The reaction to Tesla's March 1 analyst and investor event was, well, meh. Investors might have missed something big.
Analysts and investors wanted concrete details about coming vehicles such as the long-delayed Cybertruck and a lower priced EV for the masses. They didn't get them. CEO Elon Musk did say something very important, however. If he's right, Tesla (ticker: TSLA) will change the entire car business significantly for the better.
What's more, the new plan, has nothing to do with electric vehicles.
Tesla shares dropped 5.9% on Thursday, after the investor event. The stock rallied Friday, finishing the week up 0.6% which trailed behind the respective 1.9% and 2.6% gains of the S&P 500 and Nasdaq Composite.
Wall Street complained later that the event was too high level, too philosophical, and too long. Analysts hoped Tesla would dramatically roll out a prototype Tesla compact EV late in the evening. What they got was a short Q&A session to finish the night.
During that session, Jefferies analyst Philippe Houchois asked an important question about how many different vehicle models Tesla would need to sell to reach its ultimate goal of hitting 20 million vehicles a year.
"Not that many. Really 10, I don't know, not that many," answered Musk.
That's the bombshell. It's an incredibly low number. Volkswagen (VOW3. Germany), which is one of the world's largest auto makers by volume, has 10 automotive brands and many, many more models.
"I mean, what's happened with conventional cars is people run out of things to do. So when you run out of things to do, they just end up reshuffling the deck, and you have pretty much the same," continued Musk. "Look at how have things converged with the phone. I mean, there used to be hundreds of flip phones. Now, what do we have? It will be like that."
He has a point. today, the vast majority of all phones have the same form factor, the so-called candy bar, which supplanted the flip phone.
Cars aren't phones. People need vans and trucks along with sedans and SUVs. Still, if Musk is right, and the number of car models drops significantly, it means less cash wasted by the auto industry, spent endlessly developing and upgrading models in a cycle that runs eight to 10 years.
The smartphone industry does it better. Global auto makers spend roughly $110 billion annually for plants and equipment and generate about $90 billion in annual free cash flow. Apple (AAPL), and its iPhone manufacturing partner Hon Hai Precision Industry (2317. Taiwan), spend roughly $15 billion a year on plants and equipment and generate roughly $100 billion a year in free cash flow.
Today's best selling car models are the Toyota Corolla, Toyota Rav-4, Ford F-Series trucks and Tesla Model Y. Of those, only the Corolla sells more than one million units a year.
Tesla's 10 for 20 million equation, which works out to an average of two million units sold annually per model, is a radical departure to the way things are done today.
It might happen. No one really cares about the shape of their phone anymore. They care about the feature enhancement through software. That's another thing Tesla has, essentially, pioneered for the car business.
Tesla updates drive quality, entertainment and autonomous driving features with over the air software updates. Now every other auto maker is trying to do the same.
Tesla disrupted the industry when it commercialized and popularized electric vehicles. That was only one of Tesla's disruptions. If Tesla succeeds with its model targets, the rest of the industry might not admit it, but they will be thrilled. Less spending can mean everyone does a little better.
As for 20 million, Musk, in prior interviews, points out that number is an aspiration, not guidance. Volkswagen plans to ship about 9.5 million units in 2023.
An auto maker selling 20 million units a year would be another thing the world has never seen.