Sergio Marchionne, the Italian-Canadian chief executive officer of Fiat Chrysler Automobiles, is the only car company boss who will take a swipe at Elon Musk, the founder and genius madman who turned Tesla Motors into one of the best-known auto brands on the planet in less than a decade since the launch of its first electric machine.
In a CNBC interview last autumn, Mr. Marchionne professed his love and admiration for Mr. Musk, then casually and subtly suggested there might be less to Tesla than meets the eye. He called Mr. Musk "a greater marketer" than disrupter, then dug a littler deeper: "As much as I reiterate my affection for Elon, there is nothing that Elon does that we cannot do."
You could dismiss Mr. Marchionne's remarks as sour grapes. Tesla, which plans to sell no more than 90,000 cars this year and has sold only somewhat more than 110,000 cars in its short history, has a market value of $30-billion (U.S.). Mr. Marchionne's FCA, which in 2015 produced 4.6 million vehicles, from Jeeps to Maseratis, has a value of $9.3-billion. Tesla shares are up by 33 per cent over a year; FCA shares are down by almost as much in the same period.
You would be wrong to write off Mr. Marchionne's comments. In effect, he is saying that to bet on Tesla is to bet on it becoming a top producer in an industry that has always been infamous for long and painful periods of shabby, even gruesome, shareholder returns. No one knows that better than Mr. Marchionne himself, who has saved two car makers, Fiat and Chrysler, from certain destruction and has been a perennial critic of the car industry's "value-destroying addiction to capital" (his words).
Fans of Mr. Musk and his sleek cars will hear no criticism of either. To them, he is the genetic fusion of Henry Ford and Steve Jobs; his cars are rolling industrial art that guarantee the demise of the internal combustion engine. As if to prove their point, they note that, since last week alone, 325,000 customers have plunked down $1,000 deposits for the Model 3 sedan, whose deliveries are slated to begin late next year. The new steel-bodied car will have a starting price of $35,000 – half the price of the larger, aluminum-skinned Model S.
No car has piled up that many orders in such a short amount of time and Mr. Musk has taken on the aura of an industrial, technological and marketing wizard. His worshippers evidently forget that Tesla's cars are not radically different from competing electric cars, and that Tesla, in spite of its soaring market value, is a small company. Its cars are really prototypes that remain removed from mass-market products.
If you accept that Tesla, in spite of all the hype, is still a car company, consider the challenges that any car company faces. It will not be immune to these challenges; on the contrary, they will intensify as the company increases production and triggers an intense competitive response from enormous companies, from General Motors to BMW, which will not take kindly to seeing mid-market Tesla 3s cluttering suburban driveways. It's one thing to grab a little slice of a highly competitive market. It's quite another thing to keep and expand that market.
Mr. Marchionne is right – car companies burn through capital faster than a Ram truck burns through gas. A year ago, his presentation, called Confessions of a Capital Junkie, neatly summed up the never-ending plight of the big mass-production and luxury car companies. He noted that, over any given economic cycle, car companies do not earn their cost of capital, and those capital requirements are climbing as the manufacturers introduce new technologies, from electric and hybrid powertrains to infotainment systems, and meet ever-tighter environmental standards. In 2014, the big car companies collectively spent €122-billion on capital and research and development, up from €76-billion in 2010. That works out to a compound annual rise of 10 per cent or more.
It gets worse. The product-development costs in the auto business consume value at much faster rates than other businesses. On average, it takes a mere 4.1 years for a car company to reinvest its entire enterprise value (debt and equity) in product-development costs. The average for all major industries, from oil to construction materials, is 20 years. At the same time, returns on invested capital in the car industry are generally the lowest of all the major industries. If you are looking for fat returns on capital, invest in pharmaceuticals or chemicals, not autos.
No wonder car making is a lousy business. Mr. Marchionne is urging consolidation to bring down development costs and end the duplication of technologies. But with consolidation going nowhere, the car business is bound to stay lousy for a long time.
Which brings us back to Tesla – a car company, remember? To stay in the game, investors will have to shower Tesla with endless torrents of capital, and they will have to do so knowing that their beloved company faces a few additional obstacles. They include its lack of an in-house bank to finance customers' purchases, the lack of networks of fast-charging stations in Europe and the United States, the inevitable competition from hydrogen-powered cars (whose tanks could be filled as fast as gasoline tanks) and the equally inevitable promotion of hydrogen by the oil and gas companies, which would see the mass production of battery-powered cars as a threat to their core business.
On top of that, most big car makers are planning "Tesla killers." The new electric Chevy Bolt will be one of them. The electric BMW i3 is already on the market and selling fairly well. Both the Bolt and the i3 carry sticker prices similar to the Tesla Model 3's. The auto industry is in sore need of a shake-up and there is no doubt that electric cars are a better choice for cities than gas and diesel cars. Still, the hype surrounding Tesla is unwarranted. Its extraordinary market value suggests that the company has already won the car wars. In reality, Tesla is just getting started.
Eric Reguly