What we know about Elon Musk’s alleged take-Tesla-private plans a week later, how Lincoln wants to go more premium, Harley-Davidson’s troubles and more on The Morning Shift for Monday, August 13, 2018.
1st Gear: Why Saudi Arabia Could Be a Player in Tesla
A week ago, Elon Musk shocked the business world—as he does—with a Tweet—as he also does—claiming he has funding “secured” to take now-publicly traded Tesla private. Since then details of this alleged plan have been scarce, and it’s even led to an inquiry by the SEC and a shareholder lawsuit. It’s been a busy week!
Until this morning we didn’t really know who Musk had lined up for the funding of such a venture, though many speculated it would be Saudi Arabia’s sovereign wealth fund, which recently bought a 5 percent stake in Tesla. Now we know: it is the Saudis, per a new blog post from Musk himself, who says the “funding secured” comments came from meetings he had with them this summer.
Going back almost two years, the Saudi Arabian sovereign wealth fund has approached me multiple times about taking Tesla private. They first met with me at the beginning of 2017 to express this interest because of the important need to diversify away from oil. They then held several additional meetings with me over the next year to reiterate this interest and to try to move forward with a going private transaction. Obviously, the Saudi sovereign fund has more than enough capital needed to execute on such a transaction.
Recently, after the Saudi fund bought almost 5% of Tesla stock through the public markets, they reached out to ask for another meeting. That meeting took place on July 31st. During the meeting, the Managing Director of the fund expressed regret that I had not moved forward previously on a going private transaction with them, and he strongly expressed his support for funding a going private transaction for Tesla at this time. I understood from him that no other decision makers were needed and that they were eager to proceed.
I left the July 31st meeting with no question that a deal with the Saudi sovereign fund could be closed, and that it was just a matter of getting the process moving. This is why I referred to “funding secured” in the August 7th announcement.
Following the August 7th announcement, I have continued to communicate with the Managing Director of the Saudi fund. He has expressed support for proceeding subject to financial and other due diligence and their internal review process for obtaining approvals. He has also asked for additional details on how the company would be taken private, including any required percentages and any regulatory requirements.
Why Saudi Arabia? Apparently it’s the Kingdom’s goal to move to more than just a petroleum-based economy, and electric cars—probably more accurately, Tesla’s planned large-scale battery production—could help there.
(Fun fact: Whenever we’re critical of Tesla we’re either accused of being “shorts”, or pawns for Big Oil, which sees a sometimes-struggling electric car company with less than 2 percent of U.S. market share as an existential threat. Now here’s a Big Oil country potentially taking a big stake in Tesla.)
Anyway, Musk says in the post that he is “having discussions with a number of other investors.” Wired reports that besides Saudi Arabia, the big investors could be from Japan and China. But an investment plan by Japan’s SoftBank last year didn’t work thanks to the latter’s concerns over who would control the company. China’s a strong contender here too, given that government’s strict EV requirements coming soon:
But China is the most likely source for the money, according to Michael Dunne, CEO of ZoZo Go, an investment advisory company for the automotive industry. He says the massive luxury car market there, a government-determined to transition to EVs, and customers who’ll pay a premium for an exclusive brand, all make China the most important market for electric cars, and one that’s only going to grow. The government is mandating 10 percent of all sales next year are battery powered.
That means Chinese investors are desperately looking to buy their way in. China’s internet giant, Tencent, already holds about 5 percent of Tesla stock. “If you look at China’s EV sector, and how much money has poured into startups born in the last few years, from Byton to Neo, it’s billions of dollars easily,” says Dunne. And that’s for companies that haven’t built a car, and have no track record. Tesla might be a new player in the automotive world, but it’s a surer bet compared to some of its competitors.
With any luck, we’ll find out more this week.
2nd Gear: Why Go Private Anyway?
It has to be about more than just burning the short-sellers and avoiding the quarterly earnings call circus in favor of long-term stability, reports Automotive News:
Success in the auto industry requires a long memory, and for some automakers the apocalyptic days of the 2008-09 downturn are still fresh. Though Tesla has shown how shifting tastes and new technological possibilities can shape the future of the business and inspire consumers and investors alike, it has not been forged in the fires of adversity that make traditional automakers so resilient.
The conservative, risk-averse industry culture that has made Tesla’s limitless confidence seem so inspiring to investors makes little sense in the summer of a sustained bull market, but it comes into its own when investor disillusionment and economic winter beckon.
With Ford taking an unpopular $11 billion restructuring charge, it’s impossible not to think back to its remarkable anticipation of the last economic downturn. If Tesla has now become “a real automaker,” as Musk has claimed, it might take a lesson from Ford, the only other American automaker to have avoided bankruptcy.
Going private to avoid scrutiny and short sellers won’t be enough. To survive lean years, Tesla will have to deliver on Musk’s forecast of ongoing profitability and positive cash flow. If Musk can lead Tesla to financial sustainability and end its dependence on the markets for capital infusions it will survive any correction and prove that it has the key attribute of a “real automaker”: the ability to endure.
3rd Gear: Sedans, The Gateway Drug to Luxury
While the American automakers are pretty much abandoning small cars and sedans these days, The Detroit News has an insightful story about how foreign automakers like Honda and Hyundai see their small cars as gateways not only to larger and more expensive SUVs, but to the luxury brands as well. People start with an affordable Fit or Civic, learn to like Hondas a lot, then upgrade to some kind of Acura sedan or crossover, the story says. That’s not really a strategy we see with the Big Three.
From the News:
But for foreign automakers, sedans are not only profitable, they’re seen as an opportunity. Sedans as well as SUVs are important foundation stones for their luxury brands — and introductory gateways to higher-priced models. As domestic automakers leave sedans, some auto insiders wonder if they are ceding a competitive advantage to full-line foreign automakers.
