Are the "GAFTAM" going to eat automotive too?
Updated: Jan 11
Everybody knows the ambitions of the GAFAM in the finance industry and in the health industry, the two biggest industries in the world. They are slowly but surely gaining speed through acquisitions, partnerships and massive R&D to become key players in these industries. However, their offensive in the automotive business might be even more striking for the general public.
(Apple - Apple car concept image)
2021 has already seen two major news for the automotive industry regarding Apple and Tesla. According to various sources including Reuters (see their December 2020 article here), Apple would still be working on its own self-driving electric vehicle to be launched on the market at the earliest in 2025, even though some analysts believe it won't be ready before 2027-28. SInce 2014, Apple has been working on its Titan electric vehicle project and experiencing ups and downs in the project, to the point that there were still doubts about Apple's intentions: would they give up, go for their own car, or join forces with a car manufacturer? Apple has been extremely secretive on this project (check the whole story here, told by MacWorld/IDG). And finally this week, we heard the news that Hyundai and Apple were in early talks. On this simple news, the market cap of Hyundai went up by 20% ($9bn). Hours later though, Hyundai backtracked and said they were in discussion with several potential partners, no longer mentioning Apple (check the story from the Guardian here). It means investors value so much the GAFAM label, even in an industry where Apple hasn't proved anything yet.
Amongst the GAFAM, this is Google that is the most advanced with its Waymo self-driving taxi project. Tested since 2018 in Phoenix, Arizona, it was launched commercially to the public during the fall of 2020. Google hasn't built its own car though, it has focused on developing one of the most, if not the most, advanced self-driving systems in the world. They found out the hard way that running a self-driving vehicle was more difficult than expected and they are now talking about "autonomous" cars rather than "self-driving" cars, to set the right level of expectations with the public.
If you want to know more about the way the Waymo system works, check this previous post and have a look at what the car is "seeing".
2020 was also the year Amazon took over Zoox, a self-driving car company that is building a robotaxi (check here for this article of The Verge on Zoox).
This week we also heard that Tesla's value has grown so much in Wall Street that Elon Musk became the richest man in the world at the moment, richer than Jeff Bezos. Tesla's price went up tenfold since January 1st, 2020. Musk said "how strange!" followed by "well, back to work" (according to the Evening Standard here). Even if Tesla is not strictly part of the "GAFAM" label in the sense that this is a pure player of the automotive industry, it shares with the GAFAM some of the same DNA and mindset.
Should we rather say GAFTAM now to include Tesla?
It is not the first time the automotive sector see new entrants. The historic players in this industry were the European and the Americans in the early 20th century. Since then, the industry has seen newcomers joining: the Japanese, the Koreans, and more recently the Chinese manufacturers. Having automotive manufacturers was almost a status symbol for emerging countries, showing the rise of their economic power. As well as losing them to foreign interest was seen as a sign of decline (remember the trauma around the British car industry, other countries have followed since). After the Toyotas and the Hyndais of this world, the Chinese players (such as SAIC, BAIC, BYD, Geely) are growing fast: they are still unknown to the Western public, but they might soon be, particularly on the EV (Electric Vehicle) segment. If you want to know more about this, check out this article from Forbes here about the rise of Chinese electric cars.
However, the automotive industry is experiencing something new: it will probably be the first time that the new entrants (Apple, Google, Amazon...) are bigger than the incumbent companies. And they potentially have more cash for R&D. Tesla's market cap ($834bn on January 8th, 2021) is already higher than the combined market cap of the 12 next market players, even though it sold only 500,000 cars last year (out of 64 million worldwide). Toyota and Volkswagen Audi, the largest two car manufacturers in the world, with revenues of approximately $250bn each and about 11 million cars sold each, were worth respectively $250bn and $103bn on the same day. Not even half of Tesla's value together.
We know that the investors on the stock markets do value expected growth, innovation, and a clear vision. And yes, Tesla has all this, probably better than any single car maker in the world at the moment. However, does that make any sense to believe that Tesla is worth nearly the rest of the industry while it produces less than 1% of the cars on earth? What does this mean? Do investors believe that Tesla will take most of the growth of the market in the future or a dominant part of the market share? Unlikely. Or that it is creating from scratch a new industry that has nothing to do with the traditional automotive industry? Well, Tesla is not the only one to produce electric and/or self-driving cars... Or do investors believe that Tesla's business will expand in other businesses to justify that value beyond the car industry? Or is it just the mechanical effect of an inflow of cash by investors who have to detain a bit of Tesla in their portfolios? It is truly difficult to rationally make sense of this.
(Source: check the article by The Motley Fool)
Isn't this automotive industry now ready to produce much more electric vehicles than Tesla, with a broader price range and an easier reach to the market? Isn't it fair to think that consumers have a variety of tastes, motivations (including a form of car "patriotism") and budget capacities that allow for many players to find their space on the market? Isn't the hype around Tesla masking the fact that other carmakers are going to offer the same features as Tesla for a fraction of the price? Isn't Tesla going to follow Apple's path in the mobile phone market: remaining the top choice for the "beautiful" people in search of status but absolutely not affordable for normal people, which means it will keep a fantastic position on the market but won't be worth the rest of the industry?
It is always difficult to pretend that the markets are wrong and that you may be right against them. You cannot beat all the brightest brains together and they will always tell you that they are right at the very moment we speak. Maybe. However, it wouldn't be the first time the markets are wrong and engage in a dangerous bubble, away from any grounded common sense.