Barriers of entry – Tesla friend or foe?

Topic: Tesla & barriers of entry (plus the difference between stocks and companies)


Find something you love and do it with focus and abandon

This website is about the joy of exploration and knowledge — sometimes for practical use (enabling increased personal comfort and expanding degrees of freedom), sometimes for the sheer pleasure of enhanced perspective. It’s all about making you resilient in your pursuit of happiness in a world of accelerating change and an increasing divide between human biological instincts and our artificial environment.

You can read more about these thoughts in this post about the meaning of life (and a few related ones as well — links in the post), or through my podcast Future Skills.

Today, however, I’ll write about finance, and Tesla, again. It’s not a hardcore investment article, but still, if you’re not interested in economics and stocks there’s probably precious little for you here today. The post is about whether Tesla is inside or outside the car industry’s high barriers of entry.


Topic: Tesla & barriers of entry (plus the difference between stocks and companies)

Conclusion: be careful what you wish for; you might find yourself on the wrong side of those coveted protective barriers to entry

Trigger: a comment about high barriers to entry in the EV industry (implicitly, and wrongly, benefiting Tesla)

Length: ten minutes?


It’s a car company!

Tesla is a company that produces vehicles for human transportation, a “car” manufacturing company. In order to develop, design, manufacture, deliver and maintain its products Tesla has chosen to design and manufacture the following (among other things):

  • Electric motor
  • Battery pack
  • Car body and chassis
  • Assisted driving software
  • Battery chargers

Tesla designs, develops and manufactures these parts and then assembles them in “car factories”. Their competitors within (cars and) EVs do more or less exactly the same. Those competitors include companies like BMW, Porsche, Jaguar, Volkswagen, Audi, Volvo, General Motors, and many more. Actually, it’s probably safe to say that ten years from now all car companies will be EV companies, but up until now Tesla has been more or less alone in the market for upscale EVs. As of mid-2018 and going forward, Tesla is trying to enter the mid market, at the same time as it’s most competent industry peers are entering Tesla’s home turf of upscale cars.

So, whether you consider EVs a separate market from gas cars or not, which I don’t, at least not long from now it won’t be.

Remember that the main part of Tesla’s stock market valuation is based on profits and cash flows occuring beyond that ten-year mark. So, if you think competition ten years from now is irrelevant, think again.

Tesla’s operations are currently worth about 70 bn USD, of which some 10bn is debt and 60bn is equity (share price 350). Most analysts expect Tesla to keep losing money throughout 2018 and 2019, and at most make annual profits of a handful of billion a year after that. Let’s say profits go from negative to zero to 5bn/year pretty linearly. In that case Tesla’s total profits 2018-2027 amount to around 20bn. The remaining 50bn of value, not even counting the discounting effect, need to come from the year 2028 and after.

Please note that this is not meant to be a professional forecast*, just a way of picturing when and how much value needs to be created in order to warrant the current share price. I’m fully aware that a profit of 4 800m in 2027, that is growing by 12% a year, by then could be worth 20x, or a 100bn (which generously discounted to today at 7% per year could actually be close to the needed 50bn. You would, however, still need to explain how and why Tesla would grow profits that quickly in competition with every car manufacturer in the world, including potential newcomers).

* Actually, I don’t think Tesla in its current form will make any profits ever (except through very creative accounting for a single quarter or two)

The point here is just to show that you can’t disregard competition in what might seem like a distant and irrelevant future, if you actually want to value the company rather than just speculate in its short term share price movements. Tesla’s value most certainly lies beyond the 10-year forward mark, and must be created in competition with formidable players that have streamlined their best practices (and political lobbying) over the last half century or more.


Barriers to entry

Some of the barriers Tesla is facing include but aren’t limited to the following

Access to capital: Tesla is already overreaching finacially, with several billion in negative net working capital (suppliers can only be pushed so far, no matter if they are “fans” or not. Soon they will have other paying EV clients requesting delivery — guess who they’ll prioritize), half a billion of client prepayments (deposits for cars they may never see, and that in any case are significantly delayed which with increased competition could mean clients switch to more reliable alternatives), not to mention 7bn in net debt before recent and coming losses during 2018. Volksvagen, GM, Porsche, BMW, Audi and many more are actually profitable and have ready access to capital Tesla might soon find out it doesn’t

Production best practices: Tesla has tried to take short cuts around established processes and methods with poor results and lost time and money. Tesla tried rapid automation and failed. Tesla is currently trying throwing massive amounts of manual production staff and round the clock manufacturing on the problem, with its predictable quality issues and production stoppages. It takes years to create prototypes, perform test drives, streamline a combination of automation and manual oversight in order to create the beautiful and robust machines cars need to be. Vehicles are emphatically not “basically a motor and a shell”, they are masterpieces of engineering — and there is a reason there are such things as “legendary quality management officers” within the car and truck industries. The only thing really legendary about Tesla’s officers is how quickly they jump ship once they see what’s going on there.

