On Wednesday, Tesla Inc. announced its second-quarter resultsThose results, along with Elon Musk’s apologies to analysts for his rudeness three months earlier, pushed its stock price up and 2025 bond yields down. During the earnings call, Musk and his colleagues said “improve” or “improvements” 14 times in describing everything from Tesla’s production lines to its in-car computing to its gross margins.
Improvements, be they in manufacturing or in margins, brought to mind comments from New York University professor Scott Galloway, speaking on German marketing podcast OMR in April about the auto industry and disruption. Galloway applied his “general test” to the industry’s vulnerability to disruption: “You look at the average price of the products relative to inflation.”
The price increases versus inflation have actually been decreases. I would argue that the vulnerability in the auto business is actually pretty low. If I look at my Mercedes … I believe on an inflation-adjusted basis, the cars I buy now are less expensive than the cars I was buying 20 years ago, and yet the product is far superior than the car I was buying 20 years ago. I would argue that the auto industry is not that vulnerable to disruption.
What I’ve advised many of the unicorns or new-economy companies who are making big investments in the auto industry is that I believe that is a shareholder-destroying venture because I don’t think the auto industry is that vulnerable.
… I’m actually quite bullish on the traditional automakers. They’ve done a good job, kept their prices low, making great investments in technology.
It’s a useful hypothesis — so let’s test it. Today’s cars are qualitatively better than those made 20 years ago, but it’s worth trying to quantify that improvement. So I asked my colleague Salim Morsy to choose two comparable cars made by major manufacturers. Salim took it a bit further back, to the 1980s, and suggested two small sport coupes with dedicated fan bases: the 1982 Renault R5 Turbo 2 and the 2018 Ford Focus RS.
The 2018 Ford is a massive improvement on the 1982 Renault. And its improvements aren’t just in the directly comparable characteristics. The Ford also has anti-lock brakes; airbags; power windows, door locks and steering; air conditioning; and a stereo system that would blow away anything from 36 years ago. It’s very hard to find a car being manufactured today these things, and in a package that’s lower-priced.
Galloway also says that industries ripe for disruption (such as newspapers two decades ago, or cable television today) also have high margins. Here again, the auto industry looks hard to disrupt. Tesla’s gross margin in the second quarter of 2018 was 14.3 percent. That’s slightly lower than the margins for Bloomberg Intelligence’s Global Automobile Valuation Peers. However, its Ebitda margin last quarter was -3.4 percent and its operating margin -15.5 percent. Global automakers have had remarkably stable Ebitda and operating margins for the past two decades, even as their gross margins have fallen.
An improving product and deflationary product with stable, low margins is indeed a challenging target for disruption — at least in terms of product quality. Other things, such as transportation-as-a-service offerings (with humans in the loop or without), that could lower demand for new cars could prove a challenge to big automakers. That challenge, though, is existential — it’s not from other automakers.
The U.S. vehicle fleet over the past four decades tells us not only how it has improved, but also the priorities we have as consumers. Since the 1970s, our cars have become about 48 percent less polluting, 92 percent more fuel-efficient, 69 percent more powerful … and they weigh the same. Our cars were getting lighter for almost a decade after the first oil price shock; since then, they’ve been trending back up to exactly what they were in 1975. Manufacturers, too, want bigger cars, and their yen for higher-margin sport utility vehicles based on truck chassis has helped shape consumer preference as well.
Imagine the efficiency improvements if vehicle weight had followed the same trend line as carbon dioxide emissions … if only consumers wanted lighter vehicles. Disrupting auto manufacturing is hard — and so is disrupting consumer preference.
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