At one time, a tie-up with Tesla might have made sense, but Tesla now wouldn't bring much to a deal.
- Partnerships and mergers are developing throughout the global auto industry.
- Tesla is the odd man out in this trend.
- At one time, a tie-up with Tesla might have made sense, but Tesla now wouldn't bring much to a deal.
- It looks like Tesla is now going to have to go it alone.
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Last week, Fiat Chrysler Automobiles and Renault announced a plan to merge. If it goes through, the combination would create the world's third-largest automaker, behind Volkswagen and Toyota, and just ahead of General Motors.
Other carmakers are partnering left and right. The alliance of which Renault currently belongs includes Nissan and last year added Mitsubishi. Ford has joined with Volkswagen. For its part, GM and Honda are co-investors in GM's Cruiser self-driving startup. Mercedes-Benz and BMW want to co-fund an autonomous electric-vehicle platform.
Tesla, meanwhile, has the market cap of a major car company — some $35 billion even after shares were hammered down through the first half of 2019 — and appears to want to work with no one.
Tesla is going it alone.
In the past, Tesla saw investment from Toyota and Mercedes parent Daimler (since ended, rather lucratively for both), but for the past few years, the company has funded its growth by selling more of its own stock or by issuing debt. Access to equity markets is an advantage that Tesla has over competitors, as most of them aren't able to use Wall Street as an ATM. So don't begrudge Tesla that capital-raising option, which it would be foolish to avoid.
The big auto equivalent is to buy startups, as GM did with Cruise in 2016 for $1 billion all-in, and then to court outside investment. Follow-on stakes from the SoftBank Vision Fund and Honda have boosted Cruise's valuation to almost $20 billion — close to half of GM's market cap.
The time has passed for Tesla to partner
Don't look for Tesla to make any big purchases, and don't expect the company to join forces with anyone to lower its costs or assist in improving what has been a pretty woeful history of vehicle launches and manufacturing ramp-ups. In fact, don't look for Tesla to get any help from anybody. The time has passed.
That's not because Tesla is a true competitor; the EV market remains tiny, disappointing, and expensive to participate in, so most automakers are still testing the waters. Tesla is beginning to threaten traditional gas-powered luxury car sales, but until CEO Elon Musk and his team can do that for years and years, the BMWs and Porsches of the world are unlikely to panic.
Tesla's strategy of going it alone is actually a consequence of the company having little to offer a partner. Electric cars might still seem novel, but they've been around in one form or another for a century. Tesla made them cool and has been rewarded with upwards of 250,000 in sales in 2018 and at times a market cap of more than $50 billion. But the technology is nothing remarkable: batteries and electric motors. Tesla has provided some innovations, but nothing spectacular; its value has come from packaging — its cars are well-designed and beloved by owners.
Tesla isn't unique. It's a car company, and we already have dozens of those. That's why Tesla's stock is being so dramatically repriced; the markets have figured out what they're dealing with.
What costs could Tesla save a partner?
Carmakers merge or partner mainly to reduce costs. The business is highly capital-intensive and cyclical, so auto companies are always balancing investment in new stuff with the need to hoard cash in the event of a sales downturn.
It isn't easy to see how merging or partnering with Tesla (the former unlikely given Tesla's elevated valuation) would lead to a cost reduction at any level. Tesla has only about $5 billion in cash, and it has lost money every quarter save three in its decade-and-a-half existence.
Tesla has also served as a frontrunner for risk in the electric-vehicle space, as it has spent billions to establish a market — billions that other carmakers haven't had to spend. They can now jump in. But they're certainly prefer that an independent Tesla sustain much of the ongoing risk.
So Musk isn't going to get a partner, and he isn't going to merge Tesla with anybody. Best case, an established automaker that's behind the curve a bit, but that has a strong balance sheet (Toyota leaps to mind) takes a stake in Tesla.
Partnerships and mergers are a trend now in the car business, but that's not the only trend Tesla is missing out on. The company has also benefited only marginally from four consecutive years of record vehicle sales in the US. That's starting to change, as Tesla builds and sells significantly more cars. But it was perhaps too slow to develop new vehicles and get them to market.
None of this means Tesla is in some kind of crazy trouble. It simply means that the first new American car brand to be successfully established in decades is now going to stand or fall on its own merits.