Howes: Tiny Tesla's soaring value highlights chronic Detroit weakness
It's good to be Tesla Inc., the Silicon Valley maker of electric vehicles.
After years of antagonism and legislative maneuvering, CEO Elon Musk's company got approval this week to sell Tesla vehicles directly to consumers in Michigan — epicenter of the automotive establishment. The deal is a qualified victory for Tesla and would-be buyers, whose free choice in the marketplace shouldn't be held hostage to protectionist dealer-franchise laws.
It's also a symbolic defeat for Detroit. The settlement with state Attorney General Dana Nessel signifies yet more philosophical daylight between the hometown auto industry still employing tens of thousands and environmental left causes championed by the AG and her ilk in today's Democratic party. Few corporate icons exemplify those causes more unambiguously than Tesla, the global auto industry's preferred virtue signaler.
As if on cue, Tesla's market cap breached the $100 billion mark on the same day. Crossing the milestone vaulted the automaker beyond Volkswagen AG to make it the second most valued automaker in the world behind Toyota Motor Corp. Even more sobering: comparatively tiny Tesla is worth more than General Motors Co. and Ford Motor Co. — combined.
There are all sorts of reasons Tesla's outsized market cap would rankle in a Big Company town reared on the bigness of the erstwhile Big Three of GM, Ford and whatever's the latest permutation of ol' Chrysler Corp. Start with the basics: they build more cars and trucks and, in recent years, deliver better quality. They employ union-represented workers in their plants, and depending on the quarter, they book operating margins north of 10%.
Tesla? Not so much, which for now may be a thinly disguised blessing. It's the characteristics of Detroit (and its legacy foreign competition in Europe, especially) that Tesla doesn't have that help make it the preferred, if volatile, auto play for savvy investors looking for the next, newly innovative thing in the changing global auto industry.
Case in point: Ford said on Wednesday that looming pension obligations would force it to book a $2.2 billion loss in last year's fourth quarter when it reports 2019 earnings on Feb. 4. Tesla doesn't have pesky pensions, legacies of commitments with roots in Detroit's Golden Age of the 1950s.
Nor, despite its location in deep-blue California, does Tesla have a union workforce. And it likely won't anytime soon, courtesy of both Musk's antipathy to the UAW and the federal investigation into union corruption that is reaching the highest levels of leadership and undermining its organizing efforts.
Second case in point: Tesla investors don't have to worry whether an embattled union leader implicated in a corruption probe will order his union members to strike for 40 days and cost the automaker an estimated $3 billion in lost profit. For global automakers operating in the United States, that's a unique problem that's made in Detroit.
The market caps of GM ($49.88 billion) and Ford ($36.32 billion) and Fiat Chrysler Automobiles NV ($21.1 billion) reflect that burden. Investors pile into equities they think will deliver the highest returns, and in these tech-crazy times, those companies are not century-old industrial giants still laboring under pension obligations, union contracts and excess plant capacity.
Third case in point: Detroit's automakers are making virtually all their profits on the sales of increasingly large pickups and SUVs. Regulators overseeing the world's largest markets in China and the European Union, however, are pushing rules in a decidedly electrified direction: namely, right into the business model of Musk's Tesla.
Sure, GM, Ford and FCA out-earn Tesla, and probably will for at least the next few years. But smart investing looks to anticipate the next big thing with the most upside potential, not to reward an Auto 1.0 play that amounts to squeezing a few more bucks in variable profit from the existing architectures supporting familiar vehicles.
Love him or hate him, Musk's electrified fleet turns that notion upside down. It embraces the emerging regulatory bias for electrification, avoids sunk investment in increasingly obsolete technologies like diesel internal combustion engines (especially fraught in Europe), and charts an expansionary course with a new plant in Shanghai and one planned in Germany outside Berlin.
For Detroit to claim a chunk of Tesla's rising valuation, it'll need to prove the burdens of its past are not permanent fixtures of the future. If history is any harbinger, that won't be easy to do or sell.
Daniel Howes’ column runs most Tuesdays, Thursdays and Fridays. Follow him on Twitter @DanielHowes_TDN. Or listen to his Saturday podcasts at detroitnews.com or on Michigan Radio, 91.7 FM.