Investor Ron Baron has a $325 million position in Tesla and thinks that the carmaker could get big. Really big.
“He said that the electric-car maker could grow to be ‘one of the largest companies’ in the world during an interview with CNBC on Tuesday,” Business Insider’s Bob Bryan noted.
Maybe. Tesla could indeed get huge.
But Baron’s optimism should perhaps be tempered – at least if he assumes that a big Tesla is a company that generates large profits.
Because Tesla isn’t headed in that direction. In fact, it’s headed in the opposite direction.
Tesla now builds a pair of luxury vehicles, the Model S sedan and the Model X SUV, and sells them for around $100,000.
Other automakers also do this: Mercedes, BMW, Lexus, Audi, Porsche. It’s a profitable business, but it isn’t a high-volume business. Compared with mass-market automakers, such as Ford and GM, those aforementioned luxury brands have meager market share. But they don’t need a lot of share. They do fine without it.
Tesla is aiming to build 500,000 vehicles annually by 2018. Many of those cars will be the new Model 3, which is supposed to sell for $35,000.
In the auto industry, it’s quite difficult to make a good profit margin on a $35,000 car – it’s much easier on pickups, large SUVs, and luxury cars.
It’s even tougher with a new design and lots of untested technology.
But that’s where Tesla is aiming: at a massive market segment that reliably grinds down profits.
Why is Tesla doing this? Because as much as CEO Elon Musk probably appreciates the enthusiasm of a major investor like Baron, he’s not interested in running a profitable car company. He wants to change the world.
For real. Musk is a visionary, and Tesla is a means to an end: the acceleration of humanity’s shift away from fossil fuels.
And he’s willing to lose a staggering amount of money – and do all the wrong things, objectively, with the cars he sells – to achieve that end.