(Please help get out of the car business.Asa Mathat | D: All Things Digital)
Here's a completely heretical idea, especially on the eve of Tesla launching its long-awaited $35,000 Model 3 in July and the stock rallying almost 80% over the first half of 2017:
Tesla should think about getting out of the car business.
Crazy, right? This is the first new American automaker in decades — and investors are so bullish on it that even though it has made money in exactly two quarters since its 2010 IPO and sold less than 80,000 vehicles in 2016, its market cap is bigger than General Motors', Ford's, or Fiat Chrysler Automobiles.
Additionally, Tesla is really nothing but a carmaker at this point. Although it sells solar panels and energy storage systems and is building a massive battery factory in Nevada, its revenues largely come from an old-fashioned place: assembling and marketing cars.
But here's the thing: for a carmaker such as BMW or Porsche or even Ferrari, limited production, a longstanding perception about the brand, and generally high to very high to astronomically high transactions (I'm looking at you, Ferrari LaFerrari supercar and your $1-million-plus price tag), the car business can be pretty good. Not Apple good, but healthy double-digit margins are in order.
Tesla started out at this end of the market, selling expensive luxury vehicles to a well-heeled elite. If it stayed with this business, it could conceivably end up with a 20% profit margin.
(The Tesla Model S.Tesla)
A victim of Musk's vision
But CEO Elon Musk wants to get gas-powered cars off the road, so that means Tesla has to attack the low-margin mass-market business. The Model 3 is the first shot. And there are 400,000 pre-orders, so it's a big first shot.
The mass market isn't really about what Tesla is good at, which is visionary spectacle and succeeding against overwhelming odds. The mass market is about grinding, unspectacular execution, day after day. This might be why Musk wants to see it taken over by robots.
For the time being, Tesla has committed to playing in this space, and doing it with a product — an all-electric vehicle — that consumers have thus far shown little interest in. EVs now make up only about 1% of global sales. Tesla needs to move that needle and move it big time, and to be honest, the company isn't strong enough to do it on its own. Others will have to come into the game.
This is where matters get challenging. Autos are a tough business: capital intensive, with cyclical sales and a requirement that car companies spend a lot on R&D to avoid falling behind. The end product is extremely complicated and relatively costly — so much so that carmakers maintain financing arms to loan customers the money to buy products.