Tesla's Snowball Effect

As I listened to the latest Tesla shareholders' meeting, with Musk on the stage. A few things left me blown away.

And I wanted to share them with you.

To be sure, first, I'm not a Tesla investor.

Second, this is not investment advice.

Third, independently of whether you like or not Musk, there are a few incredible facts here.

And I, as well, have a conflicting relationship with Musk's public figure.

On the one hand, I respect him as an entrepreneur, and I believe he's one of the greatest entrepreneurs of our time.

On the flip side, I do not agree with many things he says. And as he is one of the most powerful people in the world today, I think it's critical to have him in check, more than anyone else.

Having premised that, let me dive into a few interesting findings from Tesla's latest shareholders' meeting.

Tipping points! (it takes years to fully roll out a business strategy, and when it does roll out, it looks like the tip of an iceberg!)

Three years ago (pre-pandemic), Tesla was worth $41.8 billion.

Today Tesla is worth over $900 billion; Ford is valued at $61.5 billion.

It took 14 years for Tesla to pass Ford's market cap.

In the next five years since then, Tesla's valuation 20xed.

In 2017, when Tesla passed Ford, it made $11.8 million in revenues, losing over $2.2 million.

In 2018, Tesla went through what Musk dubbed "production hell" (the attempt of the company to ramp up manufacturing), which brought it very close to bankruptcy (a few days away).

Analysts all called up Tesla for that (I was among them).

Yet when things turn around, those same analysts disappear.

I want instead to give you a deep dive into the current state!

Production Hell! (one thing is to prototype, another thing is to scale)

For this quarter, Lucid motor delivered just 679 vehicles on 37000+ reservations.

For some context, in the same period, Tesla delivered 254,695 vehicles.

This reminds us that one thing is prototyping, and another thing is scaling.

For Tesla to be where it is today, it took years of going through what Elon Musk has dubbed “production hell.”

That flirt with the production hell made Tesla very close to bankruptcy, not once but at least three times.

The latest - a few days away from it - was 2018.

Just ten years before, in August 2012, Tesla had barely made three thousand cars.

Thus, the most difficult part (as Musk confirmed over and over) was not to make a viable EV but to go from production to mass production!

The profitability paradox (a single year makes up for all the lost years)

Above are Tesla’s cumulative losses over the years.

After losing money pretty much for all its history.

Suddenly, profits in 2021 made up for the losses throughout the years.

For new developing industries.

Once the new industry becomes viable. And if you’re taking advantage of economies of scale.

In a single year, you make up for all the losses produced over the company's history.

This is the best way to measure scalability.

And perhaps an index that the company dominating that industry has reached/or is reaching economies of scale.

That’s a powerful combination. Indeed, it doesn’t matter whether you create a new industry.

What matters is that you dominate it.

A new paradigm (what we call EV will have a different name and a clear set of features in the consumer's mind)

Each new industry comes with its paradigm.

In the EV case, we’ll learn to call it in a way that comprises these primary components:

• self-driving for consumers to make demand scale

• robotics in manufacturing to make supply scale

• energy storage and distribution to solve the “range anxiety.”

  
  

Like today, the iPhone wouldn’t make sense without touch, apps, and cameras.

EVs won’t make sense without self-driving on the consumer side and robotics on the manufacturing side.

And, of course, the energy infrastructure that solves the “range anxiety” of people owning EVs.

On the robotics side, it’s interesting to notice that robots make other robots obsolete.

In the picture, you find the “body shop robot count” per unit produced at Tesla’s factories.

In other words, at Tesla, the same Model Y takes much fewer robots to build in Berlin than in Fremont.

Non-linear growth (slowly, then suddenly - the snowball effect)

When new industries develop, they initially move painfully slow.

And to be fair, in many cases, they collapse on themselves.

That is why it’s so risky to develop a whole new market.

And that is why it’s so hard to predict what new industries will be able to pass the embryonic development.

Indeed, there is a threshold before which growth seems painfully slow, and no matter how much you push, things don’t move faster.

Yet, as you pass through that threshold, things start to move so quickly that growth becomes exponential!

That is what a hockey stick's growth trajectory looks like!

This is a dream for those surfing that trajectory and a nightmare for competitors that have to deal with a rising tsunami coming against.

And that’s what the EV industry, headed by Tesla, looks like, as of now.

And Elon Musk explained it well; when commenting on the chart above, he said:

This is one of the cleanest exponentials…it looks like one of those fake projections you see in VC meetings, but it's actually true!

The quote above explains the snowball effect of creating a new industry while dominating it!

Also published here.