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Does Tesla Deserve to be The World's Most Valuable Automaker? | Economics Explained - YouTube
Channel: Economics Explained
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tesla is today the most valuable
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automaker in the world by market
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capitalization
[4]
beating out industry giants like general
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motors ford volkswagen group and even
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toyota
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it has achieved this impressive feat
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despite a short operating history
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a limited product lineup and even
[16]
relatively modest sales figures
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compared to these much more established
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entities in spite of all of these
[22]
indicators though
[22]
investors are willing to pay more than
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five times as much for the same stake in
[26]
tesla
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as compared with more traditional
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automakers so what is going on here
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what do investors see in tesla that a
[34]
rational person
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might not what is the company's vision
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to truly justify being valued this
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highly
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and could this all be a charismatic ceo
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taking a pool of naive investors
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for a ride oh and of course before we
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start answering these questions
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we need to give the standard disclaimer
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that we do for all company videos
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and that is that nobody on the economics
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explain team currently owns any tesla
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shares or stock options
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so even though we would want to remain
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impartial either way
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now you know this episode of economics
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explained was made possible by our fans
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on patreon
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if you would like to gain early access
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exclusive q a sessions which are now
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held every saturday at 9 30 eastern
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please consider supporting our channel
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at patreon.com
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economics explained toyota by most
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metrics
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is the largest car company in the world
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they produce the most cars they make the
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most revenue
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employ the most people and have a long
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tenured history with brand recognition
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and a base of loyal customers
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that probably spans even further than
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they would actually like it to
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by comparison tesla sells 130th as many
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cars
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makes less than 10 of the revenue and oh
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yeah hemorrhages money every year it
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operates
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2019 was actually considered a good year
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as far as finances go
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because it only lost 862 million dollars
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which was an improvement from the year
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four where it lost 1 billion
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despite this toyota has a market
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capitalization
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of just under 200 billion dollars
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whereas tesla
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is more than double this runner-up
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sitting at a valuation of over
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400 billion so the first thing to know
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here is that market capitalizations are
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sometimes a bit
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misleading this number is calculated by
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taking the market price of a stock and
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then multiplying it by the total
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number of stocks there are currently
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just under 1 billion tesla shares in
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existence
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so if we multiply that by the 430
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market price we get ourselves a market
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capitalization figure
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now the market price is something that
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can jump around quite
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a lot for any number of reasons that are
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completely divorced from the underlying
[164]
fundamentals of the company
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amateur investor hype stock buybacks
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easy access to capital price
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manipulating tweets
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[Music]
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to commit securities fraud all that good
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stuff can push the share price up or
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down
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without actually making the company they
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reflect any larger or smaller or more
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prosperous
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all of these factors are common
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criticisms leveled at tesla
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but supporters will point to the fact
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that building cars
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is just one small part of scaling up the
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tesla empire
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one of the most telling insights into
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the difference between tesla
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and regular automakers is to look at
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their subsidiaries
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regular automakers have grown their
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influence by buying up
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other car brands volkswagen is a great
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example of this
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volkswagen group is not only responsible
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for the people's car but they also own a
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part or all of
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bentley audi bugatti porsche sia
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lamborghini skoda
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as well as a collection of commercial
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vehicle manufacturers
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tesla by contrast is a company that
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still owns other companies
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but it takes a slightly different
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approach to its mergers and acquisitions
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instead of buying up competitors it owns
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companies within its own supply chain
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which allows it to not only be a car
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manufacturer but also a component
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supplier
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a dealership a fuel station energy
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generator and
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maybe even one day a transport provider
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all of its own
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now these two different approaches all
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hope to achieve the same two things
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increase revenue and decrease costs
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which results in increased profits
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business 101 right but here's how they
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do it
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a company like volkswagen is investing
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in what is known as a horizontal
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integration
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i.e they are investing in businesses on
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the same level of the production
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process as their own porsche and
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volkswagen are companies that
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technically do the same thing
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they take raw materials and component
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parts and turn them into cars
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before selling them off to dealership
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networks now just because all of these
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car companies
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do the same thing doesn't mean that
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there aren't huge advantages to teaming
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up
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companies like volkswagen will build
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cars on similar platforms and share them
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between
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all of their brands the volkswagen
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tiguan audi q7 porsche cayenne bentley
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bentayga
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and even the lamborghini urus all share
