Elon Musk recently announced that Tesla will be offering Tesla Car insurance. This could be more than just another step in the relentless drive toward vertical integration of all things to do with Tesla vehicles.
What the analysts and critics appear to have missed, is that all these Tesla cars have 360 degree cameras and accelerometers constantly recording the state of the car and its situation. In the event of an accident this data would be available to Tesla Insurance to defend against paying out. Add in sentry mode then it not only covers damage to the vehicles whilst being driven, but also records incidents when parked.
The evidence provided by these cars would make resolution of liability very cost effective for Tesla, reducing the major cost of providing vehicle insurance. This gives Tesla a massive advantage over other insurance providers.
With the vehicle telemetry being constantly available to the insurer, there is an opportunity to have dynamic pricing of insurance based upon the vehicle location and the driving style. Once autonomous driving is proven and legalised, there will be another step change, where potentially manually driven miles would incur a surcharge on the insurance premium.
Although promised within a month back at the end of April Tesla insurance is still not out of the blocks, apparently waiting for the completion of a “small acquisition that we need to complete and a bit of software to write”. I suspect that insurance will be offered to the US market, and Europe and the UK may not be addressed in the short term.
New technology will disrupt, but it seems the US insurance business and the analysts are not really joining the dots and coming to grips with the new reality.
Tesla’s share price is down, why should anyone invest in Tesla?
Elon Musk’s strategy has been to vertically integrate wherever possible. This gives Tesla closer control of their value chain and an ability to have their own proprietary technology. For instance the recent custom processor development that reduces dependence upon Nvidia for autonomous driving compute resource.
The perceived risk of the shared patents is not as significant as some state. The ability to execute on these patents is dependent upon engineering experience which Tesla has an 8 year lead on all legacy manufacturers (compare the specifications of the original 2012 Model S with the newly released Audi eTron you’ll find that oldest Tesla model wins across the board). An additional key advantage for Tesla is the millions of miles of real world telemetry from their cars, this is more valuable than the patents in enabling their product lead, particularly in safety and innovation in autonomous driving.
Battery supply is the Achilles heal for all electric car manufacturers, and looks likely to remain so, neither Kia or Hyundai can meet demand for their new electric cars. VW the most likely European challenger, with plans to ship 200,000 electric cars. But they have significant battery supply chain issues; firstly a proposed 20GB supply agreement with Samsung was downgraded to 5GB, and then patent litigation between a chosen partner SK Innovation and LG Chem bringing supply into doubt. The legacy automotive manufacturers who are committing to electric vehicle production are having to scramble to lock in supply chain deals for batteries, with the current lack of supply that implies increased battery prices in the short term and massive investment costs in the medium term. Simultaneously they are having to invest heavily in an attempt to catch up with Tesla. Meanwhile the Model 3 rips a hole in one of their more profitable segments outselling all the competing models in the US market.
Tesla is currently better positioned than their competitors with its own battery plants and partnership with Panasonic. Tesla has been steadily improving their own battery technology both incrementally, and more recently through the recent acquisition of Maxwell. The Maxwell technology has the potential to both increase power density and perhaps more importantly to reduce the factory space required to manufacture cells. Additionally Tesla now own the Maxwell supercapacitor IP, which appears to be at the heart of the recently released active suspension system in the Model S and Model X updates.
The Tesla cars are more advanced than any mass market competitor can hope to be in the next few years. They are currently more efficient (the important how far can it go on a charge). They are more capable, the performance version of a Model 3 will out perform a BMW M3 on a track for a lower price (not particularly useful for the average driver but a commercially important flagship variant).
On the downside, I’d have to agree that Tesla finance can seem precarious and Elon Musk likes to fly at the limit of risk. Tesla at this point is highly dependant upon his ruthless drive. Elon seems to exhibit a confluence of being both a shrewd operator along with occasional naivety, for instance announcing the closure of all showrooms, bating the SEC etc.. Like Steve Jobs with Apple, there is an undeniable dependence on a singular personality, which is definitely a risk to any investment. However Apple has continued, so I think would Tesla, although not with the same ruthless pace.
The dip in share price last quarter was due to the confluence of a number of factors over the three months; the reduction in US electric car tax credits, the China import papers debacle, impact of European industrial action on imports, the logistics of export to Europe (built cars sitting on ships), the Shanghai battery fire, the showroom go/no-go decisions. Although I expected that to be a temporary blip the share price continued down to around 35% from its peak price. This drop was due to a combination of Trump trade war related tech stock price hits and the fact that Q2 is not likely to deliver a profit, delighting the Tesla bears and short sellers. What they are missing is that the lack of profit is due to ongoing capital investment in new plant (a gIgafactory in China) new model development (the Model Y, the pickup truck and the truck). Value here in the medium term will not be from dividends it will be from growth.
On balance I’m seeing more good than bad in the overall picture, this low point is buying opportunity if you have the risk appetite. I’ve topped up last week to reduce my average buy-in price. Although the volatility of Tesla shares is appealing to traders I’m holding my handful of Tesla shares as a long term investment.