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As the rest of the auto industry plays it safe, Tesla piles on more risk
Posted on January 20, 2019 by Charles Morris
After years of record sales and huge profits, legacy automakers are preparing for leaner times ahead. The US Big Three have killed off most of their sedans to concentrate on trucks and SUVs. GM is shuttering plants and laying off workers, and has pulled out of Europe and Russia. Ford has announced a substantial restructuring of its European operations as well.
Above: Tesla Model 3 fleet in parking lot (Image: InsideEVs)
Meanwhile, Tesla CEO Elon Musk attended a groundbreaking ceremony for a new Gigafactory in Shanghai, where he hopes to be producing cars within the year. The Californians are also bringing Model 3 to Europe, and pushing full speed ahead on new projects, from Model Y to the Tesla Semi to a jet-propelled flying Roadster.
As Detroit's automakers contract into their comfort zone, what is Tesla doing? Taking on even more risk (tempered slightly, however, by recent job cuts). Matthew DeBord, writing in Business Insider, noted the jarring contrast between Musk’s China plans and Big Auto’s ongoing announcements of austerity. However, he believes both sets of players are simply doing what comes naturally to them.
“Before 2009, big car companies would count on brief recessions and robust recoveries, reliably stalling on difficult strategic decisions,” but they no longer have that luxury, DeBord writes. “The arguments in favor of these [downsizing] moves aren’t complicated: when times are good and profits are rolling in, as they have been for years, make the tough calls. Then batten down the hatches when the bad weather sets in, as it always does in the highly cyclical car business.”
Above: Some automakers are moving away from sedans in favor of trucks and SUVs (Flickr: Tino Rossini)
There are alarming developments afoot in the industry. The biggest, says DeBord, is an economic slowdown in China, which is now the world’s largest market. Automakers are also keeping a wary eye on demographic trends that may presage lower demand for cars, and on the massive investments that they will soon be making in electrification.
Not only the Big Three, but also the Japanese, Germans and South Korean automakers are all “wisely de-risking,” while Tesla is doing just what it’s supposed to do: “gobbling up risk, front-running it while the rest of the industry is happy to sit on the sidelines.”
Tesla is taking on significant risk by building a new factory when the rest of the industry is closing them, but the Shanghai Gigafactory could signal a major turning point for the company. “Although Tesla makes some fantastic vehicles, its real product is risk,” writes DeBord. The legacy auto industry avoids risk whenever possible, and that’s why Tesla, incredibly, has a bigger market cap than GM. “For investors, risk equals payout, and that applies to longs and short sellers.”
Above: Tesla’ breaks ground on its first overseas Gigafactory (Youtube: South China Morning Post)
While the voice of reason might argue that Tesla should be consolidating its gains instead of committing to a new factory, “unfortunately, Tesla can’t afford to wait out a downturn and defer its expansion. If and when the China market starts to grow robustly again, Tesla wants to be well-established in the country.”
Besides, DeBord concludes, “where would Tesla be without risk? You have to be true to your principles - and risk is what’s made Tesla the first successful new car company to arrive in decades.”