“Tesla is just a car company. It trades at a premium to other car manufacturers. The valuation is crazy” – that was the refrain from Tesla bears for years. And without doing a deep dive into Tesla, it seemed reasonable. After all, a car is a car. Analyze the number of units sold, the average price, the gross margins, the profitability and you can put a multiple on the company and know what it’s worth, right?
Not so fast.
The move to electric vehicles has virtually upended existing car manufacturing. And the Ford CEO revealed the dirty secret most executives in the industry won’t even whisper publicly.
What Ford CEO Said Will Stun You
Ford CEO Jim Farley explained why it is SO hard for legacy car companies to get software right. In its first generation, Ford farmed out all the modules that control the vehicle to its suppliers because they could bid them against each other. So Bosch would do the body control module, someone else would do the C control module, someone else would do the engine control module, and Ford would have about 150 of these modules of semiconductors all throughout the car.
The problem? Farley explains the misery that lies under the hood:
“The software is written by 150 different companies, and they don’t talk to each other. So even though it says Ford on the front of the vehicle, Ford needs to go to Bosch to get permission to change their C control software.
That means even if Ford had a high speed modem in the vehicle and the ability to write the software, it’s still Bosch’s IP.
So, Ford has a loose confederation of software providers featuring 150 completely different software programming languages, and all of the structure of the software is different and there are millions of lines of code.”
And it gets worse.
Legacy Car Manufacturers vs Tesla
Now contrast that with Tesla, which was purpose built from the outset to realize a vision that one day every vehicle could autonomously drive itself. Soon you see why legacy car manufacturers are in such a pickle, facing an almost insurmountable climb to compete. Farley explains:
Because of the issues “Ford decided as part of the second generation product to completely insource the electric architecture, which means to insource all of the software, but car companies haven’t written software like this, so they’re writing the software to operate the vehicle for the first time ever”
Looking at Tesla through that lens, you can see it’s had a near decade long runway to gain a competitive advantage over existing car manufacturers. And car manufacturing is just one division of Tesla, it also enjoys massive profits from its energy generation and storage business. Then there’s the charger network. And so on.
Quickly you realize how far ahead Tesla is and with its decision to slash prices to stimulate demand further and broaden its reach and brand advantage, the company is simply choosing to take market share at an accelerated pace.
All that bodes well for Tesla, even before it has what CEO Musk calls its ChatGPT moment, where the 3 million vehicles on the road can all of a sudden drive autonomously.
The takeaway: bet against Tesla at your peril.