Daniel Howes in The Detroit News
Don’t blame Tesla Inc. for becoming the most valuable American automaker Monday, if only briefly.
Blame the weight of history on Detroit’s automakers. It’s a legacy none of them can escape anytime soon — no matter how much profit they book selling pickups and SUVs, or how deeply they move into mobility services and self-driving cars.
Investors have memories, too. Only yesterday, it seems, the CEOs of General Motors Corp., Ford Motor Co. and Chrysler Group LLC were asking Congress and the Bush administration for help to avoid uncontrolled collapse that would have devastated the industrial Midwest.
Only eight years ago did a new president, Barack Obama, order GM and Chrysler into Chapter 11 bankruptcy in exchange for a financial lifeline extended by the U.S. Treasury in the name of American taxpayers.
Only then did Detroit’s leaders begin to atone publicly for the bad ol’ habits accumulated over decades of labor-management dysfunction and a general feeling that generally accepted economic rules don’t apply inside the Detroit bubble. But they do, as the global financial meltdown demonstrated.
That’s when the incumbent Masters of Detroit were forced to reckon with the industry’s long history of incinerating capital and calling it progress; of paying union members not to work; of presiding over corporate cultures shaped to minimize risk instead of embrace it and the innovation it can produce.
Perception persists, even when reality appears to be changing. Look no further than the market valuation of tiny Tesla compared to industry giants GM and Ford: Tesla’s market cap closed Monday at $49.34 billion, according to MarketWatch, compared to $50.79 billion for GM and $44.72 billion for Ford.
Put another way: a share in Tesla will set you back $312.39, according to Monday’s close. Investors valued a share in the Blue Oval at $11.25, and GM closed at $33.97 — less than a dollar higher than its 2010 initial public offering price of $33. Gives new meaning to the term sideways.
The century-old players are pushing to play the mobility and self-driving car game because it threatens their business model. They also need the growth it promises to revise credibly their investment thesis. Judging by their stalled share prices, the cyclical past is winning.
Blame plateauing sales in the United States. Blame nagging doubt that Detroit’s automakers, especially, can successfully manage a slowdown. Blame the inescapable fact that foreign markets do not necessarily deliver the kind of growth investors need to see to invest in traditional automakers.
In hopes of changing investor perception, Detroit is exiting businesses previous iterations of leaders wouldn’t dare consider: GM and Ford are ending production in Australia; GM bolted Russia, once a point of pride atop RenCen headquarters; GM is selling its Opel and Vauxhall brands in Europe, effectively abandoning the world’s No. 2 market after some 90 years.
Fiat Chrysler Automobiles NV CEO Sergio Marchionne is ending car production in the United States. He’s warning, repeatedly, that the industry’s rate of capital burn cannot continue, especially for more thinly capitalized players like FCA. To prove his point, he’s effectively put the automaker up for sale.
Chairman Elon Musk’s Tesla is a different cat. He’s selling a vision of the future largely unencumbered by a legacy past — no unions and no plant closings, no bankruptcies and no asset sales, no long history of insular management standing astride reality yelling stop.
Oh, sure, Musk has his own history of making promises he doesn’t keep, the kind of promises investors would not tolerate coming from the c-suites of GM and Ford. His automaker is not profitable; how long investors will stomach that remains to be seen.
Still, Tesla generates enthusiasm among its loyal customers (and whose who would be, witness the $1,000 deposits for its Model 3 running in the hundreds-of-thousands). If Musk can deliver on the promise to produce 500,000 copies of the new $40,000 model by the end of next year, it will redefine the industry.
Detroit’s burden is different: to prove its reform is for real. Its history of failure, contentiousness and competitive miscalculation is long and legendary. Investors can be forgiven for exercising caution because it’s their money, after all.
It may not be “fair,” in the schoolyard use of the word, this reticence to accept the narrative that Detroit has changed because conditions have changed, the business model has changed and leadership has changed.
But it is rational. Expect the skepticism to continue until evidence of a reformed Detroit is undeniable.