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Why Tesla Could become the next Standard Oil

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SteveG3

SteveG3

Active Member
Supporting Member
Sep 21, 2012
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#1
I realize this is a ridiculously long post... but I put it in the comment section of a Seeking Alpha article, and seems like something worth having a discussion here...


Tesla Motors Inc (TSLA): Looking Beyond Tesla As An Auto Company - Seeking Alpha


TO BE CLEAR, WHAT I AM ABOUT TO SAY IS SPECULATIVE AND NOT A PRIMARY REASON TO BUY TESLA, BUT RATHER A FREE CALL OPTION THAT COMES WITH TESLA.

Elon Musk has stated that Tesla will discuss the giga factory on the Q4 earnings call next month. He said he is happy about the plans and partnerS involved.

Who might those partners be? Panasonic seems like an obvious choice. Who makes it plural partners, i.e. partner number 2, or possibly number 3?

Solar City? well, in the future they could fit well... but today Tesla's need for a partner beyond Panasonic is cash. Solar City cannot do much for Tesla there.

Here's the speculative part... what if the partner ends up being a giant. What if it ends up being Samsung, or Google?

Okay, again read what I wrote in CAPS... this IS SPECULATION, it is not a core reason to invest in Tesla, but rather a free call option.

Why Google?

1. The mission of Tesla is to accelerate the adoption of electric vehicles.

2. Massive scale needed to go from ICE to EVs. Before the end of the decade, global vehicle production will be 100 million/year.

Elon repeatedly has said the one giga factory would produce as many lithium ion batteries as all total global production combined.

To one day, decades from now, convert that 100 million ICE production to EVs would take TWO HUNDRED GIGA FACTORIES.

the scale is massive.

looked at another way, entire nation states are rich from the oil industry. The per capita income in Norway is $100,000 vs. $50,000 for it's neighboring Scandinavian countries. All due to oil wealth. There are several countries in the middle east, wealthy, entire countries, because of oil wealth.

Now, not all of the wealth of the oil industry would flow to energy storage. I estimate roughly 20-30% (based on the different dynamics of electricity/battery vs. liquid fuel of gas refined from oil and the percent of oil used for vehicles).

Nonetheless, this is a massive scale.

3. Google, Larry Page as a private individual, (or Samsung) has the cash to handle the massive scale. Google $48 billion net of debt, Page $30 billion plus, Samsung $30 billion.

4. Larry Page's stunning enthusiasm for Tesla and Elon Musk.

Not only is Page a close friend of Musk's (as is Google cofounder Sergei Brin, also worth $30 billion plus), at least according to Steve Jurveston, Page has expressed his belief that his money would be best left in Elon Musk's hands.

PARAPRHASING:

If I get hit by a bus, I think it's probably best I leave my money ($30 billion in personal wealth) to Elon Musk. He's doing the things I believe in and I think his private enterprises could do more than a non-profit.

Watch here from 27:30 on this linked video... I don't think I've captured how compelling these comments were:

http://bit.ly/1jbpfuv

Granted, these remarks attributed to Larry Page imply where his money would go when he dies... but what of, say, 10% of his money, $3 billion, putting a new joint venture to develop battery technology in a much stronger position.

There is precedent for this... look at Warren Buffett turning his wealth over to his personal friend and fellow business genius/billionaire Bill Gates.

5. This is the mission for which Musk created Tesla, and it's becoming increasingly clear that the other automakers are not motivated to step in.

I could write at length about why the other automakers are not motivated. But there's two main points,

a) as things stand, even if Tesla gets up to 500,000 cars by 2020, 99.95% of the auto business is entirely unaffected by competition from Tesla. That is, they are not the blundering fools ignoring their impending fall do to disruption. While the disruption is at a stunning pace from Tesla's perspective (i.e. growing volumes 25X in 6 years in this scenario), it is a rounding error to the auto makers... i.e. "oh, our global addressable market has grown from 80 million in 2013 to 99.5 million in 2020. Oh, the devastation... had it not been for Tesla, we'd be at 100 million in 2020").

b) if the automakers do enter the disruption the entire deck gets reshuffled and their industry becomes vastly more unstable. Do you want to be part of a club where everyone is fat and safe, or tear up the current order for one where the deck is completely reshuffled, the developing technology is fast and hard to predict. That is, do you want to go from being in a club where every few decades or so one of you might die, or one where every 5 years, the technology may shift and you might be Blackberry.

