Is Tesla in the market to acquire another automaker?
Originally published at https://evannex.com on December 16, 2020.
Oh, the irony! In Tesla’s early days, many assumed it would eventually be acquired by a larger automaker. After all, this was, and is, the tried-and-true trajectory for a Silicon Valley startup. This wasn’t just a journalist’s fantasy-the co-founders themselves considered it a possibility. Marc Tarpenning told me in 2013, “We believed (quite naively), that once the Roadster was out and people saw that you could make a compelling electric car, all the car companies would jump on this idea…so even if the stand-alone company becomes questionable, it’s okay because there’ll be ten car companies around the planet that will want us.”
At the time, nobody imagined that the legacy automakers would show so little interest in electrification, or that by 2020, Tesla would have left them in the dust.
Now Tesla is the world’s largest automaker by market cap (though very far from the largest in terms of sales), and could theoretically acquire just about any of the world’s legacy carmakers. In fact, financially speaking, Tesla could gobble up two or three of the smaller brands with a minimal dilution of shareholder value.
Elon Musk recently started up the rumor mill when he said, in answer to an interviewer’s question, “We are definitely not going to launch a hostile takeover, but if somebody said it would be a good idea to merge with Tesla, we would have this conversation.”
On the face of it, it doesn’t sound like a bad idea. Most automakers have been battered by the pandemic, and Tesla might be able to pick up a lot of hard assets at a bargain price. It’s an interesting fantasy (and a thought-provoking object lesson in how quickly technology can change the business landscape), but for those of us who follow Tesla closely, there are several obvious reasons why it’s unlikely to happen.
The legacy automakers only have a couple of things that Tesla would want. Tesla could acquire some existing factories, perhaps in strategic parts of the world, and retool them to build its EVs and other products. However, this just isn’t the way Tesla is doing things these days. The company has been down the refurbishment road before, with its Fremont factory and with Gigafactory 2 in Buffalo (a former steel mill), and has plainly come to the conclusion that it makes more sense to build new factories from scratch to its specifications.
Tesla decided early in the game that converting an ICE vehicle to an EV (as it did with the Roadster, and as some legacy automakers are still doing) makes no sense. To realize the full potential of an EV, you have to start from the proverbial “blank sheet of paper.” The same applies to Tesla’s factories, and that’s why, beginning with Gigafactory 3 in Shanghai, it has chosen to build new facilities on greenfield sites (there were surely disused factories in China, Germany and elsewhere that it could have picked up on the cheap).
An integral part of Tesla’s business model is aggressively squeezing out costs by incrementally improving its manufacturing processes, and to do that, it has to be able to design its factories for optimal efficiency. Each new Gigafactory is more efficiently designed, more closely attuned to Tesla’s evolving needs, than the last, and some say that Gigafactories may prove to be the company’s most important innovation. Refurbishing existing auto plants just isn’t the Tesla way.
Another so-called asset that a legacy automaker could bring to the table is a pool of loyal customers. Many car buyers are loyal to particular brands, usually for purely emotional reasons. A Tesla-powered Peugeot or Fiat might capture a certain number of buyers who wouldn’t look at a car with the red T logo. This vestige of the auto industry’s past has led automakers to keep historic brands alive by creating duplicate branding for the same automobiles. Examples include the Opel Ampera-E, the European version of the Chevy Bolt, the Buick Velite, a version of the Chevy Volt rebadged to make it more attractive to Chinese buyers (who have a historic affinity for Buick), and the Citroen C-Zero and Peugeot iOn, both rebadged versions of the Mitsubishi i-MiEV.
However, Tesla isn’t likely to consider this brand-based goodwill much of an asset. On the contrary, it’s exactly the kind of wasteful and unproductive auto industry tradition that Tesla is dedicated to sweeping away. Other structures that legacy automakers consider “assets” (their dealer networks, marketing operations, etc) are probably better described as “baggage,” and it’s difficult to imagine that Tesla would want anything to do with them (and let’s not even get into the touchy subject of automakers’ union contracts).
For these reasons and others, any merger in which Tesla would take over another automaker’s assets and fold them into its own operations just seems incompatible with the California carmaker’s business model. However, what if Tesla decided to play the corporate spoiler, accelerating the EV revolution by destroying ICE automakers from within? It could buy one or more of the automakers that have been most resistant to electrification (Fiat Chrysler and Honda come to mind), and shut ’em down! Some would imagine this as poetic justice-after all, we all know that oil companies and their shadowy allies regularly buy up green-tech startups and bury their gas-saving innovations, just as pharmaceutical companies suppress life-saving cancer treatments (Elvis, Obama and aliens are also involved somehow).
Leaving aside the question of whether this would actually work, shuttering factories, putting dealerships out of business and taking away car buyers’ beloved brands would not be any way to win friends and influence drivers to go electric. Elon Musk is no Daenerys Targaryen (we hope), and I don’t think he has any plans to decimate Detroit with flame throwers. The march of technology and the free market will accomplish the task of creative destruction in due time.
The only merger scenario I see that makes any sense would be one in which Tesla buys a controlling stake in an EV-reluctant automaker, then gently steers it onto the right path. With Tesla calling the shots, an automaker’s existing EV programs could be strengthened, perhaps with the addition of some Tesla tech, ICE models phased out, and workers retrained for 21st-century careers.
Even this seems unlikely-it would involve wading into the mire of the legacy auto industry, and dealing with a corporate culture that’s the opposite of Tesla’s own. And how likely is it that an ICE-builder, forcibly converted to an EV-only brand, would be profitable?
In any case, Elon and his companies have plenty on their plates right now-if Tesla can bring all, or even most, of its already-announced projects to fruition, it will bring about the desired revolution. However, I could be wrong-Elon Musk and his crew have never been frightened of a full, or even overflowing, plate.
Originally published at https://evannex.com on December 16, 2020.
Written by: Charles Morris