GM and Ford May Be Wishing Tesla Succeeds. Here’s Why.

The traditional car industry has a dirty little secret. It desperately hopes


is wildly successful.

That sounds unbelievable, especially since Elon Musk’s car company is the principal disruptive force in a business that is more than a century old.

It’s easier to envision Tesla as a threat to the industry. The company single-handedly made battery electric-vehicles profitable, and fun, creating an existential risk for legacy auto makers. Today, battery EVs account for roughly 10% of all new cars sales around the globe, which also means the traditional industry’s addressable market is just 90% of what it was a few years back.

The response from the EV disruption by the traditional industry has been predictable. Auto makers are spending hundreds of billions of dollars on electrification technology, fighting tooth and nail to preserve their places in the automotive universe.

That’s what’s happening on the surface. Tesla is disruptive in other ways, too. It treats its cars like iPhones, regularly updating features and even testing some on the fly.

The most significant software-based feature is Tesla’s driver-assistance product it calls Full Self Driving, or FSD. It costs $15,000 and hundreds of thousands of drivers have paid for it. The most-conservative estimate puts FSD penetration at 10% of all Tesla vehicles ever sold.

Tesla didn’t respond to a request for comment about FSD sales.

If 10% of all the passenger vehicles in the world were equipped with similar self-driving software the car business would have stumbled into an addressable market worth $3 trillion, generating annual revenue of roughly $150 billion. What’s more, FSD-like gross-profit margins should be roughly three times what car makers earn building cars.

The existing industry will be quite happy to see Tesla successful developing its FSD product. They are all working on competitive offerings. Tuesday,

General Motors

(GM) announced the first vehicle which would have its competitive driver assistance product, called Ultra Cruise: The Cadillac Celestiq.

(In 2021, GM outlined a plan to double sales, and selling EVs and autonomous-driving products were big parts of it.)

Tesla is also vying to make the entire car business more capital efficient. The late former head of

Fiat Chrysler

Sergio Marchionne lamented that the entire car business didn’t earn its cost of capital in a now-famous 2015 presentation he titled “Confessions of a Capital Junkie.”

Cost of capital is what a company, or industry, needs to spend to produce its goods and services. If an entity can’t earn the cost of capital, it is destroying, not generating, wealth and shareholder value.

Marchionne’s solution was consolidation. Bigger car companies that could produce more units on a single vehicle platform.

Musk has a different way to achieve the same vision. He believes Tesla can reach annual sales of 20 million units with only 10 models. It’s a radical thought. In 2022, the only vehicle model that sold more than 1 million units was the


Corolla, although Tesla’s Model Y should sell more than 1 million in 2023.

Fewer models means less spending on R&D, assembly plants, and equipment. The global auto industry spends more than $100 billion a year on plants and equipment. It spends roughly 75% of that figure on new-vehicle development. For that $175 billion in spend, the industry generates roughly $100 billion in free cash flow.

Any significant reduction in spending could improve free cash flow materially. Every auto maker can benefit from that change.

The car industry, of course, spends money to develop better cars. People still want better cars. Musk simply believes that software will be responsible for a lot of vehicle improvements down the road. Software in EVs control features such as ride quality, energy efficiency, and driver assistance. As software takes an even bigger role controlling vehicles in the future, car owners simply won’t have to upgrade hardware to get a better car.

Self driving and capital efficiency are the most significant changes Tesla is bringing that could benefit everyone. There are a couple others. Tesla is selling insurance and backup-battery storage products such as the Tesla Powerwall.

Both ideas can be copied by existing auto makers.

The global market for car insurance is roughly $1 trillion a year, and that generates roughly $30 billion or $40 billion in annual net profit, after paying claims. That’s a margin of only 3% to 4%, however, and other opportunities are larger.

The size of the battery-backup business isn’t really known yet. Musk says stationary power could be bigger than the car business some day. In any case, what investors know now for sure is that GM formed a business to sell battery-storage products to consumers last year.

If you can’t beat ’em, join ’em.

Write to Al Root at [email protected]