What does Buffett think of Tesla?

　　On January 23, 2020, at the Buffett lunch, he was asked what he thought of Tesla.

　　Buffett said: "Musk is a great man and Tesla is a great company, but he is not an ideal investment target."

　　Ten days later, Tesla's stock price rose 70%, from over $500 to a high of $968.

　　Was Buffett slapped in the face?

　　The reason why the stock god is not optimistic

　　Buffett has good reasons not to invest in Tesla.

　　First of all, Tesla’s competitors are all traditional auto giants with huge financial resources.

　　Volkswagen Group will invest nearly 60 billion euros in hybrid, electric mobility and digitalization in the next five years; BMW has signed battery procurement contracts worth more than 10 billion euros with CATL and Samsung SDI; Toyota and BYD jointly developed pure electric models are also planned to be launched on the market in 2025......

　　Surrounded by powerful rivals, it seems that Tesla's competitive advantage is not solid. Batteries and motors are not new technologies with a large number of patents. It will take a long time for traditional giants to catch up, unlike chip technology. After many giants enter the market, how much of the new energy electric vehicle pie will belong to Tesla, the pioneer?

　　But on the stock market, Tesla's price has far exceeded investors' imagination.

　　Tesla's stock price has more than doubled in two months, with a market value of up to $160 billion, which is $60 billion more than the combined market value of three traditional American automakers: General Motors, Ford and Fiat Chrysler, and second only to Toyota's $195.8 billion.

　　But according to the measurement indicators of the traditional automotive industry, Tesla is just a "small company": its deliveries in 2019 were only 368,000 vehicles, equivalent to only 3.3% of Volkswagen and 3.4% of Toyota; Tesla suffered a loss in 2019, but achieved a net profit of US$132 million in the fourth quarter, exceeding expectations, which is only equivalent to 1% of the profits of giants such as Toyota and Volkswagen.

　　Citron, a well-known short-selling institution, said: "We like Tesla, but we are shorting it."

　　In the short term, Tesla is overvalued, but why would a new energy vehicle company whose scale and profits are still in its developmental stage trigger such crazy market pursuit? Is this another bubble?

　　Definition of “disruption”: A new concept changes the basis of competition in an industry

　　To make an inappropriate analogy, Tesla is like "an eagle born in a chicken coop". It is somewhat similar to traditional car companies in their early development, but they are not the same species.

　　Tesla CEO Musk, in addition to sending rockets and satellites into outer space on a large scale to change the world, has also started an electric car "side business" to put his usual "crazy" ideas into practice, so this company has the gene to subvert the market when it was born.

　　Tesla's three major disruptive factors are:

　　The industrial chain changed by lithium batteries

　　Tesla was the first to suggest that lithium batteries could make electric cars as good as internal combustion engine cars. Driven by technology, battery capacity will become higher and higher, and eventually new energy electric cars can be as cheap as internal combustion engine cars.

　　The figure below shows the results. Batteries need to continue to drop to $100 (USD/kWh) at this scale to be cost-competitive with gasoline. And this goal is just around the corner.

　　"The electric system will destroy the internal combustion engine and everything related to it." This is not just about replacing the internal combustion engine with an electric motor and the fuel tank with a battery, but about tearing the transmission system, the "spine", out of the car and replacing it with a new power system. This is very disruptive for any manufacturer in the engine business, and the competitive basis of many suppliers has changed as a result.

　　Tesla's newly established production base in Shanghai has an ultimate annual production capacity target of 1 million vehicles, and it has integrated hundreds of parts suppliers, including dozens of suppliers directly and indirectly related to batteries and electronic control systems.

　　In this new energy vehicle industry chain, a large number of fuel vehicle suppliers have been replaced. Those who are the first to integrate the supply chain will continuously reduce manufacturing costs, improve production efficiency and establish the first-mover advantage of this industrial system as production capacity expands and research and development deepens.

