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Arctic Leaf

Tesla hits some speed bumps

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Tesla’s stock was down around $200 again after its fourth-quarter report disclosed that neither its sales nor profits had met analysts’ expectations. At the same time, the company went into what one analyst called its “insane mode” as founder Elon Musk predicted that by 2025 the company’s market capitalization would reach $700 billion, matching the current value of Apple.

Analysts were scratching their heads as Musk’s vision seemed utterly at odds with the difficulties that are starting to pile up with Tesla’s ability to meet current goals. The company’s 2014 revenues rose to $3.2 billion, up from $2 billion the year before. However, expenses continued to mount, and losses widened from $74 million to $294 million last year. For the fourth quarter, Tesla delivered only 9,834 of the 12,000 cars it had predicted. Musk blamed the winter weather and customers’ holiday travel for the shortfall. A bigger disappointment has been sales in China, where Tesla sold only 120 cars in January. Musk has supposedly messed up by insisting that the cars be sold only by dealers, whereas the Chinese want anyone to sell them. He also says that concerns about home chargers and the lack of public charging stations have made it extremely difficult to crack China’s notoriously tough market. Musk now says that the company is now not counting on any sales in China to help it reach its goals.

But those goals are wildly ambitious. Musk told analysts that Tesla is anticipating a 30 percent increase in revenues per year for the next 10 years, which is the pace needed to put Tesla’s market value on par with Apple’s. “That would imply sales volume of well over 5 million vehicles per year,” Edward Niedermeyer wrote in Bloomberg View. “That would have Tesla surpassing the 2014 sales of such familiar names as Nissan, Honda and Fiat-Chrysler – at highly significant profit margins – within a decade.” Needless to say, Niedermeyer and many others find this prospect unlikely.

But Tesla isn’t standing still. It announced last week that it will produce a battery for home electricity storage. This will fold nicely with its partnership with SunCity, run by Musk’s cousin. People who install solar panels on their roofs will welcome a battery system that allows them to store electricity for times when the sun doesn’t shine. Just as solar seems to function best when distributed across a wide variety of users, so energy storage may ultimately work best when it is distributed over a wide variety of users.

Whether Tesla will be able to survive all this, however, is still an open question. The main threat to Musk’s vision seems to be coming now, not from predictable delays and bumps in the road, but from healthy competition from experienced automakers. Chevrolet has announced the Bolt, a successor to the Volt, which will be swinging right in Tesla’s wheelhouse – the $30,000 market for electric vehicles that can travel 200 miles or more on one charge.

General Motors has moved the introduction date up to 2017 (the same as the Tesla 3) and seems deadly serious about entering the EV market. “The Bolt EV concept is a game-changing electric vehicle designed for attainability, not exclusivity,” General Motors CEO Mary Barra said in a statement. “Chevrolet believes electrification is a pillar of future transportation and needs to be affordable for a wider segment of customers.”

Besides the Bolt, GM will have an improved version of the Volt, plus the $75,000 Cadillac ELR, a plug-in model. Daniel Miller of Motley Fool isn’t terribly impressed with any of these efforts, noting that the ELR has already had little success competing with Tesla’s Model S in the luxury-car category. “Because of that premium, first-mover brand image that Tesla created with its Model S, it’s hard to imagine how the Bolt will steal much of Tesla’s Gen 3 market in 2017, even if it is price-competitive,” Miller writes.

But if Tesla really has something to worry about, it’s the rumors that Apple, its Silicon Valley rival and the world’s largest company, is preparing a secret plan to enter the car market as well. Just this week it was revealed that Apple has a secret project employing 1,000 people to come up with some kind of concept car that will rival the Tesla Model 3.

“Apple has batted around the idea of developing a car for years,” reported Adam Satariano and Tim Higgins of Bloomberg Business. “Phil Schiller, Apple’s senior vice president of marketing, said in 2012 court testimony that executives discussed building a car even before it released the iPhone in 2007. Mickey Drexler, an Apple board member and head of J Crew Group Inc., also said in 2012 that Apple co-founder Steve Jobs had wanted to build a car.”

Apple has worked on batteries for the iPhone and iPad and also has a supply chain that could easily be applied to vehicles. “The mapping system it debuted in 2012 can be used for navigation. Last year, Apple also introduced CarPlay, a software system that integrates iTunes, mapping, messaging and other applications for use by automakers,” Satariano and Higgins wrote. Of course, that’s a long way from turning out thousands of vehicles, but Apple has invaded other businesses before. It basically knew nothing about the music business when it started on iTunes, and had no experience with telephones when it invented the smartphone.

In any case, even if Tesla finds itself in competition with much larger established companies – something Musk predicted at the start – it is revolutionizing the field of automobiles by making the electric car seem practical. Although Musk’s dream may prove to be overblown, he has certainly advanced the search for alternatives to the internal combustion engine.

Arctic Leaf

Is Elon Musk the next Henry Ford?

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Elon Musk doesn’t mind making comparisons between himself and Henry Ford. Others are doing it as well.

In announcing his plans for a “Gigafactory” to manufacture batteries for a fleet of 500,000 Teslas, Musk said it would be like Ford opening his famous River Rouge plant, the move that signaled the birth of mass production.

