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Tesla and EV: The Modern Version of 1960s Toyota

Updated: Apr 6

When we think of electric vehicles (EVs), we often think of Tesla as the pioneer and leader of the industry. However, there are many concerns over Tesla market share dominance as other legacy automakers are entering the space. But did you know that Tesla current situation are very similar to the rise of Japanese carmakers in the 1960s and 1970s, particularly Toyota? In this blog post, we will explore how Tesla position itself in the auto-vehicle industry and seek the answer to justify Tesla high valuation in the stock market.


Tesla brand

Picture: Tesla. Source: Unsplash


The Rise of Japanese Car


Japan has a long and rich history of automobile manufacturing, dating back to the early 20th century. However, it was not until the second half of the century that Japanese car makers rose to prominence in the global market, thanks to a combination of factors such as oil crisis, quality improvement, and global expansion.


The first factor that contributed to the rise of Japanese car was the oil crisis in the 1960s and 1970s. The oil crisis was a period of high oil prices and shortages caused by political instability in the Middle East and OPEC's decision to cut oil production, which is very similar to the current day as they recently attempted the same tricks twice in March and May of 2023 but it seems to not work out well this time (figure 1). The oil crisis had a significant impact on the demand for cars, especially in the US, which was the largest car market at the time.


gasoline price

Figure 1: Crude Oil price 2023. Source: Trading Economics


With the energy crisis in 1970s sending gasoline price doubled in 1979 and triple in 1980 comparing to 1970, US consumers began to look for more fuel-efficient and reliable cars, which gave an advantage to Japanese car makers over their American counterparts. Japanese cars were smaller, lighter, and more economical than American cars, which were often large, heavy, and gas-guzzling. Japanese cars also had fewer defects and breakdowns than American cars, which were plagued by quality issues and recalls in 1960s and 1970s.


The second factor that contributed to the rise of Japanese car was the high quality products at affordable price comparing to US competitors. Japanese car makers adopted a number of innovations in technology and management that enabled them to produce cars with high quality and low cost. Some of these innovations included:


- The use of robotics and automation in the manufacturing process, which increased productivity and reduced human errors.

- The implementation of lean production system, which eliminated waste and improved efficiency in every aspect of production.

- The development of just-in-time (JIT) inventory system, which reduced inventory levels and storage costs by delivering parts and materials only when needed.

- The establishment of quality circles and kaizen (continuous improvement) programs, which involved workers in problem-solving and quality improvement activities.

- The adoption of total quality management (TQM) philosophy, which focused on customer satisfaction and quality assurance throughout the entire organization.


The third factor that contributed to the rise of Japanese car was their aggressiveness in opening factories around the globe. Japanese car makers realized that they could not rely on exporting cars from Japan alone, as they faced various barriers such as tariffs, quotas, exchange rates, regulations and transportation costs. Therefore, they decided to build factories in other countries, especially in their major markets such as the North America and Europe. By doing so, they could reduce production costs, avoid trade restrictions, adapt to local preferences and regulations, and gain access to new markets and resources. They also established joint ventures and partnerships with local car makers, suppliers, dealers, and governments, which helped them gain trust and support from the host countries. Toyota and Volkswagen partnership and Mazda-Ford co-factory production were the prime example.


Toyota vehicle

Picture: Toyota vehicle. Source: Unsplash


The result of these factors was a remarkable increase in the market share of Japanese car makers in the US and other countries. According to American Enterprise Institute - AEI, in 1960s, Toyota only had less than 1% market share in US and all Japanese brand vehicles only took less than 2% of the total. Toyota, along with other Japanese brands such as Honda, Nissan, Mazda, Mitsubishi, Subaru, Isuzu, Suzuki, Daihatsu ate up at a rapid pace the 75% market share of Ford and GM. By 2000s, Toyota at the peak accounted for 19% of the US Car Sales in 2009, while the sum of Japanese brand took nearly 40% of the total. Japan also became the world's largest car producer in 1980, surpassing the US for the first time. Japan maintained this position until 2008, when it was overtaken by China due to its rapid growth.


