the production process, it buys up or creates businesses that cover other parts of the process.

Tesla's, largest investment has not been into the cars themselves, but rather into component manufacturing recharging stations and owning their own dealership networks. All steps in the process of selling a car that traditional manufacturers have left to other companies.

This achieves the same two goals: it reduces expenses because you don't have to include profit markups for all of the different steps of the process. For example, if audi sells a car to a dealership, they are going to sell it at a wholesale price and then that dealer will add a markup to the consumer to make their own profits by owning this entire process.

Tesla can cut out those middlemen. It also increases revenue by offering additional revenue sources. Tesla really only makes three cars at the moment: the model s the model 3 and the model x. We have just seen that the volkswagen group has a wider selection of products within just one chassis, but in the same way that volkswagen increased revenue by offering lots of different types of cars to lots of different types of people, tesla, is offering lots of different services To the same types of people, if you buy a new porsche, then go fill it up down the road.

Volkswagen is not seeing any revenue from the sale of that gasoline, whereas if you buy a new tesla and go charge it at the company's, supercharger network, they will. The same is true for a lot of other areas as well.

A byproduct of making electric cars with an emphasis on vertical integration is that tesla has become really good at making batteries the same tree. Hugging tech bro that will inevitably buy tesla may very well buy a house with a battery pack as well, meaning that again they have made money outside of just being one of the many moving parts in the auto industry.

So increase revenue and decrease costs to make more profit simple formula with two very different approaches from established, automakers and tesla respectively. The only problem is that as innovative as tesla's, fresh new approach may seem it hasn't really worked.

They haven't made any profit to the contrary. They are losing money, but maybe that's. Okay, because they haven't yet achieved the magic solution to all business woes economies of scale. Economies of scale is a phenomenon in production where the unit cost of goods trends downwards.

As more items are made, this phrase tends to get thrown around pretty loosely, but it's, actually a lot more complex than what most people think. There are three main reasons why this happens: mitigation of fixed costs, efficiencies and scale and negotiating power say you were tasked with building just one car.

If push came to shove, you could probably do it, but most of you watching would need to go to school. To learn how to put a car together, and you would also need to buy a whole lot of equipment to actually manufacture that car.

This education and a workshop full of tools would cost hundreds of thousands of dollars and take years of your time to put together. If you were to turn around and sell that car at a price that was commensurate with your outlay and effort, and that would be an astronomically expensive vehicle easily hundreds of thousands of dollars.

But now let's say you were tasked with building two cars. Well, you wouldn't need to go back to school, to learn to build another car and you could just use the same tools all over again. In this example.

The tools and education are the fixed costs, no matter how many cars are made, you don't need to spend any more on these and as more and more cars are produced, they reflect a smaller and smaller fraction of the total cost involved in Making that car the next big step is scale, hand, tools and a garage workshop are great, but even with the most skilled mechanic in the world, it is going to struggle to put a card together from scratch in less than a month.

A full-on assembly line, on the other hand, well that's, a different beast. Now, tasks can be broken down into very easy, very repetitive, actions that might not require an education at all. What's more is if they do exactly the same thing day in and day out, you get very, very good at it, inherently making production much more efficient.

Finally, if you are ordering a single piece of every component that goes into a car, you're, going to be paying retail price for those parts. But if you are ordering hundreds of thousands of components at a time or even better, yet manufacturing them in-house, you are going to pay much less for them.

This lowers the variable costs of production, so all in all it's. Looking like a pretty big win for the economies of scale, it mitigates fixed costs, increases output and reduces variable costs. What's, not to love it's, pretty easy to graph out this process and see that cost competitiveness will naturally favor those who produce the most so sure.

Maybe teslas are a bit too expensive for most consumers. Today, as we saw earlier, they only make 1 30 at the number of cars that toyota does as soon as they expand into making a few million cars a year.

They will have the magic economies of scale on their side and be super profitable right. Well, maybe, but probably not as fantastic as the economies of scale effect looks. It has a dark side. You see this chart here is not actually complete.

It is supposed to look more like this in typical manufacturing. After a certain point, producing more goods starts to cost more and more. This is caused by a reverse of the reasons that we saw all the components getting cheaper in the first place, those fixed costs.

For starters, either a would-be manufacturer is going to have to try and squeeze more and more out of their existing factory or workshop or whatever, or they are going to need to open up a second location to keep making more cars.

This is a huge jump in fixed costs that will need to be shared amongst the costs associated with each individual car. After that, the same thing happens with breaking down processes into smaller and smaller tasks.

One man building an entire car by hand is not very efficient. A team working on set steps is efficient, but a huge team of thousands of people, each responsible for one single screw or weld is just as inefficient as having one person doing the whole thing.

Eventually, people will just get in each other's way and, finally, that bulk discount turns into clearing out entire markets. If you want to buy 10 000 glass windows, you get a bulk discount. If you want to buy 10 million, you force demand up.

So high that prices will naturally increase call it a personal vendetta of mine, but the loose way that people throw around the idea of economies of scale being the secret ingredient to every business is potentially harmful in choosing good quality companies.

To invest in this should probably be the key takeaway of the video, but nobody will click on a video called the negative, marginal cost minimization in high output production. So you know haha. I tricked you into learning, but maybe we have been a bit too cynical here and missed the point of tesla entirely.

Most institutional investors agree that a 400 billion valuation for a car company, even one with all of its vertical integration, is absolutely ludicrous, especially considering all the factors we've already explored, but maybe tesla is not a car company at all.

I mean sure it builds cars, but not many of them, and they are really only a means to an end of efficiently getting people from place to place. What is much more exciting, especially to investors, is the final step of the company's, plan to control everything related to road based transport.

The idea of car ownership itself tesla is quite famously developing systems for self-driving cars right now. These systems are little more than a cool party trick, but they have some much more serious long-term potentials.

It could become their very own transport network, taxi companies and uber drivers make money by purchasing vehicles and using them to transport passengers, which means that there is more money to be made in moving people about than simply selling a car.

As a one-time transaction, even a range-topping tesla model x sells for under a hundred thousand dollars in the us today, which is obviously a lot of money, but that same car. If let loose to act as its very own, uber driver could make hundreds of thousands of dollars before eventually being retired, elon musk has already spoken quite freely about a future where nobody owns a car, which would be very unusual rhetoric for a car company.

Ceo, had it not been for this more holistic approach to a transport solution now what investors hope this means is that tesla is more of a tech company that, just so happens to make cars rather than a car company.

That just has some cool tech technology. Has the advantage of being able to achieve the aforementioned economies of scale far more efficiently than other types of businesses like retail oil and gas, healthcare, pharmaceuticals and yes, of course, even auto manufacturing? That's? Why today, seven of the top 10 most valuable companies in the world are tech companies, so the cynical analysts are right.

Tesla, the car manufacturer is not worth even a fraction of the 400 billion evaluation, but a company that proposes to be the world leader in renewable energy storage, a replacement to gas companies and a cheaper alternative to uber all in one.

Well, that's. A more intriguing proposition, especially when you consider that well yeah they do make really cool cars. I definitely want one hi guys. I hope you enjoyed the latest video. If you did please consider, liking and subscribing this video is made possible by our patrons over on patreon.

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