Ad Astra: SpaceX versus Tesla

2022 Was A Bad Year For Billionaires

A lot of billionaires lost a lot of money last year – none more so than Elon Musk, whose estimated net worth plunged by more than half, according to the Bloomberg Billionaires Index. That was mostly due to the precipitous fall in the value of Tesla’s shares, which dropped from $352 on 1 January last year to $123 at year end. Incidentally, Tesla’s shares were subject to a stock split effective on 6 June 2022 – and these values are quoted on a like-for-like basis. Musk still holds 13.4 percent of Tesla shares, having sold large tranches over the summer to finance his purchase of Twitter.

Musk is no longer the richest man in the world – that slot has been taken since before Christmas by Bernard Arnault, the founder and chief executive of the Paris-based luxury brands conglomerate LVMH. This reminds us that luxury goods are reliably non-cyclical. But Musk remains the second-wealthiest man, with Jeff Bezos not far behind, given that shares in Amazon also tanked last year.

There are a number of reasons for the slump in the value of Tesla. One is the less rosy outlook for electric vehicles. The other is that Musk spent most of Q4 last year tinkering with his new toy, Twitter, which he bought for $44bn, even though industry analysts thought that its true value was more like $14-17bn. And for all his travails at Twitter, there is no sign that he has added value there at all. Instead, Tesla investors perceive that its major shareholder and chief engineer has been absent without leave.

As we know, tech stocks, bonds and cryptocurrency all bombed in 2022. Even the ‘Sage of Omaha’, Warren Buffett, managed to lose £2.7bn last year. The world’s top 10 billionaires were all down on the year with the exception of the Indian industrial mogul Gautam Adani.

That said, Musk may yet be turn out to be the goose who can lay at least one more golden egg that will propel him back to the number-one position. That is thanks to his most promising gift to mankind – SpaceX.

Why SpaceX Is Phenomenal

SpaceX, the rocket outfit that Musk runs when he isn’t firefighting at Tesla and flailing at Twitter, is raising $750m in a new funding round. This values the still-private company in which Musk is thought to have a majority stake at US$137bn. This means that SpaceX (founded in 2002) probably has a market cap higher than the veteran aerospace giant Lockheed Martin which makes among many other things Trident missiles and was worth just over $115bn when the market closed yesterday (19 January). How has SpaceX become so valuable?

There are two popularly rehearsed main reasons for SpaceX’s success.

First, it recycles its rockets with the result that launch costs have decreased substantially. Imagine an airline industry where airliners could only be used once and then scrapped − and you get the picture. SpaceX has unquestionably reduced the costs of launching both satellites and human astronauts into orbit.

Second, Starlink, SpaceX’s satellite-internet company now has 3,300 tiny satellites in orbit, with the potential to provide global internet access. Starlink could generate up to $30bn in revenue by 2025, according to the data house, Chartr. Consider that there were only 4,852 active satellites in space at the end of 2021, according to the UN Office of Outer Space Affairs. And SpaceX nearly doubled that number in 2022. That is remarkable.

This news came just as we were hearing about the failure of Virgin Orbit to launch nine satellites into space last week from Spaceport Cornwall. It is still not clear why the launch on 9-10 January failed, but the world will be watching closely. The conclusion may well be that the horizontal-launch model, whereby rockets are flown into the upper atmosphere attached to a modified Boeing 747 or Boeing C-17 Globemaster, is less reliable than using a vertical-launch, reusable rocket as is the case with SpaceX.

There is huge demand for reliable launch companies since the various Russian launch companies, operating from the Baikonur Cosmodrome in Kazakhstan and the Vostochny Cosmodrome in Amur Oblast, effectively became out of bounds due to Russia’s invasion of Ukraine on 24 February last year. That is why many western governments are beating a path to SpaceX’s door.

The UK has other rocket companies such as Gravitilab Aerospace, Astraius, Skyrora and Orbex. While it is worth keeping tabs on these bold start-ups, they do not come close to SpaceX in terms of the maturity of their technology or track record. Moreover, all launches within the UK must be licensed by the Civil Aviation Authority, which to date takes 12-18 months. Even Sir Richard Branson has expressed “frustration” about the “bureaucracy” surrounding launching rockets from the UK.

Such bureaucratic frictions do not seem to afflict SpaceX. When it eventually comes to market its going to be another Tesla rollercoaster – with a rocketing share price (excuse the pun).

