Electric vehicle maker Tesla will need to spend up to $AUD275billion ( $US 180 billion) to reach founder Elon Musk’s goal to produce 10 million electric vehicles annually according to industry analysts.
Leading industry analysts Morgan Stanley say the capital outlays facing the company will be very hefty if they are to meet the ambitious goals set by Musk and while Tesla share price has climbed to more than $AUD1200 ($US 800) a share the analysts remain cautious, saying the true worth of the company is around $AUD1000 ( $US680).
Morgan Stanley is not necessarily giving Tesla a poor mark as the enigmatic organisation has finally started to turn a profit having put together several quarters of profit together and if not for the Covid crisis it was looking at its first profitable year in 2020.
But the fact is Morgan Stanley sees Rather, the investment house sees multiple risks ahead, most importantly howmuch it will cost to build the massive vehicle and battery factories needed to produce its electric cars and in high volumes. In the 17 years it has existed, Tesla has built a shade over one million electric vehicles so far.
Morgan Stanley says Tesla will need to spend $AUD100 billion ($US66 billion in aggregate capital expenditures in the next ten years to 2030.
In a report the Morgan Stanley analysts wrote that while Elon Musk’s goal of building 10 million units of vehicle volume supported by ‘terawatt’ scale battery factories implies far greater levels of spending than had been forecast and greater than they believe demanded in global markets for many years to come.
The report says that a 10 million vehicle volume would require at least 15 factories and roughly 800 GWh of battery capacity. That is nearly 30 times what Tesla produces now. Ramping up to that level of manufacturing capability would take $AUD227billion to $AUD275billion ($US 150 billion to $US180 billion.
One challenge the Morgan Stanley points to is the growing tension between the Trump administration and China over the COVID-19 pandemic and the economic issues such as tariffs that could upset Tesla’s plans for China which will be a crucial market for the electric vehicle company.
“We believe Tesla China will jump from an estimated roughly 13 per cent of Tesla volume in 2019 to nearly 30 per cent this year and that business accounts for around $AUD75 ($US50) to $AUD106 ($US70) of valuation in the Tesla share price,” said the Morgan Stanley analysis.
Tesla needs good U.S. relations with China to continue to grow its business there.
Morgan Stanley believes Tesla deliveries will drop 13 per cent in the second quarter compared to the first quarter of 2020, because of the economic crash caused by the pandemic and to cover that drop Tesla will burn through $AUD4.1 billion ($US2.7 billion), which is a huge chunk of cash in any bodies language
“While we believe the market will largely look through 2Q results as a one-off bottom, risks remain as to the level of demand resiliency in the U.S. and Europe through the second half of the year. While we’re prepared for some impairment of demand, we’re also acknowledging the potential shortages in supply of finished Tesla products relative to its large order backlog,” the analysis said.
They believe Tesla will produce about 420,000 vehicles this year.
Tesla is not alone in the electric vehicle space with other companies, including tech giants such as Alphabet, Apple and Amazon likely to enter the business. In fact Amazon already has a large investment in the startup electric truck venture Rivian and has ordered 100,000 electric delivery vans to be deployed starting next year.
Established vehicle makers are also offering more electric models, while the Chinese government is backing a number of electric vehicle makers and any one of those could emerge as a Tesla competitor.
The United Auto Worker has been sniffing around Tesla’s plant in Fremont, California and are3 desperate to unionise the Tesla workforce, which is apparently one of the reasons why Tesla is reportedly looking at Texas as a site for a second U.S. factory.
“It has long been our working assumption that as Tesla expands its manufacturing footprint, it too shall have a material portion of its production workers represented by unions. While this doesn’t necessarily prevent the company from achieving industry-leading returns, such developments, in the event they come to pass, could make investors question the company’s flexibility and competitiveness throughout economic cycles,” the analysis said.
While Morgan Stanley believes Tesla’s balance sheet is strong enough to weather the storm as it currently stands, it believes investors should consider the multitude of risks facing the company.
“These include but are not limited to U.S./China relations, additional factory shutdowns, and global auto demand in 2020,” the analysis concluded.