Why Apple-like Vertical Integration is Key Strategic Advantage for Tesla (based on WSJ article)

Tesla ($TSLA) is a hot company with a lot of zealous bulls and bears – it is a $800bn battleground. The battle is all on all fronts – from purely financial ones (“tesla is overvalued”) to strategic ones (“tesla tech will be surpassed by new players”). Today I wanted to discuss the intangible value of having achieved vertical integration from car manufacturing to charging for Tesla based on my reading of an article about EV charging from Wall Street Journal. Key takeaway from the article is that having the first-in-class super charging network is increasingly turning out to be a KEY DURABLE AND LIKELY IMPROVING STRATEGIC ADVANTAGE for Tesla – I discuss more below.

Credit: Tesla.com

Full disclosure I am a Tesla bull – I own Tesla stock, but I try to be rational because I want to make money and avoid losing money. It is a sizable position in my portfolio and I watch it like a hawk.

One thing that was surprising for me in this article was that it was positive for Tesla – a traditional media writing an article that is positive for Tesla was refreshing as most of the narrative has generally been focused on “over-valuation” of Tesla.

“Yet so far, only one carmaker has offered a reassuring pitch about conveniently and reliably recharging on the go: Tesla. And Tesla’s fast-charging technology doesn’t work on non-Tesla cars.”

“The world’s automakers collectively adopted a competing standard in the U.S., making their vehicles incompatible with Tesla’s. (Notably, the reverse isn’t true: With an adapter, Teslas can charge at nearly all fast-charging stations.)”

Other car manufacturers decided to create their own charging standards that are not comparable with the ONLY NATIONWIDE CHARGING NETWORK. Given that availability of charging stations is usually the number 1 concern for potential EV buyers, this is a big surprise to me, but I am guessing the upcoming competitors decided to go their own way because Tesla demanded terms that were way too favorable for Tesla.

Tesla.com: nationwide supercharging network

For non-Tesla EVs, lack of widely available charging station is not the only program – they are suffering from poorly maintained charging station network – is this a sign of problem with common positive externality?

“In a survey of 3,500 EV drivers conducted in September and October 2020 by EV advocacy group Plug In America, more than half reported having problems with public charging. These problems were worse for respondents who drove non-Tesla vehicles; almost 60% of those reported issues. The most common complaint was a non-functional charger.”

Almost 60% of non-Tesla EV drivers have had issues with non-functional chargers – the public electric network itself is also extremely unreliable. For Tesla drivers, the charging network is integrated into the vehicle’s navigation system and you can see how many chargers are on-line across the nation. Unfortunately, non-Tesla charger network appears to have an issue with integration with various EV systems – a common bug when there is no vertical integration.

Tesla.com: navigation is deeply integrated with super charging network – giving real-time information on charger availability

“Think of Tesla, a vertically integrated platform in control of the technology in both its vehicles and chargers, like Apple, which controls everything from its microchips to its app store, says Prof. Bhargava. The rest of the automakers are like the many manufacturers of Android phones, he says. Only in the current charging environment, there’s no Google to direct all those manufacturers.”

I love the Android-Apple analogy. Non-EV market is like senkoku-era in Japan – there is no clear leader and rule that governs all. There is no real standardization – all of which create issues from poor customer experience or just poor communication between charging network / cars. There appears to be no clear sense of direction among non-Tesla EVs while Tesla goes to march on with expanding its network.

Lastly, charging network appears to have a huge, sustainable, and natural barrier to entry for late-comers – and that is its HIGH CAPITAL INTENSITY

According to an analysis AlixPartners conducted last year, the average fast-charging station, charging market price for electricity, would take 20 to 25 years to pay off its initial investment. Part of the problem is that when in use, a single fast-charging stall can draw the equivalent of a whole neighborhood’s electricity needs. So it can be very expensive to connect a station with up to a dozen individual chargers to the local electrical grid, and secure enough energy supply.

AlixPartners see 20-25 years for pay off timeframe for fast charging station!! Tesla was the first to get there and has been financing with government subsidies and regulatory credits that Tesla receives from other ICEs. So effectively, ICE manufacturers have been subsidizing the build-out of Tesla’s supercharging network. Unfortunately, these ICE manufacturers will only rely on themselves to finance their charging network.

$TSLA valuation is something, but $TSLA’s business strategy seems to be right in-line with how the electric vehicle industry is evolving. The competitive advantage appears to be well-entrenched and for this reason plus myriad of others, I remain bullish on Tesla and its future.

Do you drive an EV? what kind is it and what do you think about your charging experience? Please leave in the comment below!

*not investment advice

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