The founder of PayPal and current titular leader of Silicon Valley (now that Steve Jobs is gone), Musk is not one for small measures. The factory he is now dangling before four western states would produce more lithium-ion batteries than are now being produced in the entire world. And that’s not all. He’s designing his new operation to mesh with another cutting-edge, non-fossil-fuel energy technology – solar storage. His partner will be SolarCity (where Musk sits on the board), run by his cousin Lyndon Rive. Together they are looking beyond mere automobile propulsion and are envisioning a world where all this solar and wind energy stuff comes true.

So, is Musk a modern-day Prometheus, bringing the fire to propel an entirely new transportation system? Or, as many critics charge, is he just conning investors onto a leaky vessel that is eventually going to crash upon the shores of reality? As the saying goes, we report, you decide.

One investor that is already showing some qualms is Panasonic, which already supplies Tesla with all its batteries and would presumably help the company fill the gap between the $2 billion it just raised from a convertible-bond offering and the $5 billion needed to build the plant. “Our approach is to make investments step by step,” Panasonic President Kazuhiro Tsuga told reporters at a briefing in Tokyo last week. “Elon plans to produce more affordable models besides [the] Model S, and I understand his thinking and would like to cooperate as much as we can. But the investment risk is definitely larger.” Of course, this is Japan, where “the nail that sticks out gets hammered down.” Corporate executives are not known for sticking their necks out.

Another possible investor is Apple, which has mountains of cash and, at least under Steve Jobs, was always willing to jump into some new field – music, cell phones – to try to set it straight. This is a little more ambitious than the Lisa or the iPod and Jobs is no longer around to steer the ship, but Apple and Musk officials held a meeting last spring that stirred a lot of talk about a possible merger. A much more likely scenario, according to several commentators, is that Apple would become a major player in the Gigafactory.

And a Gigafactory it will be. Consider this. The three largest battery factories in the country right now are:

1)    The LG Chem factory in Holland, Mich. is 600,000 square feet, employs 125 people and produces 1 gigawatt hour (GWH) of battery output per year.

2)    The Nissan factory in Smyrna, Tenn. is a 475,000 square-foot facility with 300 employees puts out 4.8 GWH per year.

3)    A123 Systems’ battery factory in Livonia, Mich. is 291,000 square feet, employs 400 people and produces 0.6 GWH per year.

Both LG and Nissan received stimulus grants from the Department of Energy, built to overcapacity and are now operating part-time.

Now here’s what Musk is proposing. His Gigafactory would cover 10 million square feet, employ 6,500 people and produce 35 GWH per year of battery power. Basically, Musk’s operation is going to be ten times better anything ever built before, at a time that most of what exists isn’t even running fulltime. Does that sound like something of Henry-Ford proportions? Similar to Ford’s $5 a day wages, perhaps?

There are, of course, people who think all of this is crazy. In the Wall Street Journal blog, “Will Tesla’s $5 Billion Gigafactory Make a Battery Nobody Else Wants?,” columnist Mike Ramsey expresses skepticism over whether Tesla’s strategy of using larger numbers of smaller lithium-ion is the right approach. “Every other carmaker is using far fewer, much larger batteries,” he wrote. “Tesla’s methodology – incorrectly derided in its early days as simply using laptop batteries — has allowed it to get consumer electronics prices for batteries while companies like General Motors Co. and Nissan Motor Co. work to drive down costs without the full benefits of scale. Despite this ability to lower costs, no other company is following Tesla’s lead. Indeed, in speaking with numerous battery experts at the International Battery Seminar and Exhibit in Ft. Lauderdale a few weeks ago, they said that the larger cells would eventually prove to be as cost effective, and have better safety and durability. This offers a reason why other automakers haven’t gone down the same path.

But Musk has managed to produce a car that has a range of 200 miles, while the Leaf has a range of 85 miles and the Chevy Spark barely makes 82. Musk must be doing something right. And with Texas, Arizona, Nevada and New Mexico all vying to be the site of the Gigafactory, it’s more than likely that the winning state will be kicking in something as well. So, the factory seems likely to get built, even on the scheduled 2017 rollout that Tesla has projected.

At that point, Musk will have the capacity to produce batteries to go in 500,000 editions of the Tesla Model E, which he says will sell for $35,000. Sales of the $100,000 Model S were 22,000 last year. Does this guy think big or what?

To date, Silicon Valley doesn’t have a terribly good record on energy projects. Since Kleiner Perkins Caufield & Byers fell under Al Gore’s spell in 2006, its earnings have been virtually flat and the firm is now edging away from solar and wind investments. Venture capitalist Vinod Khosla’s spotty record in renewables was also the subject of a recent 60 Minutes segment. But, as venture capitalists say, it only takes one big success to make up for all the failures.

Will Tesla’s Model E be the revolutionary technology that, at last, starts making a dent in oil’s grip on the transportation sector? At least one investor has faith. “I’d rather leave all my money to Elon Musk that give it to charity,” was the recent evaluation of multi-billionaire Google founder Larry Page.