Janet Goes to Guangzhou

The S&P 500 closed out Q1 2024, up over 10 percent.  But while the S&P 500 was rising day after day one former highflyer was crashing and burning.

The Boeing Company closed out the quarter down over 25 percent.  Still, it wasn’t the worst performing stock in the S&P 500.  That honor goes to Tesla Inc., which declined over 29 percent.

This amounted to $230 billion in lost market capitalization.  Moreover, according to Forbes’ estimates, it contributed to a $55.1 billion decrease to Tesla CEO Elon Musk’s net worth.  And it dropped Musk from the world’s richest person to third, behind French luxury mogul Bernard Arnault and Amazon geek Jeff Bezos.

Short sellers, on the other hand, reaped $5.77 billion as Tesla’s share price cratered.  Still, Brad Gerstner at Altimeter Capital is buying the dip.  He believes Tesla is making “massive progress at an accelerating rate” on its self-driving technology.

In 2015 Musk told shareholders that by 2018 Tesla cars would achieve “full autonomy.”  Will 2024 be the year it happens?

Regardless, it won’t help improve the company’s Q1 earnings report on April 17.  At this point, beating Wall Street expectations for both vehicle deliveries and revenue is looking unlikely.

On average, analysts expect deliveries of 457,000 units.  However, Deutch Bank’s Emmanuel Rosner has cut his delivery forecast from 427,000 units to 414,000 units.  And Adam Jonas with Morgan Stanley has lowered his delivery estimate from 469,000 units to 425,000 units.

Wells Fargo analyst Colin Langan recently remarked that Tesla “is a growth company with no growth.”

Chinese Competitors

In late-2021, Tesla was priced for perfection.  Shares were trading above $400.  The company’s market capitalization was over $1 trillion.  Investors were piling in with anticipation.  Then, the growth stall out happened.

Tesla’s Q4 2023 earnings, which were reported in January, revealed an ugly 40 percent year-over-year decline in quarterly profits.  Today, Tesla’s market capitalization has been cut in half – to $544 billion.  And the stock is down about 60 percent from its peak.

Higher interest rates and weakening demand for Electric Vehicles (EV) in the U.S. and Europe are part of Tesla’s challenges.  But the slowdown in China, which accounts for about a fifth of Tesla’s revenue, is proving to be a bigger factor.  Insurance data tracked by CnEVPost shows a 5 percent year-over-year decline in China over the past 12 weeks.

The issues Tesla is facing extend across the EV market.  EV’s, even with their government subsidies, are more expensive than internal combustion engine vehicles.  And, because of their additional weight and range maximizing drive mechanism, EV owners are discovering they’re burning through tires every 6,000 miles.

After dominating the EV market over the past decade, Tesla is now falling behind Chinese competitors.  Specifically, China’s BYD has surpassed Tesla as the world’s top EV maker, and it’s not looking back.

In the first quarter, BYD launched its Qin Plus EV at a starting price of around $15,200, followed by its BYD Seagull, a small all-electric hatchback with a starting price below $10,000.  By comparison, Tesla’s Model 3 sells in China for about $34,000.

What to make of it?

Industrial Mutation

Tesla is contributing its part to the evolution of the EV market.  Perhaps it will adapt to a rapidly changing market and press forward for decades to come.  Or maybe its best days are behind it.  The process is what matters.

Austrian economist Joseph Schumpeter first elaborated the idea of creative destruction in his 1942 book, Capitalism, Socialism, and Democracy.  There he described it as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

Economic growth, as observed by Schumpeter, begins with the innovations of entrepreneurs.  Then demand from new businesses increases the price of production, including labor.

This, in effect, has a negative impact on existing businesses.  They must operate in a condition of higher prices.  They may also find that their market share has declined because of competition from the new, innovative businesses.

Over time, as consumers move to products that include the more innovative technologies, demand slips away from the old products.  Prices then fall.  And the big growth period is over.

The immediate impact of the innovation saturates the marketplace.  A shakeout occurs, where the economy consolidates the new businesses.  A depression may even set in.

According to Schumpeter, the depression stage is both useful and creative.  It brings the economy into equilibrium through forced adjustments.  The level setting during the depression then encourages new innovations that take shape in the next stage of recovery.

This process, where new and innovative companies destroy the value of established companies, is what Schumpeter called creative destruction.

No doubt, it’s disruptive to the existing order of industry and employment and can result in mass layoffs of workers with obsolete skills.  Nonetheless, it is necessary for sustaining long-term economic growth.

Innovation is what provides new opportunities for workers in more creative and productive businesses.  It also delivers better and lower priced products to the market.

This is simply how the world works.  Dinosaurs like Kodak, Pan American Airways, Bethlehem Steel, Montgomery Wards, Blackberry, and countless other extinct businesses die out as new, more nimble and creative enterprises are born.

Janet Goes to Guangzhou

As Tesla loses EV market share, its workers feel the impact.  Recently, Tesla reduced production at its Shanghai factory, cutting worker schedules from six and a half days per week to five days.

The creative destruction brought on Tesla by its Chinese competitors also highlights the folly of President Biden’s plans to turn the U.S. economy into a green energy powerhouse.

Cheap, Chinese made clean energy products, including EVs and solar panels, are flooding the economy and pulling down prices on global markets.  U.S. and European clean energy manufacturers cannot compete.

Chinese companies, like their American and European competitors, are the recipients of massive government subsidies.  These subsidies are pushing production well above demand.

This week Treasury Secretary Janet Yellen traveled to Guangzhou and Beijing to ask Chinese government officials to knock it off.  It’s a ridiculous request; akin to opponents of the Iowa Hawkeyes asking Caitlin Clark to stop making so many 3-point buckets.

Governments don’t like creative destruction when it gets in the way of their schemes to plan the economy.  To counter China’s ability to make clean energy products faster and cheaper than American companies, the Biden administration will likely raise Trump’s tariffs.

But competition from Chinese businesses is much bigger than just EVs and solar panels.  And past efforts to erect trade barriers on Chinese companies have backfired.

Consider the case of Chinese mobile phone maker Huawei Technologies.  Several years ago, the U.S. government restricted sales of the most advanced computer chips to Huawei.  Rather than folding, the company developed its own chips and, in 2023, recorded record profits.

Investors in AI bubble stock Nvidia should take note.  Shares are up 19,000 percent over the last decade.  The story driving the moonshot over the last 18-months, which has taken the share price from $120 to $860, is that no one else can make AI chips as advanced as Nvidia.  This story may no longer be true.

According to the Wall Street Journal, “Huawei has managed to deliver AI chips that developers say match the capabilities of some of Nvidia’s top processors.”

And like Tesla stock in November 2021, the share price of Nvidia has a long way to fall.

[Editor’s note: It really is amazing how just a few simple contrary decisions can lead to life-changing wealth.  And right now, at this very moment, I’m preparing to make a contrary decision once again.  >> And I’d like to show you how you can too.]


MN Gordon
for Economic Prism

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