For those of you who know me well, you recognize I have always been a gearhead at heart. I love tearing apart an engine, can work on pretty much anything outside of a transmission and can keep a motor running long after it should be used up. In college I worked at Chrysler dealerships in both service and parts gaining a good inside knowledge of the auto industry. With that in mind I have followed closely the rise of Tesla Motor Company. When you think about Tesla most will say when asked, what industry is Tesla in, you could not be more wrong if you said the auto industry.
Anyone who owns a Tesla will confirm, the quality of the product is exceptional. I have yet to see a Tesla on the side of the road broken down. Over the past 10 years what used to be unusual is now commonplace, seeing a Tesla tooling down the road. While they admittedly make a great car, when you look at the financial statement’s they are not an auto company.
The financial statements show that the company has yet to make a profit on any vehicle they sell. Elon Musk recognized that with the massive investment required to break into the auto field, he needed other sources of income to entice investors into the company to keep it solvent. Over the past few years, more and more states have required all automakers to sell vehicles that produce zero emissions. If the firms do not sell enough zero emission units in the State they have to pay huge fines or purchase carbon offsets from companies that have achieved the sales level. Enter Tesla. Since GM, Chrysler Fiat, Ford and the foreign makers are not even close, they have been going to Tesla and purchasing the offsets to comply with the requirements. In time, as more electric cars are produced and if consumers want them, Tesla’s “other income” could be diminished. However, it gives them time to reach that fixed cost break even point on actual auto production and sales.
For 2021 Tesla added another segment to the business model. I am not sure if this should be called Investment Broker or Finance Company or what just yet. In January Tesla announced a $1.5 Billion investment in Bitcoin. At the current exchange rates for Bitcoin, that investment, if it holds, will produce a huge profit for the company.
Lastly, the firm is a battery company. They have designed cutting edge battery technology that is the envy of the green technology. So actually, you have a firm that is becoming its own mutual fund. Few companies recently have been able to achieve such success in industries that do not represent what most think is its core business. By the way, I do not own any Tesla stock, just very impressed with the foresight of what was thought to be an auto company in an industry I have always been drawn to.
Economically this past week we saw the continuation of strong manufacturing output in the reports being released. Next week the ISM report will be out. With the numbers from the New York Empire Manufacturing Index, rising from 3.5 in January to 12.1 in February, and Philadelphia Fed Manufacturing holding at January levels, it is expected that the Feb ISM will be roughly the same as January at around 58 or 59.
Manufacturing in Europe is also going strong. Last week the numbers for Germany, Britain and France all showed a narrow range around the upper 50’s. Supply chain shortages for many products worldwide have increased the production demand. The US in particular is showing a rising appetite for goods as consumers were on a buying spree in both January and the start of February.
On the service side of things, European countries showed a significant drop, all three countries showed service sector activity below 50, dipping into the mid 40’s. This is likely covid related as Europe still struggles with getting the pandemic under control. With the United States opening up more and more, our service sector is expected to continue to expand, showing a greater level of health than Europe.
The bitter cold that roared across Minnesota into the Southern Plains will have a devastating economic impact for February. Between the businesses that had to be shut down, the supply chain delays that occurred, as well as the massive damage to buildings due to frozen pipes, the impact to the economy will carry on into early March. Sadly, while construction materials are in short supply due to growing new housing demand, the people of Oklahoma and Texas may have to wait to be able to repair the water damage done by frozen pipes. It will also take some time to replenish the stores of water and other essentials due to supply chain issues that have been impacted by Covid. I would hate to try to estimate when things will get back to normal. With all that has gone on over the past year, normal seems to be a subjective term.
Have a great week