Take Honda Motor Co., which depends on less-expensive Honda-branded offerings to feed new customers to luxury-brand Acura.
[...] While the RDX is aimed at the red-hot SUV market, Honda executives don’t see its customers as coming exclusively from Honda SUVs, which are booming. They say that the affordability of an entry-level Honda Fit subcompact sedan may bring a new customer to the Honda portfolio — but when their life circumstances change, they might be interested in a luxury crossover.
“The inflow from Honda is critical to us,” continues Robinson. “I’ve never thought of the inflow in terms of sedan vs. SUV. With both Civic and Accord, it has to do with finances, with age, with lifestyle considerations, so it’s not just customers going from Civic (sedan) to ILX (compact Acura sedan), or Accord to TLX (mid-size Acura sedan). It’s very much people changing segments depending on what they are interested in at the time.”
As that story notes, it’s hard to see buyers going from a cheap Dodge or Jeep to an Alfa Romeo or a Maserati, and I don’t know how many Chevrolet buyers really aspire to own Cadillacs anymore, so maybe the U.S. automakers are missing out there.
4th Gear: While Lincoln Stays Away From Ford
Meanwhile at Lincoln, they’re kind of taking the opposite strategy: working to make more standalone dealerships away from Ford to build the brand up into its own luxury operation. That’s because it apparently works, as luxury customers have little desire to buy and get their cars serviced at the same place some broke joker’s trying to get a nine-year loan on an EcoSport.
From Automotive News:
Lincoln executives say stand-alone stores regularly outsell dualed dealerships and are responsible for most of Lincoln’s sales gains in recent years. They cite internal and external surveys concluding that luxury customers prefer buying in a dedicated space.
Lincoln has roughly 150 dealers in the 30 markets that it says account for 70 percent of the industry’s luxury sales. Nearly half of those dealers have built or started construction on exclusive stores independently. That, executives say, is evidence of the strength of Lincoln’s revival.
The company wants its 78 remaining dualed dealerships in those markets to commit by next July to building stand-alone stores that will be completed by July 2021. Service departments and parts of the business that don’t interact with customers can continue to share buildings with the Ford brand.
[...] Lincoln says the sales at its 72 stand-alone large-market stores speak for themselves. Retail sales at those dealerships rose 48 percent from 2014 through 2017, compared with 18 percent for the brand overall.
Much of the dealership innovation has come from China, the story reports, which is still a huge source of growth for Lincoln.
5th Gear: How The Harley Faithful View Trump’s Trade War
Though still an icon of American motoring and manufacturing, Harley-Davidson has had a rough go in recent years as its domestic sales slide, as its key Baby Boomer demographic ages away from bikes, as broke-ass Millennials have no interest in $20,000 V-twin sleds, and now, as it finds itself the target of retaliatory tariffs that could send more bike production to Europe.
That’s because of President Trump’s tariffs on imported metals and cars in the first place, but the Harley faithful has a huge overlap with the Trump faithful—imagine a venn diagram that’s nearly one big circle—and this New York Times trip down to Sturgis reveals they’ll lose their faith in the Motor Company long before they give up on the president.
Like Mr. Trump, Gary Panapinto, 63, a machinist from Illinois, had doubts about Harley’s true intentions, believing that the company was planning to move the bulk of its bike production offshore, and, like Mr. Trump has intimated, he suggested that Americans would be forced to buy a product that was made overseas. While Mr. Trump has fanned that perception, Harley has said that it will shift production only for bikes it sells in Europe and that American bikes will still be made in the United States.
“They need to keep them here in the United States, especially if they’re going to sell them here,” Mr. Panapinto said. “I think Trump is just trying to protect jobs in the U.S.”
But there’s Boomer Logic here that doesn’t really add up, like the one retiree who rode Japanese bikes for years and now thinks “they are not worth it because they are filled with foreign-made parts and, he said, increasingly made overseas.” Uh, okay! Or this:
“I don’t like everything he says, but I don’t like everything my wife says,” said Mr. Rich, 72, who used to ride Indians — another American brand, made by Polaris — before giving up the hobby.
For his part, Mr. Trump has been good for business. Mr. Rich was busy selling shirts printed with an image of the president blazing past the White House on a Harley-Davidson with Stormy Daniels, the pornographic film actress who claims to have had an affair with Mr. Trump, falling off the back. The tryst that Ms. Daniels — whose real name is Stephanie Clifford — says took place in 2006 has not turned off customers.
“Well, he was a Democrat back then,” Mr. Rich said with a smile.
Sure, bud. But the real question here is this: if more stuff is made in America, will Americans pay more for it?
But even Mr. Cox, a South Carolina chain saw artist who carves trees and other objects, could not escape the realities of global supply chains and the high cost of making some products in the United States. While he used to sell American-made T-shirts, the $20 Trump shirts he was selling outside his R.V. were made in Haiti. The American-made shirts proved to be a hard sell.
“If I get a T-shirt made in the U.S.A., it’s going to cost about $8 more,” Mr. Cox said. “I looked far and wide to try to get a shirt made in America, it’s just they get you, they gouge you.”
That’s the catch here. It always is. Everybody wants American manufacturing and American jobs, nobody wants to pay the extra premium on goods that come with that. We’ve all become accustomed to cheap foreign-made stuff. Which is it gonna be?
That story’s a good read. You should check out the full thing.
Reverse: Spinning Triangles Forever
Neutral: Is A Private Tesla More Stable Long-Term?
Will the company be more poised to weather a downturn this way?
Update: This story’s headline has been updated to be more clear about the situation, and Musk’s discussions with investors.