“The economy, stupid.” Simple, effective, to the point, and it became the de-facto slogan for the Clinton election campaign-helping Bill Clinton unseat President George H.W. Bush in 1992.
The economy is not that convoluted; it has cycles: good-bad, good-bad, up-down, up-down. When things get bad, it can take a little more than a few simple fixes and a bit of time to ameliorate and restore an ailing economy. The industrial revolution and mass production of the assembly line created the Roaring 20’s, only to be busted by the Great Depression. It took World War II to pull both the United States and World out of the Great Depression. Since then, the economy has continued to cycle, computer technology increased productivity, with the business cycle of expansion and contraction throughout the 50’s, 60’s, 70’s, 80’s, and 1990’s until the dot-com bubble collapsed and put the US back into recession in 2001.It was a boom in housing that brought the US out of recession, but it was the bubble and collapse that sent the US and World into the Great Recession in 2007.
The economy in the US has continued to mend since, but the question we have posed the last few months is: is the current cycle of expansion is ending, beginning, or still developing? We continue to point out that the world economy is less than healthy, with difficulties in China, the rest of Asia, Europe, developing markets, and those that have large exposure to collapsing oil and commodities.
What is going to be the next Industrial Revolution, World War, computer technology, dot-com, or housing boom that bursts on the scene and moves the cycle wave vertical? The electric car is building steam. It was the automobile after World War I that brought the world out of the hyperinflation and depression of 1920-1921. The automobile again helped the world economy boom after World War II, and if Elon Musk has his way, it will again be the automobile that changes the world.
Tesla recently announced the Model 3 and it’s going to cost $35,000 stripped and, per Elon’s own math, $42,000 with “normal” options that gets the claimed 210 miles on a charge. The Model 3 blew away expectations, but reality could be a strong wake up call. It is not just Tesla, it is all auto manufactures that are looking to jump on Elon’s bandwagon and create a buying revolution for customers to “junk” their old, obsolete gas burning automobile dinosaurs and replace them with shiny new electric cars. Tesla has taken almost 300,000 $1,000 reservations for the Model 3, which is very impressive, but Tesla customers lose their $7,500 government credit once the company sells more than 200,000 cars. Tesla has already sold 100,000 cars, so 2/3 of those reserved Model 3 customers may not get the rebates they expect unless the rules change, which would put the price of the Model 3 in a very different price point. Tesla announced that they missed their production targets of existing Model S and X cars, delivering just 14,800 vehicles vs 16,000 expected – a 10% miss. Even with this miss, Tesla is gearing up to deliver up to 300,000 cars to depositors in just two short years. To do this, Tesla will need to go from 14,800 to 50,000 cars per quarter , and even then, since almost 15,000 of those 50,000 units will be current models, that’s only 35,000 Model 3s and it will take 10 quarters to work through just the current backlog, so it would seem that the production predictions are very optimistic.
Tesla has been making cars for 14 years and they are still struggling to deliver on a 60,000 car annual pace, yet they just took deposits for 5 years’ worth of cars at their annual production rate. A boom in hiring seems great for the economy, and Henry Ford showed that putting money in the pocket of his workers and suppliers sold more cars, and was a win-win for everyone, but to say it will be without logistical challenges is an understatement. Tesla is just one of the players. Warren Buffett betting on Chinese electric manufacture BYD, who is turning a small profit, but gearing up for big sales numbers as they move to sell vehicles outside of China.
It is inconsequential whether or not it will be Tesla, BYD, or an established auto manufacture-the electric car is going to change the world, and the fuel switch from gasoline to other fuel sources to power the world automobile fleet will be the engine of change for the world economy. The electric car revolution should not be seen as the answer to the world’s pollution problem. The Paris Climate Agreement indicated an objective of total elimination of humanity’s use of fossil fuels (keep oil in the soil); the electric car will help, but it is not the answer. Fossil fuels such as coal, oil, and natural gas are the dominate fuel sources for power plants across the US and world that will be needed to charge up the batteries for electric cars. The electric car is not the perfect “green” solution, but it could be the magic bean that the world economy needs to spur the next round of growth.
There will be winners and losers as the revolution takes place. It may not even be electricity that becomes the fuel of choice as solar, hydrogen, natural gas, and other sources are all fighting to power our automotive fleet down the road, but regardless of the final outcome, Elon Musk has thrown down the gauntlet and shaken the auto industry and the world of big oil to the core.