The Rise of EVs and Tesla


Electric vehicles are not a new concept. In fact, they date back to the 1800s, when small prototypes were made by blacksmiths in Hungary, Netherlands and US. However, they were soon forgotten due to high cost, technology difficulty and low energy conversion efficiency compared to gasoline vehicles like Ford's Model T, which was introduced in 1908. In fact, according to the US Department of Energy, the cost of a gasoline car was $650 in 1912, while an electric roadster sold for $1,750.


Tesla, founded in 2003 and taken over by Elon Musk later, had a vision that was still almost 20 years ahead of its time. Gasoline vehicles were still the king while electric cars were haunted by the same issues: high cost, battery technology and other technical difficulties. Taking lessons from previous attempts at EVs by the likes of GM or Toyota, Tesla originally positioned itself as a luxury brand to make up for the high production cost with limited supply and long waitlist. Thanks to battery innovations, the performance and price of EV cars improved significantly in the 2010s. For instance, the Tesla Roadster achieved 244 miles per charge at $100,000 USD price per vehicle, which was the first EV to crack the 200 miles milestone, seems insignificant comparing to the new Tesla Model S that can goes 405 miles per charge at $88490 USD price per vehicle.


It was not until recently, in the 2020s, that EVs started to gain momentum in US, Europe and China. For America, this was partly due to the EV encouragement Build Back Better Act that President Biden signed into law in 2021. The bill provides tax incentives of up to $12,500 per vehicle to spur consumer demand in electric vehicles. It also raises the cap of 200K-unit-per-manufacturer and allows buyers who sign a binding purchase agreement before the law is signed to retain access to the old credit if they choose. On the other hand, Europe also provided many subsidies to EV manufactures in 2020 to help achieve the EU's CO2 emission target. For China, they were the leader in government support for EV as it started as far as 2009, when the heavy air pollution encouraged the Chinese government to transition for a cleaner economy.


Government subsidies

Picture: Government Printing Money For EV Subsidies. Source: WixMedia


Tesla has been one of the main beneficiaries of these support, as it has already sold more than 200K vehicles and can now offer more credits to its customers. The company is strategic in plant placement and sets up factories in China, Mexico, US and Germany to not only qualify for subsidies but also to achieve the lowest cost-efficient price. Tesla has also been leading the way in innovation, with its Model 3 and Model Y being among the most popular and affordable EVs on the market. Tesla has also been expanding its product line with the Cybertruck that potentially starts delivering as soon Q3 2023. The second generation of Tesla's famous Roadster is also in production with significant improvement.


Tesla's success has inspired other automakers to join the EV race, such as BYD, Nio, Rivian, Fisker, Lucid and Volkswagen. These companies are also offering attractive models with different features and price points. The competition is expected to increase as more consumers become aware of the benefits of EVs, such as lower maintenance costs, environmental friendliness and performance.


Tesla Is The Toyota of 1970s, But Better


With all those being written, it is clear that Tesla has many attributes that resemble Toyota in the 1970s. However, in my opinion, they have a much better strategic position in the auto vehicles world right now compared to Toyota. However, let's look closer at the similarities before diving deep into the key deceiving factors that differentiates the two.


First, Tesla factories are the most efficient factories for vehicle production in the world, which was similar to Toyota situation based on 1980s studies mentioned above. Tesla has adopted a vertical integration strategy, which means that it produces most of its components in-house, rather than relying on external suppliers. This allows Tesla to reduce costs, improve quality, and innovate faster than its rivals. It can be seen clearly at the net margin at Tesla, which it maintained at 13% even with the recent aggressive price cuts, compared to the 2% of Ford or 6% of GM. Tesla also uses advanced automation and software to optimize its production processes and minimize waste. For example, Tesla's Gigafactory in Nevada produces more battery cells than any other factory in the world, with a high degree of automation and precision. Another example is the Giga Shanghai, which is the world most efficient factory in the world operating 24h a day as it is cheaper to ship a Tesla Model Y from Shanghai to Canada than from Fremont to Austin. Similarly, Toyota was known for its lean manufacturing system, which eliminated excess inventory and defects, and enabled continuous improvement and flexibility. Toyota's system in 1960s was so effective that it became a model for other industries and countries.