Massive disincentives for the automobile industry to push forward into EVs. No, they're not dumb or mean spirited... their just not jumping from a warm bath into shark infested water.

The only exception of an organization with a large enough amount of money and the incentive to invest in the MASSIVE costs of going from oil fields, refineries, gas stations, to increased grid ability and energy storage is the government of China.

6. The synergy of resources. Yes, there's the obvious, Tesla needs money and Google or Larry Page privately, has it.

Than there's the almost as obvious. Elon Musk can tap into the wealth of brain power at SpaceX and Tesla, as he described doing writing up the Hyperloop proposal. What if Google's enormous brain power was part of the pool to draw from?

It's not simply about getting these batteries produced, it's also about having the best minds developing the best technology to accelerate and maintain the point at which it is plain for everyone to see EVs make more sense than oil.

7. If I am correct in seeing that no one (China possibly excepted) is going to step in and make the massive investment the energy storage transition requires... believe me Elon Musk has seen it. Musk will have seen it and discussed it with the people he trusts and has confidence in. Larry Page is on the short list of these people. Larry Page has over $30 billion, Elon Musk has a very persuasive way of communicating.

**********************...

It may not be so much whether Tesla can be the next BMW or even Toyota, it may be, can they become the next Standard Oil (you youngins, pop that into wikipedia).
 
#2
Very interested to see where they go with this definitely will help resolve supply issues, increase profit margins, and prepare them to be not only a manufacturer but a supplier of batteries when others inevitably get on board. Google is a definite possibility, they seem to be trying to expand into many different markets, shown by their purchase of Nest, but their past manufacturing efforts haven't been anything spectacular so I'm not sure if they have that much too offer Tesla as far as manufacturing is concerned. They already have the land in fremont to build a battery factory which would be great to reduce their emissions and costs related to getting the batteries to the car.
 
#3
Jace, you know more than I do about Google's manufacturing efforts than I do. Panasonic makes sense as one of the partners bringing battery manufacturing experience to the table.

What Google or Page and/or Brin can offer in a way few on the planet can, is vision, money, brain power, and commitment to something larger and longer range than the next quarter's earnings. Perhaps, there can be some debate about the last point for google as a whole, but for Larry Page and Sergei Brin, they have that freedom with their personal wealth.
 
#4
Google's operating margin is around 30%. Why would they bother investing in a low margin business like the batteries? It doesn't make sense unless they have other motives.
I believe that among the reasons why Google purchased NEST is Goodgle didn't want Apple to have it.
If Google sees a fit down the road with Tesla then perhaps a JV now with Tesla in the battery business places them where they want to be in 8-10 years when Elon is ready to exit the EV business.
 
#5
JoNoSaisQuoi said:
Google's operating margin is around 30%. Why would they bother investing in a low margin business like the batteries? It doesn't make sense unless they have other motives.
I believe that among the reasons why Google purchased NEST is Goodgle didn't want Apple to have it.
If Google sees a fit down the road with Tesla then perhaps a JV now with Tesla in the battery business places them where they want to be in 8-10 years when Elon is ready to exit the EV business.
Click to expand...


Yes I think a major part of it was that they were "buying" Tony Fadell and Matt Rodgers. But yes don't really see why they would want to get involved with large scale battery manufacturing.

Steve- I do agree that it would be a good partnership for Tesla in the sense that Google does have vision, and $$$, and they have been spending a lot of money on the research for car automation so anything is possible. Would like to see them partner with someone like Elon, who actually has a vision for the future and wants to manufacture a quality product, not just pump out batteries with as much of a margin as possible while spending little on advancements.
 
#10
Chrisr400cc said:
What are the chances of Tesla doing a secondary to get money for the Giga factory? Their Market Cap has gone up quite a bit since their last one.
Click to expand...