(additional barrier: attracting competent senior officers)

Lagging battery technology: In order to save time and cement its lead in EVs and batteries, Tesla entered into a huge battery purchase agreement with Panasonic. I don’t know this for sure, but “according to sources” Tesla needs to buy 16bn dollars worth of battery cells of a certain – now obsolete – kind before it can source the cells elsewhere. Meanwhile Tesla’s competitors are free to buy modern cells from any battery manufacturer they like, including Panasonic. It will take years, or likely billions in compensation, before Tesla has worked through this first mover disadvantage backlog.

Lagging driver software technology: Tesla’s “autopilot” is ranked last or next to last by industry researchers. The most recent “keep hands on wheel at all times” update seemed to only cement that position. Recent communication from Tesla indicates Tesla is about to start from scratch as its current software is beyond fixing. Tesla may have been first in AP for a while, or at least regarding the audacious promises Musk dared make, but now the company is finding out reality tends to win against fantasy, and that being last means you’re outside the moat and walls with little chance of getting in.

From first to last within chargers: Chargers tell much the same story as batteries and software: Tesla was first off the blocks, but that also meant building in technological cul-de-sacs and spending money on dead ends that second movers could avoid. Much of the story of Tesla is about Musk blazing the way in a glorious attempt to save the world and make history, but wasting too much money and making too lofty promises he can’t keep. Several competitors are building networks of more numerous as well as more efficient chargers. Once again Tesla will find itself outside the barriers to entry, not benefiting from the security inside it hoped for.


But, but, but… barriers to entry and such

I got a comment the other day saying Tesla is worth a lot since the barriers to entry for the EV industry are so high and protective. Yes they are. The problem is that Tesla finds itself outside those barriers and my assessment is that they’ll never manage to climb over them. I imagine Tesla bulls think Tesla is already inside and more or less alone there.

Sadly, nothing could be further from the truth.

Tesla is the new kid on the block; the block being car manufacturing, not some fantasy “EV” or “tech” castle. As the newcomer Tesla needs to come up with at least as good design, testing and production practices as its super experienced peers. Tesla needs to find ways of effectively procuring the products it doesn’t necessarily have to produce itself.

So far, Tesla’s real claim to car manufacturing fame is betting on a high performance electrical engine and putting it into a beautiful but expensive metal body. Tesla’s early adopters had nothing to compare the S and X models to, and I understand why they view Tesla and Elon Musk through rose tinted glasses. The S model was definitely before its time, and Musk could just as well have been a robot sent back from the future to save mankind from global warming.

It was a good try, and it could have worked, I think, if it weren’t for subsequent short cuts and the predictable first mover disadvantages that tend to befall trail blazers.


On the wrong side of an alligator moat

Today, Tesla has an average engine, a poor body job, costly and lagging chargers and batteries, not to mention huge debts and other obligations. Despite being first and making cars consumers and politicians loved, Tesla has run larger and larger losses and cash outflows. Starting now, effectively debt free and massively cash producing competitors, with their subsidies ahead of them, not behind like Tesla, show who’s on the inside the barriers to entry and who’s not.

The stock is a whole different story (currently at 354 USD/share), but mostly without consequence for Tesla’s real life operations and expected longevity. Sure, Tesla might be capable of another stick save in the form of a share issue at all time highs, and/or bond conversions to equity. That would buy Musk and other Tesla longs some time.

No matter, it’s not a few billion here or there that are critical; it’s whether Tesla can produce fully functional cars at a profit in competition with experienced players in one of the most important and competitive industries on Earth. Given the Game Of Thrones Wall-high barrier of entry I find it highly unlikely. Until reality rears its beautiful and effective head, enjoy the imaginative stock price journey signed one of our time’s greatest dreamers: Elon Musk.

