The Tesla Phenomenon

July 23, 2020

My Dear Reader,

A month ago we discussed the rise of Tesla and its stock value despite traditional business indicators that would suggest that Tesla still has a while to go before becoming an American Automotive staple. A recent conversation with a friend of mine rehashed this topic in my mind, and I got to thinking about the upsides to Tesla’s effort to pour capital into R&D at the cost of typical business function.  Particularly if we juxtapose the rise of Tesla with the recent troubles that befell GM in the 2010s.

In the early 2010s, the car-buying public started to move away from the traditional sedans, and market research at the time concluded that they were moving towards electric cars and SUVs.  Interestingly enough, this change was driven primarily by Cadillac’s success with the Escalade, and the new chassis was built to give a sedan ride, with SUV height. However, at the time, chairman Dan Atkinson was more a representative of the US Treasury department than an actual CEO and was more concerned with maintaining GM’s profitability and maintaining investor relations in the wake of the ’09 bailouts. And used profits and investor money to rebuild GM’s IT infrastructure, which had been outsourced by the prior CEO

As a result, by the time new and current CEO Mary Barra took over in 2014, GM was well behind the tread when it came to cutting out some of the extra models that still catered towards a sedan buying market. The electric car market was also not performing nearly as well as they had hoped, with the Chevy Volt performing below market expectations. Mary rightly began to cut down on some of the under-performing models and even some makes, namely Buick. GM attempted to rebrand Buick to appeal to a young crowd, but results so far have been mixed, I think, but that is anecdotal. However, I have not found any concrete evidence to the contrary. 

During the economic boom of the late 2010s, GM was able to begin to transition its trademark Chevy towards better selling models such as the Silverado and Tahoe. However, in 2018, GM was hit hard by the economic tariffs put on Mexico and Canada and Mary Barra released a statement to investors warning of decreased profits due to the tariffs and sent a letter to the SEC in June of that year. 

This came as somewhat of a surprise and the market proved it with a 10 dollar drop in stock price between June of 2018 and October of 2018. When car companies are in a state of flux, in order to stabilize, sometimes the quality of the cars suffer.  Cadillac and Chevrolet seem to be running well, but I would argue that some of the other GM offerings, mainly Buick, has seen a huge drop in desirability and I could envision GM continuing to diminish and perhaps even dropping the brand outright.

But with heavy investment in reeling in IT costs and a failure to keep up with Tesla’s advancements in electric car manufacturing, it’s clear how a company with the long history of GM could be severely impacted by the tariffs of 2018 and the coronavirus. Tesla has been able to create a feeling of progress around their company, and in order to back that feeling up, they’ve spent a fraction of the marketing dollars as GM has and have been able to put the savings back into newer designs and improving efficiency with every model.  2020 has been strange in many ways, but the miracle of Tesla has been its execution of a new type of business plan. And one that I believe that we will see often duplicated, but rarely perfected.

To Your Creation and Potential,

Kevin Prendiville