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the same
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basic chassis and components this
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achieves the two things that the
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business wanted to do
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it increases revenue because suddenly
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the manufacturer can appeal to all
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manner of different
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buyers with effectively the same car an
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average family gets the base model
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volkswagen a wealthier family will buy a
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porsche or an audi and for the people
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that want a truly ostentatious display
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of wealth
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there are the bentleys and lamborghinis
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that cost six times as much
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for effectively the same car this means
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that volkswagen will draw revenue from
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buyers that don't want to consider
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a car from the other end of the spectrum
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either because it's far too expensive
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or far too povo this technique of shared
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platforms
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also reduces costs because research and
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development as well as manufacturing
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overheads are shared between
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all of the brands it would be cost
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prohibitive for a boutique manufacturer
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like bentley
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to invest the same amount of money into
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developing a new drivetrain
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modern cars require huge teams of
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engineers designers and lawyers to make
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sure that cars comply with
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all the various road laws around the
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world while also being a good car
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and yes yes i know there are boutique
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manufacturers out there that do pull
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this off without being beholden to some
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corporate overlord
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but just remember those cars tend to be
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extremely expensive
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even by bentley and lamborghini
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standards and they probably lack the
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day-to-day reliability as well
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i mean i don't know patreon.com so maybe
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one day i can find out
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now tesla takes this expansion concept
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and turns it on its head
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literally it does what is called
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vertical integration
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where instead of buying up competitors
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in the same step of the production
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process
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it buys up or creates businesses that
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cover
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other parts of the process tesla's
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largest investment has not been into the
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cars themselves but rather into
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component manufacturing recharging
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stations and owning their own dealership
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networks
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all steps in the process of selling a
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car that traditional manufacturers
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have left to other companies this
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achieves the same two goals
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it reduces expenses because you don't
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have to include profit markups for all
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of the different steps of the process
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for example if audi sells a car to a
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dealership they are going to sell it at
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a wholesale price and then that dealer
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will add a markup to the consumer
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to make their own profits by owning this
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entire process
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tesla can cut out those middlemen it
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also increases revenue
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by offering additional revenue sources
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tesla really only makes three cars at
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the moment
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the model s the model 3 and the model x
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we have just seen that the volkswagen
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group has a wider selection of products
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within just one chassis but in the same
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way that volkswagen increased revenue by
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offering lots of different types of cars
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to lots of different types of people
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tesla is offering lots of different
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services to the same types of people
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if you buy a new porsche then go fill it
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up down the road volkswagen is not
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seeing
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any revenue from the sale of that
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gasoline whereas if you buy a new tesla
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and go charge it at the company's
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supercharger network they will
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the same is true for a lot of other
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areas as well a byproduct of making
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electric
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cars with an emphasis on vertical
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integration is that tesla has become
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really good at making batteries the same
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tree hugging tech bro that will
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inevitably buy tesla
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may very well buy a house with a battery
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pack as well
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meaning that again they have made money
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outside of just being
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one of the many moving parts in the auto
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industry
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so increase revenue and decrease costs
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to make more profit
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simple formula with two very different
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approaches from established automakers
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and tesla respectively
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the only problem is that as innovative
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as tesla's fresh new approach may seem
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it hasn't really worked they haven't
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made any profit
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to the contrary they are losing money
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but
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maybe that's okay because they haven't
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yet achieved the magic solution to all
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business woes
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economies of scale economies of scale is
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a phenomenon in production
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where the unit cost of goods trends
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downwards as more items are made
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this phrase tends to get thrown around
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pretty loosely but it's actually a lot
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more complex than what most people think
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there are three main reasons why this
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happens
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mitigation of fixed costs efficiencies
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and scale and negotiating power
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say you were tasked with building just
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one car
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if push came to shove you could probably
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do it but most of you watching would
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need to go to school to learn how to put
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a car together and you would also need
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to buy a whole lot of equipment to
[564]
actually manufacture that car this
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education and a workshop full of tools
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would cost
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hundreds of thousands of dollars and
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take years of your time to put together
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if you were to turn around and sell that
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car at a price that was commensurate
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with your outlay and effort and that
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would be an astronomically expensive
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vehicle
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easily hundreds of thousands of dollars
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but
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now let's say you were tasked with