P.S. Did you like the article? Share it, please!

P.P.S. Consider one of the following: visit my TAOS store, invest in P2P loans at Lendify (500 SEK welcome bonus), Patreon, or just listen to Future Skills.

How to become an investor – a practical check-list

Topic: a practical check list for becoming an investor

Length: short

Conclusion: focus on the psychology not the maths; read books; continuously refine your strategy by objectively analyzing your decisions (good and bad)


Investing has very little to do with advanced math, statistics and accounting

Sure, you can take that approach, but unless you are talented and have a special interest in those areas, you’re unlikely to be able to compete with those that do*. Instead focus on getting the big picture right; avoiding big mistakes, and controlling your emotions. Use the one, single competitive edge private hobby investors still possess: patience and the lack of impatient clients and monthly update requirements. You can’t compete with high frequency trading algorithms or forensic accounting experts, but you can compete in low frequency trading.

* even professionals who are very skilled and experienced sometimes lose big, despite armies of analysts and accountants spending thousands of man-hours finding value – or lack thereof – hidden in company books (cooked or not). Quickly browse through my 50-point check list for fundamental investors if you’re interested in what you’re up against — and that’s the short version.


Start by reading books about the psychology of investing

I have a few suggestions on my blog (here). I will also soon make my video course on investing available through my and Ludvig’s podcast Future Skills. You might want to check it out, but don’t expect quality advice to be for free.

Another good place to start is my TAOS series of 12+ posts about important investor character traits, practices and habits (the site says 369$ but the artwork actually costs 199$; the price is right once you enter the store. The article series is free of course). You should also browse my previous articles on investing on my Best Of page.

A few of the suggested books are: Margin Of Safety – Seth Klarman, Reminiscences of a stock operator – Edwin Lefevre, The Most Important Thing – Howard Marks, The Black Swan – Taleb, The great crash – Galbraith, How an economy grows and why it crashes – Peter Schiff, The Death of money + The New Case For Gold – James Rickards, Fed Up – Danielle DiMartino Booth. And my own book.


There are dozens – if not hundreds – of viable strategies

The key is to find a strategy that is a good fit with your personality, not forcing yourself to comply with some kind of objectively optimal plan. Nothing beats actual experience on the financial markets so try to get some action as soon as possible to learn the ropes, both in terms of knowing yourself and the markets. Formulate strategies, backtest them, and try them out in demo accounts or with very small amounts of real money.

One more thing: investing on the financial markets does not mean stocks only. There are alternatives: commodities, precious metals, real estate, private equity, your own business, education or skills etc. I personally like the quattro stagione approach (read more here about choosing your investment strategy and building a multi-asset class portfolio)


Find (or create) a place where you can discuss and refine investment ideas and strategies

Avoid the typical gun-slinging machissimo stock trader forums where mostly guys post and brag about their best trades and mock anyone with a serious question. Investing is about truth-seeking, about eliminating unnecessary mistakes and losses, not about being right. Those obsessed with being right usually run into huge losses when they fail to admit their errors and cut their losses.


Trial by fire

As soon as you have a working and backtested strategy, start using real money (albeit small amounts). It’s the only way to stress-test your psychological constitution and verify your fit with that strategy


Make sure to create a feedback loop…

…by writing down your reasons (compliant with your strategy) for entering an investment, and following up on those reasons when you exit the trade. Analyze what went wrong, what went right, what was skill and what was luck. A well executed trade based on good decisions may very well end in a loss, and a string of bad decisions may create a gain. Don’t let your wins fool you into thinking the decisions were better than they objectively were.

Choose and formulate your ex-ante reasons for entering a trade in such a way that they are helpful in deciding when to exit, as well as analyzing whether the ex post result was luck or skill.

Refine your strategy with any new long-term insights you gather from every investment

Remember that both you and markets continuously evolve, meaning your strategy and investment method must too.


Summary

  1. Psychology is more important than maths in investing
  2. Read books and insightful articles about investing, not testosterone dripping online stock forums
  3. Find a strategy that suits you. Refine it in company with likeminded truth-seekers
  4. Use real money; it’s the only way to truly stress test your emotions and your strategy-psychology fit
  5. Create a feedback loop of continuous improvement, your work as an investor is never done
  6. Bonus tip I: it’s not easy, anybody who says it is don’t know what they are talking about (or are actively trying to fool you). Anybody who has simple one-dimensional solutions to the ‘problem’ of investing is either a narrow minded sheep destined for slaughter, or a snake oil salesman out to trick you.
  7. Bonus II: 10 newbie habits you should avoid (+watch CNBC all day long)

P.S. Don’t forget about my podcast Future Skills and the coming video course.

