Bob: John, welcome back to Plugged In! It has been about a year since we last spoke and I know our readers are eager to hear your updated thoughts regarding some of the key issues/challenges facing the EV and autonomous driving space. Let's begin with Tesla, which reported 4th quarter results that were generally below analysts' expectations. Yet, contrary to the normal investor reaction, the price of the stock increased, rather than declined. In the analysts call, Musk is talking about Tesla's unsupervised FSD (Full Self-Driving), saying it will be rolling it out first in Austin, and then throughout the United States during 2025, and then the rest of the world by the end of 2026. And it's interesting, he starts off by saying, I know that "I cried wolf before" and then, arguably, he goes ahead and does exactly the same thing. I am skeptical (to say the least), and I am confident many others are as well, that Tesla will be operating self-driving vehicles throughout the United States during 2025 and throughout the world in 2026? Mr. Musk was quoted recently as saying: "I'm not saying it's an easy path, but I see a path to Tesla being the most valuable company in the world by far....there is a path where Tesla is worth more than the next top five companies combined." What is your take on Tesla's results and its prospects?
John: Although Tesla has its share of challenges, as do all EV manufacturers, it still has a very unique and efficient manufacturing process and cost advantage over its competition, with the notable exception of the Chinese OEMs. Look, apparently millions of investors in Tesla stock believe it, because, you know, as you referenced, the company reported what I would call legacy automaker kind of results and the stock goes up. So you have to distinguish between Tesla's recent financial performance as a vehicle manufacturer and what Tesla's investor-base believes regarding the totality of Tesla's business operations, not just the EV segment. The fact is that they're wowed by this Optimus humanoid robot. They're wowed by this talk of robotaxis and its energy storage business and all the cash that these businesses can potentially generate. For example, the energy storage business is up like 67% and did something like $10 billion dollars in revenue. Their services, which include insurance and financing, was up like 27%, $10.5 billion dollars in revenue.
Bob: So the bottom line is, from what you're saying, is that the investor-base and analysts aren't focused that much on Tesla sales of vehicles. They're looking at the potential, which is becoming evident in other business segments, which are, in a sense totally unrelated to the sale of a model Y, or other model.
John: Yes. As you know, stock prices are based on future earning potential. Not what's going on right now, unless it's a disaster. Then everybody starts selling. But you know they're looking to FSD; they're looking to robots. They're looking to artificial intelligence. Elon's running around now saying Tesla is actually the greatest AI company in the world. So that's what they're investing in. They think that those four things: the robots. FSD, energy storage and AI justify a trillion dollar valuation for the company.
Bob: Separating the vehicle manufacturing and sales business from the rest, just looking at it as a car manufacturer. What's your perspective of its future?
John: Look, they're a hell of a good company. Make no mistake about it. I'm not talking the styling. I'm talking the design and engineering of their cars is par excellence. I mean, it's better than any of the legacies. They've really done a bang up job of designing for manufacturing, so their manufacturing process is far better than the legacies. Tesla was also the first one to do a software defined vehicle, which is what every other car company is struggling to develop right now. Tesla was the first to do what they called centralized, zonal computing. Everyone is struggling to try to do all that right now. So, in sum, Tesla has some significant advantages over the competition; but has some challenges as well.
Bob: Where, in your opinion, has Tesla fallen short of expectations?
John: My criticism of their cars has been, and they're just starting to address this, is that they all look the same, and they haven't changed in years. Well, they just did a mild refresh of the Model 3. They did a more significant refresh of the Model Y. Say what you will about the Cybertruck, I think they sold, I don't know 40,000 of them last year. Something like that. I mean, it's nothing compared to an F-150; but it's the first year in the market. What I've said all along is that the auto industry is a fashion industry. A lot of people don't want to admit that, but it is. And when people buy a new car they want everybody to know they bought a new car. They don't want them to think. Oh, is that a 10 year old, Tesla? Or is that a new Tesla? And especially when you go out to the West Coast, I mean, the place is crawling with Teslas. Everybody's driving a Tesla. I think, especially this year, as people come off their 3 year Tesla lease, those Tesla lessees will be looking to potentially upgrade and will think: Wow! Those BMW electrics look terrific. That Cadillac Lyric! Oh, my gosh, that is fabulous! And I think, especially in California, where "you are what you drive," you are going to see a lot of people looking to upgrade their ride to one of the so-called luxury brands. California, you know, the Liberal Bastion, who dislike that #%!% Musk, will want to try something else. 2025 is going to be the litmus test, I think for Tesla in the U.S. market, especially in those regions where EVs sell well. To the extent that there is a significant migration of these expiring leases to other brands, it will represent a significant loss to Tesla, both from an economic and prestige standpoint.
Bob: Interesting. Okay, let's stay with the subject of Tesla; but focus on its autonomous driving business. So effectively, Tesla now is entering into the same business as Waymo, Zoox and to a certain extent Uber and Lyft. Is there enough potential business out there for all those companies to succeed?