Car factory

Picture: Car Factory. Source: WixMedia


Second, both Tesla and Toyota also opened many strategic factories around the world for optimized delivery cost and local governments rebate program as mentioned above. Tesla currently has world-class efficient factories in the US, China, Germany, and plans to build more efficient ones in Mexico, Indonesia, and Texas (USA). These factories allow Tesla to access new markets, reduce transportation costs and tariffs, and benefit from local incentives and subsidies. For instance, Tesla's factory in Shanghai helped it gain a foothold in the largest EV market in the world, and also enabled it to avoid import duties and qualify for government grants. Likewise, Toyota expanded its global presence in 1970s by building factories in various countries, such as the US, Canada, UK, France, Thailand, and Indonesia. Toyota's global expansion helped it increase its market share, diversify its product portfolio, and adapt to local customer preferences and regulations.


Third, legacy automakers are struggling to make profitable EVs (GM shutting down Chevrolet Bolt in difficult economy while Ford are expected to lose $3 billions USD for EV this year, which is 1/3 of its gasoline cars profit). This is similar to how GM and Ford found difficulties in having a product at a low price to compete with Japanese cars in 1970s. Tesla has a clear edge over its competitors in terms of technology, design, performance, and brand recognition. In fact, GM quickly found out the high entry level for finding talents in making EV while Ford were forced to invest hugely to retool its Ontario factory in order to produce EV efficiently. Tesla's EVs are widely regarded as the best in the market, with features such as long-range batteries, fast charging, autonomous driving capabilities, sleek aesthetics, and high customer satisfaction. Tesla also has a loyal fan base and a strong online presence that generate positive word-of-mouth and free publicity. On the other hand, legacy automakers are lagging behind in the EV transition, as old CEOs even pushing back the clean energy transition. They also have to deal with the cannibalization of their existing gasoline car sales and the loss of customer loyalty.


Clearly, Tesla in the 2020s bears a striking resemblance to Toyota in the 1970s. Both companies have revolutionized the auto industry in their respective eras, but there are some significant differences between their journeys. Firstly, their market positions differ greatly. Toyota, back in the 1970s, primarily targeted the lower end of the consumer market. This strategy yielded a net margin of 7%, but it constrained their brand image to affordable but long lasting quality. To compete in the luxury market, Toyota had to create Lexus in 1989, a separate brand that only ranked 7th in the high-end sector according to Luxe Digital's popularity research.


In contrast, Tesla has positioned itself at the higher end of the market from the get-go. Its innovative and stylish electric vehicles have earned it the 2nd rank in the high-end sector in the same research. With an average cost of vehicle productions at the high $30,000 USD, it allows the company introduction of the Model 3, priced around $40,000 USD. This marks Tesla's foray into the mid and near-low end sectors. With a gross margin of vehicle sales at around 20% and a likelihood of introducing a ~$20,000 USD model in the near future, Tesla is now posing a serious threat to lower-margin brands like BYD and Toyota, shaking up the traditional segmentation of the auto market if they are willing to raise a price war.


High Net Margin

Picture: High Net Margin. Source: WixMedia


Another major point of divergence between the two companies is their focus on disruptive technology. Toyota was known for its innovations in cost-cutting manufacturing techniques, in particular the TSP, in the 1960s and 1970s and they were they were the model for studies and competitors' replication. However, these advancements don't quite compare to Tesla's Full Self-Driving (FSD) technology. Tesla's autopilot has been in development for many years, and by 2022, it began to show signs of nearing completion. Once regulatory hurdles are overcome, this technology could transform Tesla into an auto taxi service provider, adding a significant new revenue stream to the company. However, it should not be expected to be done before 2025 as there are still a lot of safety questions and accident resolutions remain.


