Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Tesla Goes into the Auto Parts Business

Tesla Motors (NASDAQ: TSLA) has quietly entered the auto parts business. Elon Musk’s automaker plans to manufacture the electric motors and gearboxes for its proposed Model 3 sedan at the Gigafactory in Storey County, Nevada.

Tesla will invest $350 million to create a production line for vehicle components at the factory, Nevada Governor Brian Sandoval announced on January 17. The actual Model 3, a lower cost vehicle will be built in Freemont, California.

It goes without saying that such a move would enable Tesla to supply components including electric motors to other automakers. That would certainly give Tesla; which reported a “net income” of -$873.97 million on September 30, 2016, some much needed additional revenue.

Why Tesla will enter the Auto Parts Business

Tesla needs all the income it can get because it generated just $294.53 million in cash from operations and $176.04 million in free cash flow during third quarter 2016. In contrast Ford (NYSE: F) generated $19.09 billion in cash from operations; and the ailing Fiat Chrysler Automobiles (NYSE: FCAU) reported $10.9 billion, in cash from operations.

Musk might see all that cash the other automakers have as an opportunity for Tesla. Ford CEO Mark Fields announced plans to spend $4.5 billion to bring out 13 electric models by 2020, last year. Fields is going to need to get the parts for all those electrics somewhere, and Tesla which has had extensive experience in research, development of electric vehicle components is a logical source.

Nor is Ford the only company building electric vehicles, General Motors (NYSE: GM) has brought out its Volt plugin hybrid. Chrysler recently unveiled an electric version of its popular Pacifica minivan.


It goes without saying that Tesla’s components can be used in other electric drivetrain vehicles. That would include hybrids and vehicles powered by hydrogen fuel cells. Fields expects that 40% of Ford’s vehicles will be electric or hybrid in a few years. That too would create a market for Tesla’s components.

This all fits in with Musk’s masterplan for Tesla which is to replace internal combustion engines with electric motors as the major power source for ground transportation. In Elon’s world view it does not matter who builds the cars – as long as they are electric.

Tesla as an Auto Parts Supplier

The Gigafactory; which is right next to both a major highway corridor (I-80) and a busy transcontinental rail line; that of the Union Pacific (NYSE: UNP), is well-positioned to supply auto factories anywhere in North America. There is also plenty of empty of land around the gigafactory if some company like Ford or Tesla wants to build a car factory there some day.

This would fit into another potential business for Tesla supplying components for self-driving, or autonomous vehicles. One possibility here would be to license Tesla’s Autopilot to other automakers. This would make a lot of sense because some of their models; such as Chrysler’s minivans and Ford’s pickup trucks, do not compete directly with Tesla.

Chrysler is trying to develop a self-driving minivan with the help of Alphabet (NASDAQ: GOOG), subsidiary Waymo. Ford has announced plans to bring out the world’s fully autonomous car by 2021.

Tesla as a Contract Manufacturer

Another potential market for Tesla’s manufacturing services is companies that have been conducting extensive research and development in autonomous vehicles but lack manufacturing capacity. This includes Apple (NASDAQ: AAPL), Uber; which is successfully deploying self-driving vehicles on a limited scale, and Alphabet (NASDAQ: GOOGL) which is heavily invested in the technology.

Tesla has a big advantage in the world of self-driving vehicles because its Autopilot is in day to day use on actual highways. The company has a great deal of knowledge and expertise in autonomous vehicles that competitors lack. More importantly it has actual experience building and deploying autonomous cars.

This might make Tesla something like Taiwan’s Foxconn Technology; or Hon Hain Precision (OTC: HNHPF), which specializes in building products for other companies such as Apple. Foxconn builds most of the iPhones and iPads Americans love. Musk’s growing obsession with manufacturing, he famously has a desk on the factory flow in Freemont, makes that likely. Tesla’s real specialty might become selling manufacturing services to the auto industry.

The Future of Tesla

My prediction is that Tesla will start selling components to other automakers within a year or so. It will also start selling manufacturing services to other companies at some point. Most of the sales will be of batteries, but there should also be a market for drive trains, control systems for autonomous vehicles and motors as well.

This belief can easily be verified by comparing the capacity of Tesla’s one auto factory with the proposed size and scope of the Gigafactory. The Gigafactory is planned to be the largest building in the world, with 13 million square feet in area, Electrek reported.  That’s room for a lot of auto parts and battery production, far more than Tesla’s current factory could ever use.

Even if Tesla’s factory reached its full capacity of 500,000 vehicles it still would not be able to absorb the gigafactory’s output. In 2016, Tesla only managed to produce 85,000 vehicles. Musk will need production capacity elsewhere, why build it when Ford, GM, Toyota Motors (NYSE: TM), Honda, Volkswagen, Chrysler etc. have all the capacity the auto industry will ever need in existence.

The future of Tesla might be as a supplier to the auto industry. In that role it would be in a far better position to achieve Musk’s dream of electric powered highways, than as a standalone automaker.