I don't think they will, but in just a few weeks we'll have a better feeling for that when they reveal more details about their partnership on that front. The fact it's been put out there that it's 'partners' (plural) on the giga factory - and knowing just how creative the whole Tesla team is - the possibilities in partnership are endless for how this whole deal works, including not needing a secondary.
 
#14
I wanted to reply to some posts here, but I think I need to start with some context. I probably named this thread poorly... I mention Standard Oil more to get at the enormity of the scale involved if we go from Oil/ICE to grid/EVs than as a metaphor for Tesla's business future.

The staggering scale I'm referring to is not simply the one giga factory to enable Gen III, but of the new infrastructure (at this point battery factories) to shift all vehicles from oil/ice to grid/EVs. The scale is so large, and the rest of the auto industry has such large incentives not to make this shift, that I think Elon may feel compelled to aim at very deep-pocketed partners (hence the whole Google or Larry Page tie in) to get things going at a scale that will overcome the auto industries resistance. So it's not so much a vision of Tesla becoming the largest corporation on the planet, but that incentivizing the automakers to go forward may take a much larger kick start from Tesla than Elon originally thought, and that partners with tens of billions of dollars could dramatically reduce the timeframe of executing the kick start.

I first thought about the enormity of infrastructure needed in coming decades this summer after looking through this presentation posted by Buran, here on TMC on August 8th (links to presentation and Buran's post below). It was a presentation JB Straubel gave in September 2008. The costs it implies for going from Oil/ICE to Grid/EV need to be taken with a grain of salt, as 1) the presentation was given in 2008 and 2) I'm going to extrapolate from what he estimated investment cost to go to 1% EVs to a crude estimate of 100% EVs decades into the future. The costs have likely gone down from 2008 to now, and are almost surely would over coming decades (that is, inflation taken out). So these numbers are meant to be suggestive of the scale of capital investment that may go on in energy storage not a meaningful estimate of the actual cost.

JB estimated that turning 1% of the ICE market to EVs would take $30 billion dollars in capital investment. So, my extrapolation implies completely going to EVs would involve $3 trillion dollars (looking at pages 10 and 11 in JB's presentation for the 1% number).

I was stunned this summer when I looked at this. After thinking about it a while I realized that it's not just that EVs will simply mean less oil used. The EV drivetrain doesn't simply replace the ICE drive train, in a sense it is replacing part of the oil industry as well. I'm sure someone here with the right scientific background could give a more proper description of this than I can, but it's as though ICE have "dumb storage tanks" just big cheap empty metal containers, whereas EVs have "smart storage containers" big expensive batteries. So, a car like the Model S doesn't simply replace an ICE drivetrain, but it's smart container replaces a piece of the oil industry. I've estimated at 100% EVs, 20-30% of the entire oil industry will go into batteries and battery production plants (I'm sure there are people that can do a better estimation of that than I can... I base it on the U.S. using roughly 45% of it's oil consumption to fuel vehicles, and the battery in an EV being roughly 2/3 of the combined energy cost of the battery and electricity costs).

So, maybe I've made a mistake here, or maybe trillion dollar or multi-trillion dollar is the right scale we need to think about if we are going to see EVs replace ICE. Given Elon's mission to see this happen, given the lack of response of the auto industry (he sounded surprised and disappointed about this at his Teslive talk) and the seeming underlying barriers to the auto industry being motivated to respond, Elon may have decided he wants really big partners with really large sums of money... not because they need that for the one Giga factory, but because it may take a bunch of Giga factories to catalyze the other automakers, and alone it would take Tesla a long time to get up to a bunch of Giga factories.

So my thought on the discussion here about whether outside funds are needed for the giga factory? not a need, but maybe now a want.