While we're on the topic of revenue streams, it's worth noting that Tesla's portfolio extends far beyond auto manufacturing. The company has also ventured into energy (with solar panels), insurance, vehicle self-financing, and software sales (FSD technology). Although these sectors combined currently contribute only about one-fifth of Tesla's revenue from auto sales, they are growing at an impressive rate. Of course, the most promising source is the FSD technology. The software can potentially achieve a gross margin as high as 80% since it only needs computing power and data storage while hosting servers are not needed.


According to Tesla's latest financial report, these sectors are expanding nearly twice as fast year over year. Even though it is only 17% of Tesla's EV sales, this diversification of revenue sources not only cushions Tesla against potential fluctuations in the auto market, but it also positions the company for sustained growth and price wars in the future. In fact, they were the one who raised the price war in 2023 with many aggressive price cut.


Final Thoughts: Tesla EV Market Share

A thinking monkey

Picture: A Thinking Monkey. Source: Unsplash


Just like Toyota in the 1970s, Tesla in the 2020s is a game-changer, but its multifaceted approach and focus on high-tech solutions could see it make an even more lasting impact on the industry. However, there are many concerns that Tesla growth will be significantly reduced once legacy automakers enter the EV segment. That is not yet a worry for Tesla if we look at the history of Toyota. From the span of 1960 to their peak in 2009, Toyota revenue grew from $16.4 millions USD to a whopping $208,995 millions USD. That is a compound annual growth rate of 21% for 49 years in total. Of course, Tesla already passed the initial phase of brand establishment so it is not realistic for them to growth as fast. However, if we use Toyota 1980 revenue as the starting point, when the brand was already established around the world and had entered rapid growth stages for several years, the compound annual growth from $40 millions USD to $208,995 millions USD in 29 years is 34%. #Full disclosure: I am a Tesla shareholder at the time of this writing. Please do your own analyst before making any decisions.


In both cases, the growth rate are very similar to the EV market growth rate. According to Business Wire, which is a Berkshire Hathaway company, the EV market is expected to grow at a compound annual rate of 26.8% until 2030. Hence, I will propose 3 scenarios for Tesla for the next 5 years based on these numbers: a bear case, a neutral case and a bull case. I will also assume the production line continues to be improved at the current rate, as it is mentioned they can continue reduce cost of vehicle production thanks to optimization, which stands at compound rate of 30% in 5 years. As of the time of this writing, Tesla stock is trading at 50 forward PE (~ 166 USD per share).


The final assumption is the decline in aluminum and lithium price. This separation from the cost of production is due to the Tesla's 30% cost reduction rate are mainly due to optimization even if it faced the unstable price of lithium and aluminum in the last few years. The fall of Lithium battery price by a faster rate of current 20% YOY thanks to more than 181 lithium factories announced by 2020, which majorities will be ready for production by 2026. At the latest, the Thacker Pass Lithium Mine, which can supply 25% of the world current demand for lithium, are expected to be at full capacity in the second half of 2026. For the sake of calculation, I put the lithium price reduction rate at 30%. Regarding aluminum, while demand for aluminum are expected to increase 5% for the next few years, the price of aluminum is at the 2018 high, notably it already crashed hugely from its peak in 2022 (figure 2). For this projection, I am expecting a constant 3.5% rate of reduction for aluminum price.


Aluminum Price chart

Picture: Aluminum price since 1994. Source: TradingEconomics


In the bear case, other sources of income for Tesla remain not a significant part of the company while its auto vehicle segment grows at a 21% rate. This indicates the Tesla brand is weaken in the EV space and the worry of losing market share becomes real. The PEG ratio, with the current EV cost reduction at 30% rate, in this scenario is 1.31, which is cheaper to the 1.67 of GM (3% total growth), 1.83 of Ford (3% total growth) and much cheaper than the 2.85 of Toyota (3.3% total growth).


