What Tesla market cap means for the world
Current stunning Tesla market cap can be translated into an rough estimate of the end game of its production volumes: but is the earth capable of reaching those volumes ?
Since the begining of 2021, Tesla is stuning people with a market cap above 600 bn$. Some argue that this market cap is ridiculous in comparison to the small production numbers (200 k# in 2019) and that Tesla remains a car company and not a Tech giant. But market cap is supposed to represent the total cash flows that the company wil generate over its lifetime, and terminal value of those cash flows (and thus the production and margin of the company when mature) are crucial in this valuation. so let’s try to estimate what this valuation bears.
Caveat: this exercise relies on estimates. The full calculation is probably wrong but the order of magnitude remains correct (I think) and is still very instructive.
Tesla could become the #1 car manufacturer but will still rely on the transportation budget of the households.
Tesla mission is to “accelerate the world’s transition to sustainable energy” in the field of transportation.wants to reinvent the transportation of mankind. But we can assume that people will spend roughly the same amount of their revenues in transportation (be it by purchasing a car, leasing it or sharing it)
The market cap of Tesla competitors that are currently at maturity can give us a 1st benchmark. Looking at the top 5 car manufacturers, we can find a ratio of market cap / yearly production volume ranging from ~10 k$ of market cap per car (Honda, GM) to 21 k$ per car (Toyota, Ford). This discrepancy can be explained by lots of factors:
- the profitability of the different companies,
- the production mix (from small cars to luxury cars),
- the fact that those companies are not 100% car manufacturers but have different proportion of ancillary activities (leasing, repair, motor cycles…)
- …
But this factor of 1 to 2 is sufficiently small to do a ‘back of the envelop’ estimate.
There is a lot of innovation in the Tesla driving experience, esp. in the user experience and autonomous driving field. and I buy the argument that Tesla is getting a lot of driving data from the existing fleet and that this will give it a competitive advantage.
With that in mind, we can give a premium to Tesla with a 30 k$ per produced car when it reaching maturity. (even though some of the best analysts do not see Tesla reach an higher margin than competition https://twitter.com/benedictevans/status/1280777883196231680).
This would lead to an annual production of 21m cars, i.e. higher than todays combined production of VW and Toyota, and 23% of 2019 worldwide production. this is huge but if we assume Tesla has found the fast lane to reinvent the car industry, that could be ok.
Note that if you take the high value of the previous benchmark (22k$ per car) you reach production of 30m cars annually for tesla. Let’s park this assumption and be a bit “conservative”.
Consequences on mining industry will be gigantic
The pillar of Tesla value proposition lies in its batteries. Media have been vocal about EV efficiency in fighting climate change. But tesla batteries (like most EV cars) are extremely heavy to power cars designed on 21st century size standards.
A standard Tesla Model 3 ( that weighs 1800 kg) has a battery of 540 kg. That is quite a lot of metals that compose Electric batteries, some being very rare.
I haven’t found the precise formula of the famous Tesla batteries so I assumed components considered as regular for EV, based on necessary energy to store and power to deliver, i.e. NMC (LiNixMnyCozO2) for the positive anode and Li4Ti5O12 for the negative anode. I will save you the detailed estimates of the final recipe (but happy to share for the ones that want to challenge me) but EV battery is composed of
- 40% Oxygen
- 31% Titan
- 13% Nickel
- 7% Lithium
- 5% Cobalt
- 4% Manganese.
So for 21m cars, (again, I don’t intend to have a precise figure but an order of magnitude) Tesla would use every year
- 4500 kt (kilo tons) of titane (2600% of current world production)
- 600 kt of Cobalt (420% of current world production)
- 1500 kt of Nickel (61% of ww production)
- 780 kt of Lithium (1000% of ww production)
- 420 kt of Manganese
Remember that those tonnage are for Tesla only — that is roughly assumed to represent 25% of car market — are compared to world production; and that several other industries are targetting the same elements for the green energy transition. This means that converting the entire car installed based to EV will necessitate to multiply several times the current productions of those elements.
Some minerals will be missing soon
OK, you could argue EV are new applications ; mining industry will adapt its production to match the needs. But the next question is “can the earth support such transition?”
Lithium seems to be very abundant across the world. with 17 Mt of proven resources and estimated resources at 80 Mt, there is some margin to feed the green energy needs.
But others are scarce. Take for example Cobalt wich economically available reserves are at 7 Mt, 50% being located in poor DRC, with political instabilities that do not favour long term investments.
Cobalt WW reserve could cover only 10 years of Tesla sales. and less than 3 years of ww EV production. Recycling is possible but Cobalt is used to extend battery life up to 10 years so the batteries are supposed to remain within the car for that duration: it would be impossible to equip all cars across the world… with current standards at least.
Elon Musk very political visit to Indonesia, with the objective to secure nickel supply is not a surprise in this context. Note that other car manufacturers are also rushing to secure supplies (VW was recently trying to secure 10 years contracts on Cobalt
So, how do we solve the green transportation paradigm?
Tesla is already announcing a “near to zero” Cobalt battery. Other car manufacturers are following the path. But analysts seem to believe that this is not a short term objectives. Next gen of batteries (NMC811) is reducing the weight of Cobalt but not changing the order of magnitude.
So we shall think differently. So far, most car manufacturers are replicating the same vehicle size that thermic cars, which leads to a Tesla Model 3 weighting 1.8 tons. quite a lot to transport 1 or 2 persons (most of the time)!
Instead, why don’t we break the past rules by
- moving to smaller, lighter cars (that would be sufficient for daily commuting) with a double advantage on battery size: reducing the weight to be moved and reducing the necessary autonomy,
- Renting larger cars during holidays (or taking the train !!!), those ones powered by hydrogen (let’s dream a bit)
- …
This would be really “accelerating the world’s transition to sustainable energy”. But it would mean also selling cheaper cars (which would have an impact on market cap) and not dropping the idea of a huge Tesla Cybertruck (worth 5 tons)… but it would be a different story telling than the one Mr Musk likes and is talented for.