As to the point raised about why Google would go for a markedly lower margin business? First, I did say previously , that I don't know if it's in shareholder interest (whereas that's not an issue if the money was directly from Larry or Sergei). It is a valid question to ask, whether such an investment is in Google shareholder's interest. I'm not sure... but I don't think it has to match Google's current 20%+ profits for it to be so. Google has $50 billion in cash... if they could invest it in growth of their ongoing business that churns out more of those 20% profit margins, they'd be doing it. So that $50 billion does not look like it has a current investment available with a 20% return... the returns a JV in energy storage could offer may or may not be in Google shareholders best interest... it depends what other options they have for investing the money.

link to JB's presentation (I think its worth a look)

http://www.whitehouse.gov/files/documents/ostp/PCAST/PCAST Sep. 2008 Straubel slides.pdf

link to Buran's TMC post in the battery thread which referred to the Straubel presentation

Model S Battery Pack - Cost Per kWh Estimate - Page 23
 
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#15
The auto companies as a whole are not fat and happy. GM and Chrysler just went through bankruptcy and Ford barely escaped thanks to the forethought of the Ford family for, among other things, taking massive loans and mortgaging their iconic Blue Oval symbol to have enough cash to weather the 2008 financial crisis. GM just exited US government ownership/conservatorship. Now Fiat-Chrysler look to be on very shaky ground, North America looks ok but Europe can pull it down.Peugeot Citroen is circling the toilet bowl. Volkswagen is doing ok outside North America but really needs to do much better in the American market to truly solidify itself as a global player of the future

The only auto company that is truly fat and happy and absolutely loves the status quo is Toyota, big steady profits and a horde of cash. Mitsubishi is reeling and insist they will stay in North America. Isuzu basically exited the auto business to concentrate on commercial trucks. Subaru gets enmeshed in Toyota's tentacles more everyday. Mazda is hanging on with 1.3M units worldwide. Honda Motor Company is bravely marching forward against the continuing onslaught of Toyota's economies of scale and massively superior R & D budget that competes head to head with Honda's own. This is like Chrysler battling GM in the 60's. We know what happened to Chrysler in the 80's. The global auto industry is plagued with overcapacity, any auto company not looking for a differentiator is institutionally moronic.

Tesla is no real threat to Tata Motors, Suzuki, Hyundai, Geely Auto or any auto company that sees most of its future in India, China, or the third world. At least not in the foreseeable future. That is something Nissan-Renault could do with EVs.

Tesla can disrupt BMW and Mercedes Benz. And take away some big profit centers from GM, Ford, Volkswagen and Fiat-Chrysler.

When Toyota Motor Sales USA started importing the Toyota Corona in the late 60's GM, Ford, and Chrysler mocked the mobile tuna cans.

I think Elon's motivation was to prod the big companies in the US and Europe to go electric and in turn they would eventually take low cost EVs to the masses of the third world.


I think Google would find the ROI in a Giga factory would be higher than spending $50M a pop for yet another internet startup founded by a former employee that grabbed a dozen of the top software engineers Google wanted to hire or investing in Treasury Bills.

Disrupting a digital Silicon Valley giant has been rather easy in the past like Netscape or Myspace. Giga factories could give Google something tangible that can't easily be swept away.

Or Larry or Sergei could do it because they believe in the electrification of the automobile and all the tangible benefits in would bring humanity with an acceptable profit to put icing on the cake.

At some point what does another billion dollars mean when instead you can be hailed along with Elon Musk as doing something great for humanity.
 
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#16
Don't lose sight of the fact that the Model S is, in most parts of the country, powered by natural gas or coal. Because electric motors are so much more efficient than gasoline engines, however, there are many fewer joules used overall. As new, more cost-effective renewable energy technologies emerge, EVs automatically change their carbon footprint.

Viewed in this light, Solar City is as much a part of the new "Standard Oil" that Elon Musk is building.
 
#17
A few points to bear hugely in mind here.

Standard Oil took 20 years - 1870 to 1890 - to control 88 percent of the US refined products. By the end of 1911 the Trust was gone, split up into almost three dozen companies. As an aside, it was the trust-busting that enriched JDRockefeller to become the world's wealthiest individual.

