Tesla is engaging in a risky expansion as the rest of the auto industry is playing defense (TSLA, GM, F, FCAU)

Tesla Shanghai

The global auto industry is ruthlessly evaluating weak markets and killing off unpopular products while Tesla is expanding in China.
Tesla doesn’t have much of a choice — if it doesn’t take the risk now, it won’t be able to dive in amid a global auto sales downturn.
The contrast highlight the biggest difference between Tesla’s immature business and car companies that are over a hundred years old.

The contrast was telling: The same week that Tesla CEO Elon Musk attended a groundbreaking ceremony for a new Gigafactory in Shanghai, China, Ford announced that it would substantially restructure its European operations and, ominously, review its situation in Russia, implying that it might follow General Motors in exiting that market.

There was also continuing chatter around a possible Ford-VW alliance — although some of the prospective bloom of such a partnership was diminished by the ongoing incarceration in Japan of former Nissan Chairman Carlos Ghosn, disgraced architect of the Renault-Nissan-Mitsubishi alliance.

The global auto industry is preparing to play defense. In the US, sales topped 17 million new vehicles in 2018 for an unprecedented fourth straight year, and although there are no major signs of a big downturn in 2019, carmakers are getting ready. The lessons of the financial crisis, when a bloated GM and a crippled Chrysler both went bankrupt, have been learned.

Read more: Tesla’s $2,000 price cut doesn’t mean it has a demand problem

Before 2009, big car companies would count on brief recessions and robust recoveries, reliably stalling on difficult strategic decisions. But no more. GM has left Russia and Europe, ended production in Australia, and streamlined in South Korea, and it’s now winding down underperforming passenger cars in the US and preparing to idle factories. Fiat Chrysler Automobiles got out of passenger cars to focus on SUVs and pickup two years ago. And Ford ousted CEO Mark Fields in 2017, bringing on Jim Hackett, who has concentrated on improving what he calls Ford’s business “fitness.”

Make the tough calls when times are good

The arguments in favor of these moves aren’t complicated: when times are good and profits are rolling in, as they have been for years, make the tough calls. Then batten down the hatches when the bad weather sets in, as it always does in the highly cyclical car business.

Automakers might be overreacting, but they are gazing out at alarming developments. The biggest of these is an economic slowdown in China, where GM, for example, is now selling more cars than in the US. The China market has grown so rapidly that it’s now the world’s largest — but it hasn’t really endured a major decline of the sort that car companies in the US and Europe have negotiated many times over a hundred-plus years.

So Ford, GM, Fiat-Chrysler, the Japanese, and the Germans, and the South Koreans are all wisely de-risking.

Tesla, meanwhile, is performing its traditional role — if a 15-year-old company can have traditions — of gobbling up risk, front-running it while the …read more

Source:: Business Insider


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