　　The first Tesla car cost nearly $7 million, but the Model 3 manufactured by the Shanghai production base in 2020 costs less than 1% of the original price. In the Shanghai manufacturing base, Tesla has achieved robot automatic installation in the process of wiring harness installation and body stamping, reducing the original manufacturing time and cost by 90%.

　　This industrialization process will give birth to a large number of new giants in the new energy industry chain (such as lithium battery manufacturer CATL). More importantly, Tesla has become a standard manufacturer in the supply chain and manufacturing system.

　　However, simply changing the industrial chain is not enough for Tesla to surpass the giants in the industry. Newly emerging battery and motor manufacturers are a kind of public resource, and they can work for anyone as long as they are paid. Tesla's deeper change to the industry is in the control system.

　　A mobile computer that can travel

　　The new experience that electric vehicles bring to users is not only the fast acceleration, no exhaust gas and no noise, but more importantly the human-computer interactive control system.

　　Traditional manufacturers generally have complex car bodies and very rudimentary control software, which is a "complex car + simple software" model; while Tesla practices the "simple body, complex mind" model for cars.

　　The central control panel of a traditional car is actually a collection of independent components nested in one interface. They each have their own control programs, need to be upgraded independently, and cannot automatically work together.

　　For example, the navigation system will plan a route for you and report traffic accidents or congested road conditions ahead, but it cannot automatically slow down the car because the motor system is not controlled by the navigation system, and the car does not have a centralized control system to allow the navigation system to report the situation.

　　The new generation of Tesla's central control system can control almost everything in the car. Its interface and principles are very similar to those of current smartphones.

　　Model 3's central control display

　　Tesla's central control panel is equipped with sensors and actuators controlled by software. The operating system controls almost all hardware, can perform multiple different tasks at the same time, and achieve collaboration with each other.

　　Tesla can remotely upgrade the control systems of various terminal vehicles through the Internet, achieving emergency braking at high speeds, intelligent automatic parking, and automatic adjustment of seats and air conditioning according to the characteristics of different drivers. This is because the code that needs to be updated is not in each individual component, but in the central control system, just like a "mobile computer that can drive."

　　What Tesla wants to do is very similar to Apple, which revolutionized the mobile phone market. It uses the closed loop of hardware + operating system to create a mobile Internet era for automobiles and completely break the traditional driving model.

　　If technologies such as batteries and electronic controls are easy to imitate, but once an operating system that can control cars through the Internet is established, it is possible to form an ecosystem like Apple or Android. Developers will develop various software on the platform to continuously upgrade the application functions of the car, and the system will become the underlying foundation. Today, an automatic parking program is installed, and the car learns to park and enter the garage; tomorrow, a battery management software is upgraded, allowing the car to travel more than ten kilometers on a single charge...

　　Once this kind of ecosystem is established, it may form a monopoly giant, just like Google's Android.

　　However, Tesla's ultimate goal does not stop there.

　　Final Fantasy: Autopilot

　　If the success of smartphones and Apple 10 years ago originated from the mobile Internet boom, the coming hurricane now is artificial intelligence, which is also Tesla's ultimate means of trying to change the world.

　　After installing the operating system and connecting to the Internet, new energy vehicles, which are "mobile computers on the move", can achieve autonomous driving through deep learning. This is not only a new technology, but will also change the world in a profound way.

　　Giants such as Google, Uber, and Didi are all involved in this imaginative field, but there are two major prerequisites that cannot be avoided in order to realize it in the future: in order for cars to learn, there must be enough driving data, and to obtain this data, there must be enough "smart cars" running on the road, and Tesla is making such a layout.

　　Tesla's approach to autonomous driving is to put as many sensors as possible into the cars it sells and collect as much data as possible from those sensors. His cars are already built on a software platform, which is something that existing foundries and traditional car companies cannot do. Then, the various autonomous driving mileages continue to accumulate and are pushed to the cars when the software is updated. This will form a self-reinforcing "winner takes all" effect: more data, more data will make Tesla's autonomous driving better, so more Teslas will be purchased, and then more mileage and data will be generated. Once this barrier is formed, it is difficult to break.