Tesla: Growing Pains

In the UK, Tesla owners were obliged to wait in long queues at charging points all over the country during the Christmas getaway. This reminded EV owners that the chargepoint network in the UK has not kept pace with EV ownership. Tesla EVs use the company’s dedicated Supercharger network. Until May last year, this could not be used by EVs produced by other manufacturers, but the network is now open to any EV driver who has a CCS connector.

By the end of last year, there were just under 30,000 chargepoints across the UK. The Department for Transport aims to increase that to 300,000 by the end of the decade. In the meantime, EV drivers have been hit by soaring peak-time prices. Some of the major networks in the UK, including Tesla’s Supercharger, Ubitricity (owned by Shell), GeniePoint and Char.gy have introduced dynamic pricing, whereby drivers pay more when demand is high. This pricing model now applies to about one quarter of all chargepoints across the UK.

Ubitricity is charging 45 pence per kilowatt hour for 21 hours of the day, but 79 pence per kilowatt hour between 4pm and 7pm. Clearly, wholesale electricity prices have soared over the last year with increased gas prices, principally as a result of Russia’s aggression in Ukraine. The intermittency of renewable electricity, which I discussed last month, also makes the price of electricity more volatile.

Recent data suggest that demand for new EVs in the UK and elsewhere is falling at a moment when the cost of electricity is rising, and the cost of petrol and diesel is falling. Petrol at the pump in the UK has fallen from nearly £2 a litre last summer to around £1.50 now.

A recent survey by the AA found that more than 70 percent of existing British motorists had been put off the idea of owning an EV because of rising electricity costs. The RAC reckons that the cost of charging an EV using public chargepoints (which are subject to VAT at 20 percent) soared by 42 percent in Q4 last year. Car magazine reckons that EV drivers are paying approximately 20 pence per mile for electricity when using public chargers, while petrol-car drivers who can achieve 40 miles to the gallon (that’s 14.16 kilometres per litre) are paying just 17 pence per mile.

The UK government has withdrawn its subsidy for new electric cars and last November Chancellor, Jeremy Hunt announced that EVs would be subject to road tax from 2025. According to Auto Trader, fewer than one in five UK car buyers were seeking an EV last November. That is a decline of over 12 percent in 12 months − evidently many drivers are re-thinking their desire to go electric. New EVs are still much more expensive than their internal combustion engine (ICE) powered analogues and used electric cars cost about £10,000 more than an equivalent petrol model. So, EVs are both more expensive to run than conventional cars and more expensive to buy.

Furthermore, the cost of maintaining cars – both ICE-powered and EVs – is rising fast. The cost of replacement components is on the up due to supply-side shortages and materials inflation. According to the Motor Ombudsman, many UK drivers are putting off servicing their vehicles altogether. Many are also holding onto vehicles for longer than previously. The number of cars over 10 years old on UK roads is growing by half a million a year. On the other hand, there is some evidence that people are driving fewer miles each year, given the cost-of-living crisis.

That could lead to a deterioration in road-safety metrics over time; though it could also mean that much-loved, traditional, small-garage mechanics can continue their trade for longer. Arguably, most carbon emissions are generated when a car is manufactured and then when it is scrapped, so it is kinder to the environment to keep each car going for as long as possible.

EVs do seem to require less maintenance than ICE-powered cars: but then there are relatively few EVs on the road of more than five years old, so we still do not really know how quickly they wear out. It is evident that the cost of fixing a defective EV motor is substantial; and if an EV battery malfunctions it must be replaced altogether – which would amount to about half the cost of the entire vehicle.

Hitherto, one of the most commonly cited reasons why motorists do not want to buy an EV is “range anxiety” – the fear of running out of power mid-journey. Such fears will not have been allayed during the cold snaps experienced in the UK before Christmas and this last week. The range available to EVs decreases significantly in icy and snowy conditions.

This is partly because EVs generally have only very simple, single-speed gearboxes to transmit power from fast-spinning electric motors to slower-spinning wheels, although a minority of EVs have two-speed gearboxes. Some EVs feature a “snow” or “slippery conditions” mode which limits the amount of torque (the turning force of the motor). EVs, just like conventional cars, benefit from all-season tyres in winter months.

It is also because EV batteries become less efficient at cold temperatures. Car magazine recently tested a Tesla and found that in cold weather, its range was 250 miles, 15 miles less than in summer weather (265 miles). That is probably an underestimate because it does not consider that in-car heating also drains the battery.