Investing is life and vice versa — just diametrical opposites

Topic: When to sow and how much. And when to harvest.

Conclusion: Yes

Length: One of my very shortest


Investing is the art of postponing

To invest means to give up the Present for better rewards in the Future. Investing entails among other things the risk of not getting a positive return, not being there for the return, and not least not enjoying whatever it is right now, i.e., you pay the price of time (including, but not limited to, aging and becoming a different person with other preferences).

You can invest on the financial markets (did you know some people only consider the stock market, the market for publicly listed stocks; that some even limit their investment universe to domestic stocks?!), in your knowledge and education, in your social and business networks, your skills, your health, or in just about anything. Sow. And harvest.

The hard question is what you actually want — money, fame, acceptance, recognition, praise, status, personal growth, self actualization? What is your purpose when you devalue the Present to the benefit of the unknown Future?

When you invest you risk creating a string of near misses, of never experiencing the moment in its full glory, always but not quite reaching that future you’re stocking with virtual gold. On the other hand, if you fully give in the the Now, the lack of planning may well reduce the available moments to experience to a suboptimal amount.


Do you choose No living or Some living?

If you are a natural Planner you risk devaluing the Present in favor of a Future constantly just out of reach. And if you always and totally live in the Now, you risk not getting that many of them.

I would go for some Now rather than none, if I could choose.

In any case, I’ve always been a hoarder, a saver, a constant postponer, an investor, a saftey junkie… up until I finally just stopped following the rules, the conventions, the “normal” path of high school, university, investment banking and managing a hedge fund. Now I’m faced with a daily struggle of trying to stay the course of exploration, living in the present while making sure there are as many presents ahead as possible. I take care of my sleep, my nutrition, my workout regime, my varied intellectual diet and relationships. I even invest mindnumbingly wisely (for the most part).

What’s next? Board meetings with stiffs in suits unable to understand the real purpose of growing a business? Actually, maybe. It’s a challenge. And under the right circumstances mutually beneficial.


For you?

Maybe seemingly unrelated to the post, but here are some practical snippets:

  1. You will be a completely different person in ten years; you don’t owe them anything, and they shouldn’t hold any allegiance to your decade-old vows
    1. A really sad example of life-wasting: “It’s always been a dream of mine to own a sports car”… so I’ve spent my best years in a basement slaving away as an accountant, and now I’m spending my freedom money on a car I don’t really want anymore… but that person, the young version of me I can hardly remember anymore wanted one at one point in time. Sad.
  2. If you actually are the same person ten years from now, you’re either delusional or stuck. Break out of your homeostasis, please
  3. Five years is typically a very long planning horizon
    1. except for financial investments; as long as they can run in the background without interfering with your life, employ them wisely in long term fashion and leave them be. Your resources will be there when you need them, if you come to need them — which like fire insurance you should hope you never come to.
  4. The author of “Cityboy” once told me when I asked his advice: “When the thought of staying two more years makes you nauseaus, quit that very day”. I took his advice in January 2014.
  5. The gaming industry understands: aim for intermediary bosses, celebrate your wins, enjoy the game, don’t waste your play solely on just winning the endgame.
  6. Nobody’s looking. At least nobody who matters, since the only one who matters is you.
    1. Do you remember when you were young and thought that your clothes mattered? As if other people would like you more or less if you bought clothes adapted to their tastes rather than your own. And as if they mattered if they did. Crazy times.

OK, final thought: Life is lived in the now, financial investments in the future — two completely different skill sets. Eat that marshmallow now; in the future you will shun sugar anyway, but invest for the long term (and hope you’ll never need it)

Remember that the most important part of a decision process is not weighing arguments, it’s establishing your purpose. The runner up factor is execution, so still not the mechanics of deciding. That is done by means of ranking arguments rather than weighing sides, and finding that one, clear reason that eclipses all else.


P.S. if you do happen to make a pros and cons list before breaking up with your girlfriend, make sure she never sees it.