The lesson? Insofar as Mr Musk maintains the course he outlines in his Secret Master Plan, he, shareholders, TMInc and the world should continue to reap gains. On the other hand, were TMInc to go the path of a single-phase or multi-phase monopoly, it eventually would be brought to the chopping block. A multi-phase monopoly might be one where TMInc maintained overweening control of the production of vehicles, the dissemination of vehicles, the battery technology, the refueling of vehicles and the like. What "overweening" means might differ in the US, China, EU, Inner Slobbovistan, and so on.

Caveat sator.
 
#18
The OP was an opus but it was more of a waking dream. It is not a binary decision. It is not Tesla versus the world. It is Tesla "within" the rest of the world. The most pro-Tesla folks see a world that does not include other automakers.

About 10 different auto companies are involved in EV design and rollout. Carlos Ghosn at Nissan is pro-EV and is the leading EV salesman in the world. He also is aspiring to do the millions of sales that Tesla wants to. GM is kind of "krapping" the bed lately and not really moving forward until their battery labs certify the next-gen battery for the next-gen cars (due 2016 at a minimum). They already have an electric Cruze running in Korea but don't bring it to the USA to due platforming. Ford is moving forward slowly but they have huge capability. Mitsubishi is doing some nice things with the PiHV outlander. Volvo is stepping up with CrossBlue.

Let's all get along and understand that when the world electrifies - all the automakers will be making electric cars. Cost of scale, and channels will rule the prices customers pay for them. All incentives will be gone because now incentives will need to go to electric companies to beef up delivery mechanisms, establish fast-charging sites and grow the infrastructure. In fact, I think money is better spent on beefing up electric companies to support EVs (more deployment of inexpensive charging sites, more locations on major and minor routes, etc.) Sure we want people to buy them. But we need to make sure all of our governments, electric companies and consumers want to support it.

Tesla will grow but I doubt they become "Le géant mondial". They have a head start but there are some massive firms out there also working on their solutions. They will all get along as long as the battery tech can be brought down in price. The current sales model supports most of the heavy-incentivized countries. It needs to make sub $20K cars for the mass populations of the world (BRIC) and Asia. The USA is only 4% of world population and the growth economies are not here. What I think we have here is viewing Tesla as "the replacement auto technology all other auto companies will fail because-of". That is not going to happen.

One stumbling factor. The time it takes to make one battery (ie. the machines needed to fill, wrap, complete, charge, package and ship) is far larger in time than to refine some oil into gasoline. The time needs to be exploded out into a number of cells needed per car, per day, per year, etc. The Gigafactory idea of 200 of them are needed to replace all cars is a 50-100 year thought. You then need 10-20 battery recycling gigaplants to bring in those used cells and recycle them. If such recycling happens within the Gigafactory - what is the ongoing cost of recycling one cell added onto the production costs of one cell? Is it sustainable? Has a full lifecycle review of this been done in its entirety?

Many EV enthusiasts read Science Fiction. I actually don't but have a knack for gardening. It will be far better to look at ways to reduce our needs to drive (telecommuting, less "bread-and-circuses", less shopping trips) than to try to find ways to just transition the cars over. More mass transit, more busing services (electric) and more getting-along with strangers will do far more good for humanity than everyone trying to exist in their own electric bubbles.

Let's move to EVs but let's also support all EV manufacturers. It is far more important to grow the full spectrum of the EV marketplace (the whole) than to be staring at how Tesla can rule the world so our stock can go up (the me). Autos are not free-software (Google) and don't have massive ad-revenue incomes to offset costs. Autos are not Apple (priced a few hundred higher than others). They are hugely substantial purchases akin to buying a house. They [EVs] should not be treated as if everyone will just buy them because of some "tech" reason.
 
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#19
My basis for investing in tsla has been qualitative analysis. Product, innovation, but primarily people. More to the point, Elon Musk, JB Straubel, George Blankenship, Chris Porritt, Franz Von Holzhausen, Diarmuid O'Connell, and a cast of thousands. Coupled with the brain-trust of SpaceX, and Solar City, working for Elon Musk is the opportunity of a lifetime. One helluva résumé addition.

In terms of expanding capabilities, Tesla is going to have to put together the finest Human Resources department in the world, just to screen applications.
 
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