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building two cars
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well you wouldn't need to go back to
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school to learn to build another car and
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you could just use the same tools
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all over again in this example the tools
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and education
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are the fixed costs no matter how many
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cars are made
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you don't need to spend any more on
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these and as more and more cars are
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produced they reflect
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a smaller and smaller fraction of the
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total cost involved in making
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that car the next big step is scale
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hand tools and a garage workshop are
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great but
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even with the most skilled mechanic in
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the world it is going to struggle to put
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a card together
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from scratch in less than a month a
[620]
full-on assembly line on the other hand
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well that's a different beast now tasks
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can be broken down into very easy very
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repetitive actions that might not
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require an education at all
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what's more is if they do exactly the
[632]
same thing day in
[633]
and day out you get very very good at it
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inherently making production
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much more efficient finally if you are
[640]
ordering a single piece of every
[642]
component that goes into a car
[643]
you're going to be paying retail price
[645]
for those parts but
[647]
if you are ordering hundreds of
[648]
thousands of components at a time
[650]
or even better yet manufacturing them
[652]
in-house you are going to pay
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much less for them this lowers the
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variable costs of production
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so all in all it's looking like a pretty
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big win for the economies of scale
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it mitigates fixed costs increases
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output and reduces
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variable costs what's not to love it's
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pretty easy to graph out this process
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and see that cost competitiveness will
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naturally favor those who produce the
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most
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so sure maybe teslas are a bit too
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expensive for most consumers today
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as we saw earlier they only make 1 30 at
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the number of cars that toyota does
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as soon as they expand into making a few
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million cars a year
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they will have the magic economies of
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scale on their side and be super
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profitable right
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well maybe but probably not as fantastic
[694]
as the economies of scale effect
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looks it has a dark side you see this
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chart here
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is not actually complete it is supposed
[702]
to look more like
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this in typical manufacturing after a
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certain point
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producing more goods starts to cost more
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and more
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this is caused by a reverse of the
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reasons that we saw all the components
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getting cheaper in the first place
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those fixed costs for starters either a
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would-be manufacturer is going to have
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to try and squeeze more and more out of
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their existing factory or workshop or
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whatever
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or they are going to need to open up a
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second location to keep making more cars
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this is a huge jump in fixed costs that
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will need to be shared amongst the costs
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associated with each individual car
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after that the same thing happens with
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breaking down processes into smaller and
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smaller tasks
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one man building an entire car by hand
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is not very efficient
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a team working on set steps is efficient
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but a huge team of thousands of people
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each responsible for
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one single screw or weld is just as
[755]
inefficient as having one person doing
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the whole thing
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eventually people will just get in each
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other's way
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and finally that bulk discount turns
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into clearing out entire markets
[767]
if you want to buy 10 000 glass windows
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you get a bulk discount
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if you want to buy 10 million you force
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demand up so high that
[775]
prices will naturally increase call it a
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personal vendetta of mine
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but the loose way that people throw
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around the idea of economies of scale
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being the secret ingredient to every
[785]
business
[785]
is potentially harmful in choosing good
[788]
quality companies to invest in
[790]
this should probably be the key takeaway
[792]
of the video but nobody will click on a
[794]
video called the negative marginal cost
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minimization in high output production
[798]
so you know haha i tricked you into
[800]
learning but
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maybe we have been a bit too cynical
[803]
here and missed the point of tesla
[805]
entirely most institutional investors
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agree
[809]
that a 400 billion valuation for a car
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company
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even one with all of its vertical
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integration is absolutely
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ludicrous especially considering all the
[818]
factors we've already explored
[820]
but maybe tesla is not a car company at
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all
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i mean sure it builds cars but not many
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of them
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and they are really only a means to an
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end of efficiently getting people from
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place to place
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what is much more exciting especially to
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investors is the final step of the
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company's plan to control
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everything related to road based
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transport the idea of car ownership
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itself tesla is quite famously
[846]
developing systems for self-driving cars
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right now these systems are little more
[850]
than a cool party trick
[851]
but they have some much more serious
[854]
long-term potentials
[855]
it could become their very own transport
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network
[859]
taxi companies and uber drivers make
[861]
money by purchasing vehicles
[863]
and using them to transport passengers
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which means that there is more money to
[866]
be made in moving people about
[868]
than simply selling a car as a one-time
[871]
transaction
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even a range-topping tesla model x sells
[875]
for under a hundred thousand dollars in
[876]
the us today
[877]
which is obviously a lot of money but
[880]
that same
[880]
car if let loose to act as its very own
[883]
uber driver could make
[884]
hundreds of thousands of dollars before
[886]
eventually being retired
[887]
elon musk has already spoken quite
[889]
freely about a future
[891]
where nobody owns a car which would be
[893]
very unusual rhetoric for a
[895]
car company ceo had it not been for this
[898]
more holistic approach to a transport
[900]
solution
[901]
now what investors hope this means is
[903]
that tesla is more of a
[905]
tech company that just so happens to
[907]
make cars
[908]
rather than a car company that just has
[910]
some cool tech
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technology has the advantage of being
[914]
able to achieve the aforementioned
[915]
economies of scale
[917]
far more efficiently than other types of
[918]
businesses like retail
[920]
oil and gas healthcare pharmaceuticals
[923]
and yes of course even auto
[924]
manufacturing
[925]
that's why today seven of the top 10
[928]
most valuable companies in the world
[930]
are tech companies so the cynical
[932]
analysts are right
[933]
tesla the car manufacturer is not worth
[936]
even a fraction of the 400 billion
[938]
evaluation
[940]
but a company that proposes to be the
[942]
world leader in renewable energy storage
[944]
a replacement to gas companies and a
[946]
cheaper alternative to uber all in one
[948]
well that's a more intriguing
[951]
proposition
[952]
especially when you consider that well
[954]
yeah they do make really cool cars
[956]
i definitely want one hi guys i hope you
[959]
enjoyed the latest video if you did
[960]
please consider liking and subscribing
[963]
this video is made possible by our
[964]
patrons over on patreon so if you enjoy
[966]
this video please consider supporting
[968]
the channel
[968]
like these awesome people did thanks
[970]
guys bye
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