John: So is there room for the companies you mentioned? Absolutely. In fact, I'd throw another one in there, Aurora, which is looking at the heavy truck market class, for long haul, which may be the best market spot to be in, long haul trucking. I mean, you just go and go and go across I-80 across the United States. Very little cross traffic. In other words, technically, it's a whole lot easier to do. And what's the number one problem that the trucking industry faces? It can't get enough drivers. The turnover is horrific. So I would throw Aurora into the mix. And that's just in the United States, you know. There's another handful of Chinese companies that are all over this, called Pony AI and Baidu and BYD is into it. Great Wall Motor is into it.
In my opinion, autonomous technology is the game changer for the automotive industry, not electric cars. All electric does is change how you drive power to the wheels. Once you go to autonomy, you open up mobility to every single segment of society. The elderly, whose children are taking their keys away from them because they don't think it's safe for them to drive. The disabled. People who are blind. The very young, I'm talking about little kids now. Your little kids want to go visit their friends? Here, take the car keys. Go visit them. I can go on and on about this. But it is a huge game changer. So is there room enough for all those companies? You bet. Now, Uber and Lyft looked into this technology early on, and, in fact, Uber was an early investor. Takes a lot of money to do this. A lot of money. You need to have deep, deep pockets and or have an investment community, you know, private equity that's willing to dump literally billions into it. GM had to give up. GM invested $10 billion dollars into its autonomous Cruise program, and now they're walking away. I mean, they surrendered. They couldn't keep on spending like that. Lyft never had the money to do it. Uber got into it and then backed out and said, we're out of this and sold off their technology.
But what Uber and Lyft will do is run to the Waymo's of the world and say, we'll buy your technology, or they'll wait for legacy automakers to buy that technology and make vehicles using that technology and then buy those vehicles for their fleet.
Bob: So, assuming there will be ample supply of autonomous driving options throughout the U.S. and beyond, do you think there will be comparable consumer acceptance/demand?
John: The public is still quite skeptical of autonomous driving. In large part, it is out of concern for what is referred to as "edge cases," circumstances that an autonomous vehicle has not previously encountered. Examples of edge cases may be a car that is spinning on icy roads in front of you, or a construction site that just went up and it blocking the road. Before AI, AV development was coming up with large quantities of algorithms that could account for any kind of driving situations that a driver might encounter; but obviously this approach has its limitations, which resulted in accidents and other incidents that undermined consumer confidence. However, over the last two years there has been a major switch to utilizing AI. So instead of trying to come up with algorithms that anticipate every driving scenario, the approach now is to use AI to teach a car to drive and adapt to unusual conditions. And how did we learn how to drive? We got in a car and we drove. We saw how others drove even before we started to get our driver's license. And that's exactly what they're doing with autonomous vehicles now, teaching them how to drive, so if they encounter a situation they never encountered before, they pretty much can figure out on their own what they've got to do. And it's so revolutionary. AI is writing the code. It's not coders writing the code. Now, you still have to have people to tell the AI what it should be doing, but the AI is writing the code.
Bob: Let's pivot and discuss how one legacy manufacturer is doing in the EV space, GM. It's been reported that in 2024, GM's EV sales surged by 50% to 114,000 units and that GM is focusing with some success in creating a domestic supply chain for a lower cost and more secure battery production. What are thoughts about its EV strategy and how it is progressing?
John: I have been a fan of GM's strategy for some time. While sales haven't lined up to expectations, I think they're on to something. They have built a solid foundation on their Ultium platform. GM's strategy is that all its EVs would be built using one platform, the Ultium platform. GM can just drop different top hats on top of it. For example, it can lengthen the wheel base or widen the track, use different battery pack sizes and configurations using one platform.
Bob: And all their EV models are based on that universal platform, which allows for significant economies of scale.
John: Precisely! The scalability of components is key. Once they hit the right manufacturing yield, things will look promising. High manufacturing yield is essential for profitability in battery production. All OEMs, to a greater or lesser degree, are struggling with this issue. GM is making progress in terms of achieving profitability on its EVs. GM claims that it hit a variable profit for its EV business as of Q4. The goal is by the end of the year to be very close to a true net profit. Once GM turns a profit on its EVs, it will be a big win in combination with its significantly profitable Internal Combustion vehicle business.
Bob: Do you see the trend to EV profitability continuing?
John: Yes, though there are significant potential obstacles, such as general economic uncertainties, termination of tax credits and other economic benefits of the Inflation Reduction Act, aggressive competition worldwide for the imposition of significant tariffs on Mexico, Canada and China, with the resultant retaliations.
Bob: Do you think that the recent imposition by the Trump administration of 25% tariffs on imports from Canada and Mexico are sustainable?
John: The 25% tariffs are probably not sustainable, in my opinion. They are going to drive up the cost of all vehicles. The Anderson Economic Group estimates that car prices will go up by $4,000 and that full-size pickups and SUVs will go up $10,000. That will immediately push tens of thousands of buyers out of the market. Many will not be able to afford that, and those with low credit scores will not be able to get a loan or a lease. So, prices go up, sales go down, and then you start to see workers getting laid off. I think the political pain will be too great to keep them in place. Adjustments will be made.
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