Since the global push for fully EV only started in 2020, and it was also the abnormal time of zero interest rates in many nations due to COVID, the EV growth in America in total vehicle sales from 1.9% in 2020 to 3.2% in 2021 is taken with light consideration. Before this period, the average ratio is 1.4% from 2016 to 2018. According to CarEdge, EV accounts for 5.8% of new vehicle sales in 2022 and 7.2% in Q12023. This reiterates the high cumulative growth of around 58% for this sector since 2020. At the same time, Tesla annual revenue growth declines consistently in 2022 and Q1 2023, from its 71% growth in 2021, down to its mean before 2021, which is 52.8% growth from 2015 to 2020. This indicates Tesla is indeed losing potential revenue to its competitors, which is supported by that CarEdge article.


For the neutral case, the company vehicle business introduces new models. This is consistent with confirmed news of Cybertruck, second generation of Roadster and potentially a lower end model prices in the range of low to mid $30,000 USD. These new line of products will help boost the EV revenue growth back to 28% as the Tesla brand maintains its position in relative with the growth rate of the whole EV sector. In fact, this is supported from the CarEdge article mentioned above, we can see that the EV market are slowing down in 2023, and Tesla revenue growth was at the same pace. At the same time, the revenue from other sources continue its high growth and will be at least 1/3 of the EV sales. In this scenario, the PEG is 0.887, which makes Tesla stock quite attractive at this current price.


For context, before 2022, the average revenue of Tesla excluding its EV business is 15%. However, its growth rate are accelerating since Q1 2022, which the rate ranges between 50% to as high as 87%. Before 2022, both of these segments also grew faster than the EV business since 2019. Given the fact that Tesla provides insurance at a lower rate for their own vehicles, as well as the energy department deal with EU governments, this gives a confidence boosts of these side hustles continue to expand faster than its EV side, in particular 50% versus 28%.


Regarding cost of production, in the four hour presentation of Tesla day, the fact of multiple reference to cost reduction for car manufacturing for its next generation of vehicles, which it is important to remember that the current line of products are 3-4 years old already, gives many hints. For this neutral scenario, Tesla can at the very least keeps its 30% cost reduction and ideally at 40%. In fact, some are hinting at 50%.


Bull case

Picture: Bull case. Source: WixMedia


For the bull case, aside of introducing new products, other sources of income grows to match half of EV revenues if FSD and auto pilot taxi are realized. For this to happen, the EV growth rate is pushed to 34% and the brand power is increased as it expand to lower segments. This indicates its revenue excluding EV sales to grow 70% likes Q1 2023 for the next 5 years. Notably, the vehicle production cost reduction is expected to be 40% annually. The PEG ratio in this scenario is 0.6875, which makes Tesla stock seems dirt cheap right now.


It has to be noted that although San Francisco has been experimenting with auto pilot taxi since 2022, it is still at a very limited route. In order for driverless taxi to have mass adaption, FSD must be solved and moved away from its Beta version. Even though Elon Musk thinks this can be done in 2023, history with the Cybertruck in 2019 and FSD in 2016 has shown he has a tendency of a few year late delivering his promises.


In China and Europe markets where Tesla is up against many lower-end competitors, the recent price wars are proving to be effective. While it triggered many price cuts in China and ate up many of the sale growth from its competitors, it also pushed Tesla growth in Europe faster than ever. However, high end competitors like Nio and BMW have not felt the heat.


With all the given information, in my opinion, the chance of a bull case is less than 10% as regulations are very slow to be formulated, mainly due to political reason rather than safety concerns. Furthermore, Tesla also seems to be ending the price war with its recent price hikes, excluding its cheapest product Model 3. The chance of a bear case is less than 20% even though I strongly believe in the value of Tesla brand. This is due to the uncertain economic environment of 2023 and the slow recovery around the world until 2025. Finally, the chance of the neutral case is over 70% since the world economy shows strong resilience despite continuous forecast and push back of recession since mid-2022.

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