It is all very well for our politicians to outlaw new ICE-powered vehicles from 2030 in the crusade for net zero, yet the economic and environmental consequences have still not been thought through. And any cost advantages are being eroded as governments remove tax privileges for EVs. Also, once more than half of all vehicles on the road are electric, the government will probably impose universal compulsory road charging. Whatever the technology, driving is going to get more expensive as the 21^st century progresses. Car ownership will most likely decline as a result, meaning that investment in public transport is more vital than ever.

Tesla: Price Cuts In A More Challenging Market

Just before Christmas, Tesla cut the price of its EVs in China in a bid to boost demand. This had the opposite of the intended result: angry Tesla owners who had missed out on the discount protested that they had been overcharged.

Then, on Monday (16 January), Tesla announced price cuts on two of its models in the UK. The largest cut in price has been for the Model Y Performance, which fell by £8,000 to £59,990, while the price of the cheapest Model Y fell by £7,000 to £44,990. The cost of Tesla’s Model 3’s long-range model fell by £6,500 to £50,990.

The strategy is to lower prices across the US and Europe by as much as 20 percent, presumably in a bid to sell off unsold stock. Previously, much of Tesla’s production was manufactured to order but that is no longer the case. This obviously means that the value of second-hand vehicles is impacted too. One member of Tesla Owners UK tweeted that he had “just lost £5k”.

Tesla’s stock fell by 65 percent last year, while niche EV producer Rivian saw 75 percent wiped from its value. I wouldn’t like to predict how Tesla’s share price will perform this year: but what is clear is that it is no longer in the sweet spot.

UK And Europe: A Not-So-Electric Future?

The ignominious collapse this week of Britishvolt, which had promised to propel the UK to the front rank of EV manufacture, was a sobering reminder that the path of electrification is not a smooth one. The company, run out of Dubai, never had a unique technology and had only a site for its factory, rather than the means to build one. It was based on the premise that if enough capital (mostly derived from government) could be raised, then the “giga-factory” would just happen. Politicians, including Boris Johnson (not the most astute business analyst), were duped.

The state-backed Advanced Propulsion Centre now predicts the UK will build around 280,000 electric cars and vans in 2025, down from earlier hopes of 360,000. Most recent figures for registrations from the Society of Motor Manufacturers and Traders suggest that a third of new UK car registrations in December were for EVs.

Meanwhile, in Germany on Thursday (19 January), the Federal Network Agency announced that it plans to ration the power supply to heat pumps and EV charging stations in order to protect the German distribution grid from collapse. Charging times of three hours to charge electric cars will be allowed so that they can cover a distance of at least 50 kilometres. Moreover, before Christmas, Toyota chief executive Akio Toyoda said that electric cars are not the only way forward for the automotive industry. He added that a “silent majority” in the industry agree with him.

Not so long ago, electric cars and their manufacturers looked like a one-way bet. But now the tide has turned. The British government has proposed a new zero-emission vehicle mandate that would force manufacturers to sell a certain proportion of EVs by the end of the decade. One leading automotive manufacturer – JLR – has suggested this would be counterproductive.

In conclusion, the outlook for space technology looks brighter right now than that for EVs. SpaceX will eclipse Tesla. Elon tweeted this week: “The WEF [World Economic Forum in Davos] is increasingly becoming an unelected world government that the people never asked for and don’t want”. His mind may be on Mars, but his feet remain solidly on Earth.

PS

Warren Buffett used to drive around in a beaten-up old Merc (chauffeur-driven, of course). He thinks top-end limos are a waste of corporate cash. My car is nearly 11 years old (one careful owner and less than 90,000 miles) and glides up and down the M11 like a six-speed magic carpet. It is a perfectly robust and commodious piece of European engineering, if not fancy. (I hate small cars – they make one feel vulnerable).

I want to keep this robust machine going for as long as possible − and long after I qualify for my bus pass. So, I really don’t resent the not insignificant cost of an approved service each year. This is now, apparently, called “bangernomics”. Just as human life expectancy is increasing, so is that of machines. That’s a really eco-friendly idea, which gives one hope.

And I have absolutely no intention of buying a Tesla.

Listed companies cited in this article which merit analysis:

• Tesla (NASDAQ:TSLA)
• Rivian (NASDAQ:RIVN)
• LVMH (EPA:MC)
• Amazon (NASDAQ:AZMN)
• Lockheed Martin Corp. (NYSE:LMT)
• Shell (LON:RDS)