Recently Tesla’s share prices rose to a level which valued the company higher than the value of Ford. This at first glance seems surprising. After all Ford rakes in $115 billion a year in revenue and builds over 6 million vehicles a year. Tesla makes a 1/20th that amount and has only ever made 186,000 cars in its entire life, about the number of cars Ford makes every 2 weeks. So what’s going on here.
Well firstly technology. Ford made a very foolish decision in the 2000’s. In keeping with the rest of the US auto industry, it decided to ignore the issue of climate change and pushed SUV’s extensively. Consequently it was rival firms, such as Nissan, Volkswagen and Toyota, who invested heavily in alternative power trains and smaller more fuel efficient cars. As too did new entrants to the market like Tesla. The 2008 spike in oil prices and the financial crisis that followed, along with increasingly tough vehicle legislation left Ford playing catchup. Its lost market share and has had to spend a lot of money recently bringing itself up to the same standard as its rivals. So investors have to factor in that Ford is still going backwards, while Tesla is growing. Tesla also owns a lot of intellectual property that they can sell or license to other companies.
Secondly Ford has lots of skeletons in its closet. You’ve probably heard of the Ford Pinto and its exploding fuel tanks. Or the Ford Explorer (one of those 2000 era SUV’s) which liked to go rolly polly on occasions. Both of these led to very expensive lawsuits. So while Ford has built 350 million cars over its history, that means there’s tens of millions of potential future law suits rolling around the highways. Naturally that’s a bit of a turn off for investors.
And thirdly there’s pensions and other liabilities. Ford has a massive number of retired workers on its pension plans. Indeed its often joked that Ford and GM are basically pension management companies who make the odd car. The reality is that many of the baby boomer generation didn’t put aside enough money to fund their retirement (yet they now have the nerve to whinge about millennials and migrants who are basically bank rolling their retirement). This leaves Ford with some rather large liabilities on its books. Naturally investors have to take these liabilities into account as well.
And speaking of migrants, Trump creates problems for American car companies, as they make a lot of their car parts (and do quite a bit of their vehicle assembly) in Mexico. Ironically, Japanese firms like Toyota and Honda, design and manufacture more cars in the US than the supposedly US auto companies. Yes, if you live in America and you want good American made car, buy a Tesla or a Toyota or maybe a Volkswagen.
Of course, Tesla will only justify such market optimism if it can increase its market share and turn a profit. For any tech company, that’s always been the problem. Its success will depend a lot on factors outside of its control. For example, a rise in oil prices would hurt Tesla’s competitors, while the failure of suitable charging infrastructure to materialise would scupper long term growth plans. So investors are gambling, but its a gamble that could have huge payoffs if it succeeds.
Meanwhile Ford is being punished for its failure to invest in low carbon vehicles and its poor labour management practices. This is the inevitable consequences when a company puts short term profit ahead of long term planning….which is a lesson a lot of companies tempted to jump on the climate denial band wagon might want to consider. Quite simply put, what goes around comes around!