Tesla's valuation trouble and Germany's spending struggle | The Dip Podcast

Key Concepts

• German Infrastructure Investment: Discussion on Germany's need for investment in future-oriented projects for growth, including digitalization, energy independence (nuclear power), tax/social benefit adjustments, railways, army, and fiber optic internet.
• Electric Vehicle (EV) Mandates and Competitiveness: Debate on whether EV mandates harm the auto industry and the importance of US investment in EV technology to remain competitive globally.
• Tesla Valuation and Elon Musk's Pay Package: Analysis of Tesla's valuation being driven by future growth expectations, particularly in self-driving cars and humanoid robots, and the implications of Elon Musk's potential trillion-dollar pay package.
• Nvidia vs. Tesla Business Models: Comparison of Nvidia's robust business model, driven by demand for chips for large language models, versus Tesla's ambitious bets on electric and self-driving cars.
• German Auto Industry Focus: Examination of the German auto industry's historical focus on the high-end market and the challenge of producing affordable, everyday electric vehicles.

German Infrastructure Investment

The discussion begins with a question regarding Germany's infrastructure investment strategy. The commenter, Euttune 9851, questions whether the investment will focus on digitalization, cheap and independent energy (like nuclear power), adjustments to taxes and social benefits to encourage work, or simply on railways, the army, and fiber optic cables that should have been implemented years ago.

Professor Olria Mandier from UC Berkeley suggests that any investment in future-oriented projects that will generate growth for Germany is beneficial. She emphasizes that the key is to ensure the money goes towards such investment opportunities and not towards "gifts to your clientele or some other type of consumptive spending." Professor Mandier specifically highlights digitalization as an area where Germany has lagged, stating, "I do not understand why the Germans had to be the last ones and in making progress there." She concludes that as long as the spending promises to generate growth, it is a positive step, even if her personal preferences for the starting point might differ.

Electric Vehicle (EV) Mandates and Competitiveness

The conversation shifts to electric vehicles (EVs) and a comment from Pakar WS6485 stating, "EV mandates kill the auto industry."

Katherine Yusco, a research analyst at the American Security Project, refutes this, arguing that there are no "true EV mandates." She contends that encouraging EV adoption will actually make the United States automotive industry more competitive globally in the long run. Yusco points out that the US primarily exports vehicles to Canada, Germany, and Mexico, all of which are experiencing an increase in EV adoption. If the US does not produce this technology, it will become less competitive, and these consumers will source EVs from other countries. Therefore, while a strict mandate might not be the ideal approach, investing in EV technology or keeping pace with international demand is crucial for the US to remain a competitive global player in the auto industry.

Tesla Valuation and Elon Musk's Pay Package

The topic of Tesla and CEO Elon Musk's substantial pay package is addressed, stemming from a comment by Dan. Dan questions the offer of a trillion-dollar package to Musk when Tesla has not yet earned a trillion, suggesting a potential issue with how American companies "cook their books."

Seth Goldstein, a research analyst at Morning Star, explains that Tesla is valued as a "very high growth company." He states, "The majority of Tesla's valuation comes from future market growth expectations." This includes the success of developing self-driving cars and marketable humanoid robots. Goldstein acknowledges that Tesla is "a little expensive" and "overvalued" but clarifies that if Elon Musk were to achieve his trillion-dollar pay package, it would signify Tesla becoming one of the most valuable companies in the world. In such a scenario, shareholders would benefit significantly, with stock prices potentially increasing sixfold from current levels, and Musk's pay would be aligned with this shareholder success.

A subsequent comment from "actions speak louder than word" compares Tesla's shareholder wealth creation to that of Nvidia, arguing that Nvidia has created "multiple times over Tesla" without its CEO demanding a "ridiculous trillion USD bonus."

Tomaso Valleti, an economist and professor at Imperial College London, responds to this comparison. He notes that Nvidia's CEO also receives significant compensation. Valleti characterizes Nvidia as having a "more robust business" due to its critical role in providing chips for large language models, which he sees as the future direction of technology. He describes Elon Musk's ventures as "big bets," acknowledging that electric and self-driving cars are the future but also highlighting the "lot lot of competition around," which lowers the "possibility of success for Elon." Valleti also touches upon Musk's persona, calling him an "Uber Mench" who wants to be seen as a "Superman doing something completely different." He links Musk's ambition to send people to Mars and award himself the first trillion-dollar package in human history as consistent with this "legend around Elon Musk."

German Auto Industry Focus

The final question is directed at Stephen, who is described as a close watcher of the auto industry in Germany. Mario Rencon's comment suggests that "The problem with German cars is that for so long, they have catered only to the high-end market. They forgot how to make cheap everyday cars."

Stephen acknowledges that the perception depends on what is meant by "high-end." He mentions premium brands like BMW and Mercedes, which have historically focused on the luxury market, particularly in markets like China where they previously sold well. However, he also points to mainstream volume producers like Volkswagen, which was once the number one car company globally. Stephen questions whether these mainstream German cars can be considered "high-end" when compared to cheaper Chinese cars, especially in the electric vehicle (EV) segment. He notes that cheaper Chinese EVs may be smaller but have advantages in areas like batteries, which many European carmakers lack.

Stephen identifies the key challenge for German carmakers as bringing down the price of EVs and developing scale to produce EVs that appeal to a broader market. He suggests that this will be a significant challenge for them.

Conclusion

The podcast episode, "The Dip," features a Q&A segment addressing viewer comments and questions. Key topics covered include the strategic importance of infrastructure investment for Germany, the impact of EV adoption on the automotive industry's competitiveness, and the valuation of Tesla in relation to Elon Musk's ambitious pay package and future technological bets. The episode also touches upon the competitive landscape of the global auto industry, particularly concerning German manufacturers' historical focus on the premium market and the emerging challenge from Chinese EV producers. The overarching theme is the dynamic nature of global markets and technological advancements, and the strategic decisions companies and nations must make to remain competitive.