It’s time to Break It Down!
There was a period in my lifetime when the phrase, “What’s good for GM is good for America” was thought by many to reflect the operational orthodoxy of our nation. The source of this perceived wisdom, if you would call it that, was said to be the Chief Executive Officer (CEO) of General Motors (GM). A little research reveals that, Charles Wilson did not exactly frame the comment the way it. was interpreted and subsequently communicated for years.
As it turns out, Mr. Wilson, President Dwight D. Eisenhower’s nominee for Defense Secretary, was asked during a 1953 Congressional hearing whether, if he were to serve in the capacity of Defense Secretary, he could make a decision averse to the interests of General Motors? After responding affirmatively, he went on to say that he:
“Could not conceive of such a situation “because for years I thought what was good for the country was good for General Motors and vice versa.”
So rather than a braggadocios assertion about the universality of the GM brand, Wilson’s statement was more like a little homespun humility about the degree to which he had immersed himself in his life’s work. Be that as it may, even had the erstwhile meaning captured the essence of some level of nationalistic fervor about the goodness and pervasiveness of GM, the page turned this week.
GM was founded in 1908, and from 1931 to 2007 held the distinction of having been the largest automaker in the United States. At that point Ford Motor Company surpassed GM in value. By 2009, the Great Recession had taken the ultimate toll on GM (and Chrysler).
The current company, General Motors Company LLC (“new GM”), was formed on June 1, 2009, following the bankruptcy of General Motors Corporation (“old GM”), which became Motors Liquidation Company. At that point GM Stockholders lost all of their investment.
On July 10, 2009, General Motors emerged from government backed Chapter 11 reorganization after an initial filing on June 8, 2009. Through the Troubled Asset Relief Program (TARP) the US Treasury invested $49.5 billion in General Motors and recovered $39 billion when it sold its shares on December 9, 2013 resulting in a loss of $10.3 billion. The Treasury invested an additional $17.2 billion into GM’s former financing company, GMAC (now Ally). The shares in Ally were sold on December 18, 2014 for $19.6 billion netting $2.4 billion. A study by the Center for Automotive Research found that the GM bailout saved 1.2 million jobs and preserved $34.9 billion in tax revenue.
With that lengthy preamble about GM, which had reclaimed its perch as America’s most valuable automaker, the breaking news is that in successive weeks, Tesla caught and surpassed the country’s top two automakers, Ford, last week, and GM this week.
What exactly is Tesla? Just in case you’ve been under a rock, or in a Rip Van Winkle state of consciousness, Tesla, Inc. (formerly named Tesla Motors, founded in 2003) is a major American automaker, energy storage company, and solar panel manufacturer based in Palo Alto, California. Martin Eberhard, and Marc Tarpenning initially founded the company in 2003, although it also counts Elon Musk, JB Straubel, and Ian Wright amongst its co-founders. The company specializes in electric cars, Lithium-ion battery energy storage, and, through their SolarCity subsidiary, residential solar panels.
Tesla first gained widespread attention following its production of the Tesla Roadster, the first electric sports car, in 2008. The company’s second vehicle, the Model S, an electric luxury sedan, debuted in 2012 and is built at the Tesla Factory in California. The Model S has been the world’s best-selling plug-in electric car for two years in a row, 2015 and 2016.
While the message stands as important in its own right, it’s imperative to acknowledge exactly what it represents, and what it does not. Tesla is…”a global pioneer at the forefront of new technologies including electric vehicles, assisted driving, shared vehicles, digitizing real-world information, sustainable energy generation and scalable energy storage.” It is not outpacing Ford and GM in vehicle sales.
The company’s stock rose more than 7%, Monday of last week, increasing its market value to $48.69 billion. Ford’s market cap is $45.31 billion. This week, Tesla valuation was placed at $51.5 billion, topping GM’s $50.2 billion. The company has yet to turn a profit, and lost hundreds of millions of dollars just last year. However, a couple of days ago, it became the most valuable American automaker, surpassing GM with almost $10 billion in profit on nearly $10 million vehicles. Tesla for its part sold only 84,000 cars last year (with starting prices of $68,000).
The encouraging first quarter numbers come as Tesla ramps up for production of the new Model 3, its cheapest car to date. The vehicle, a sedan, slated to launch this summer, will have an entry-level price of $35,000, and has already garnered nearly 400,000 pre-orders from people who made payments of $1000 for reservations last year.
It should also be noted that Tesla has a long-running saga of production problems, and it has not come close to filling its ambitious and cleverly marketed goals. It not only sells far fewer cars than its rivals in Detroit, it also employs a fraction of their workforce.
The competition has responded to the dubious nature of some of Tesla’s advantages. GM’s vice chairman Bob Lutz had this to say:
“This is the ultimate bubble, which is doomed to bust. Tesla cars are fine, but the business model is not. The high cost of production is not recovered in the sale price. All legacy car companies will soon have a variety of similar electric vehicles.”
According to the Wall Street Journal, David Cole, an investor in Detroit automakers, and chairman emeritus of the Center for Automotive Research added:
“Its (speaking of Tesla) market cap is based on hype and promises versus substance.”
Of course Musk has heard it all. Not surprisingly, he has formulated what he considers a most apt answer, and framed his response in a tweet Monday afternoon:
“Tesla is absurdly overvalued if based on the past, but that’s irrelevant. A stock price represents risk-adjusted future cash flows.”
At this very moment Tesla and GM are both working on expanding their electric vehicle profile and perfecting autonomous vehicle technology. Navigant Research released a report Monday that says Ford is ahead of Tesla and others in the self-driving car race.
GM and Ford have a near century-long or more head start on Tesla. But there is no denying Tesla’s assault on the Stock Market is having an effect. It has made Musk one of the richest men in America and given him widespread influence across a number of arenas. Even critics who say Tesla could represent a technology bubble in the stock market acknowledge that the company’s success points to a new reality in the automotive industry that will reshape the experience of driving for most Americans. The story of the company’s rise illuminates the contemporary stratification of the American economy. Eco-friendly government tax credits, a boom in financial backing, and the promise of new school innovation coalesce to deliver, in Tesla, a badge for the drivers who can afford its imposing price point. “Don’t Look Now, but There’s a New Sheriff in Town!”
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