The Economist - USA (2020-02-01)

The EconomistFebruary 1st 2020 Business 55

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I

n its questto “accelerate the world’s

transition to sustainable energy” Tesla is

different to other carmakers. Their mission

is less to change the planet and more to

make and sell as many cars as possible. De-

spite its technological lead in electric cars,

Tesla has struggled with the mundane task

of mass-producing vehicles. Of late, how-

ever, the firm has started to hit production

targets. It is even turning a profit. That such

milestones seem modest by car-industry

standards has not stopped investors from

swooning. Tesla’s market capitalisation

surpassed $100bn in January and is now

only exceeded by one other carmaker,

Toyota, a Japanese giant. It is worth more

than Germany’s Volkswagen, which made

more than 10m cars last year, 30 times as

many as Tesla. It has lapped premium ri-

vals like bmw (with a market value of

$47.5bn) and Daimler ($51.2bn).

The latest indication that Tesla is at last

making an impression as a manufacturer

came with its fourth-quarter results, un-

veiled on January 29th. After years of losses

the firm made an operating profit—of

$359m—for the second quarter in succes-

sion (though it still lost money for the

year). Its boss, Elon Musk, was uncharac-

teristically restrained but noted revenues

in 2019 of nearly $20bn without spending

cash on advertising. Earlier in the month

Tesla also revealed delivery numbers that

pleased analysts and seemed to show that

the firm has put behind it what Mr Musk

had called “production hell” around the

Model 3, its first mass-market car.

Profits and production are not the only

reasons Tesla is joining the automotive

mainstream. New products and plants are

also on track. Its Cybertruck, an angular

pick-up straight out of a 1980s sci-fi flick,

which Mr Musk unveiled in November, is

set to hit roads in 2021. This year Tesla will

launch the Model Y, a smaller suv, and the

Roadster, a pricey sports car. It has just

started making Model 3s at a new “Gigafac-

tory” in China, showing that it could react

far more swiftly than leaden-wheeled com-

petitors; it got the plant in Shanghai up and

running in 11 months. It is set to break

ground on another in Germany.

If all goes to plan, reckons Morgan Stan-

ley, a bank, Tesla will be making 2m vehi-

cles a year by 2030 and its operating margin

over the next decade will average 8.3%.

That would put it close to the current out-

put and profitability of both bmw and

Daimler (at least before their margins be-

gan to be squeezed by heavy investment in

electrification, both to catch up with Tesla

and to meet European emissions rules).

But then why is Tesla worth twice as

much? For one thing, its electric-car tech-

nology leaves rivals in the dust. It is also

unencumbered by the legacy of a business

based on internal combustion engines,

which, reckons ubs, another bank, could

make it the world’s most profitable car-

maker. Jefferies, one more bank, points out

that a stronger balance-sheet (should it in

fact strengthen) would allow Tesla to start

thinking beyond merely making cars. It

speculates that the firm may confirm it is

working on a project to develop a “million

mile” battery, which will set a new stan-

dard for energy density and lifespan.

Its ambitious expansion nevertheless

faces many challenges of the car industry:

spiralling labour costs, warranty issues,

cut-throat competition as rivals (including

go-getting Chinese ones) close the technol-

ogy gap. For the time being, Tesla may bask

in a Big Tech valuation, predicated on its

disruption of carmaking. Investors appear

keener than ever to condone its joyride. But

if recurring profits do not materialise, ex-

pect them to confiscate the keys. 7

Tesla is proving itself as a carmaker. Is

its tech-like valuation justified?

Electric vehicles

Car stock racing

E

very frocksold by the likes of Gucci or

Givenchy is billed as a must-have that

season. But, it turns out, some are more

must-have than others. For all the hype

they generate, even leading fashion brands

struggle to shift much more than half their

wares at full price. Whom to sell to once

fickle fashionistas have moved on to the

next trend? The luxury world is desperately

searching for new ways to find a worthy

closet for this unwanted inventory.

Dealing with “end-of-season” merchan-

dise is a particularly thorny problem for

luxury brands. Offering discounts to of-

fload ageing wares is a time-tested trick

among retailers. But cutting prices to clear

the shelves is a bad look for labels whose

raison d’être is to exude exclusivity.

Chic brands used to bin last year’s garb

quietly rather than sell them cheap. That

changed after July 2018, when Burberry, a

British purveyor of upscale macs, faced a

furore as it disclosed having destroyed

$38m of bling (it claimed incinerating

them was a way of generating energy).

France will ban the practice entirely

by 2023.

Luxury groups are loth to reduce pro-

duction, given that goods can be sold for

ten times what they cost to make. But put-

ting up “Sale!!!” signs is considered un-

couth. Plus, says Luca Solca of Bernstein, a

broker, “you have to weigh cash made from

discounted sales with the damage done to

the value of the brand.” Prada, a posh Ital-

ian label, said last year it would end all in-

store discounts.

Some brands’ offerings are so time-

less—a Hermès handbag, say—that sea-

sonality is not an issue. Others manage to

get rid of old stuff by offering discreet

“sample sales” to staff and their friends.

PARIS

Luxury groups ponder ways to get rid

of their unsold inventory

Luxury cast-offs

Not for sale

Dis-charged

Sources:SeriousFraudOffice;USDepartmentofJustice;pressreports

*Deferred prosecution agreements

†Provisional,withAmericaandFrance

Selected British and American DPAs*

and relatedallegations,$bn

2014 15 16 17 18 19 20

0

1

2

3

4

Britain United States

Rolls-Royce

False accounting;

failure to prevent

bribery

TescoStores

Falseaccounting

StandardBank

Alleged failure to

preventbribery

SercoGeografix

Falseaccounting

Sarclad

Corruption; failure

to prevent bribery

GüralpSystems

Conspiracytomakecorruptpayments;

failure to prevent bribery

Ericsson

Bribery;inadequateinternalcontrols

Mobile TeleSystems

Bribery

Alstom

Bribery;

falsifying

records TeliaCompany

Bribery

TevaPharmaceuticalIndustries

Bribery

Och-Ziff Capital Management Group

Bribery

Airbus

Alleged bribery and filing inaccuracies

†

On January 28th Airbus agreed to pay Britain’s Serious Fraud Office and its French and

American counterparts €3.6bn ($4bn) to settle a bribery case, pending court approval.

The penalty relates to alleged payments to third-party consultants in several markets.

Under a deferred prosecution agreement the planemaker will face no formal charges.

Though prosecutors may pursue individuals, no British dpa has so far led to a conviction.

Deferred gratification