Incrementalism is Killing Legacy Automakers
If you are a shareholder in a legacy automaker, incrementalism is why you’re losing
Are you a long-term legacy automotive investor? If so, incrementalism is killing your returns.
What is incrementalism? It is a strategy of making gradual improvements or innovations to products, services, processes, or systems over time, rather than aiming for radical changes.
This corporate automotive incrementalism is stalling, or maybe even destroying, the valuation of practically every legacy automaker. How do I know? With the exception of Toyota, nearly every volume, global, legacy automaker has an inconsequential market valuation between $38 billion and $68 billion (General Motors, Ford, Stellantis, Honda, Hyundai, VW Group, BMW, Mercedes Benz). Toyota has a more sizable valuation of $315 billion. But Toyota is an exception, not the legacy automotive valuation rule.
Legacy automotive valuations are in stark contrast to the nearly $750 billion market capitalization of Tesla. Many believe Tesla is an overvalued stock. Yet, this has been a consistent belief about the company’s valuation for at least five years. At some point, the “Tesla-is-overvalued” club (myself included) must conclude that they might be wrong. This crowd must eventually admit that the company will not suffer some sort of catastrophic devaluation event as some investors assume.
Why do investors reward Tesla at a level not experienced by legacy car companies? Tesla challenged and destroyed automotive incrementalism. The company has deployed disruptive innovation which had forced the entire automotive sector to play catch-up. Here are some examples of this Tesla disruptive innovation:
Online vehicle sales without traditional automotive dealers.
Electric cars developed as premium offerings versus those only engineered to satisfy corporate fuel economy standards.
Periodic over-the-air vehicle updates using software that repairs customer cars and improves vehicle performance.
Buildout of a global charging infrastructure.
Developing and offering a mobile app helping to create a more seamless customer ownership experience.
Early vehicle inclusion of advanced driver assist system (AutoPilot) and the rollout of its Full-Self Drive capability while still being feature-incomplete).
Aggressive implementation of vertical integration for critical components as well as software development.
Legacy automakers have been unwilling to be disruptive to themselves. In the meantime, they’ve allowed Tesla to effectively rewrite the entire automotive playbook. Investors have rewarded Tesla, while essentially ignoring much of the legacy automotive sector.
This lack of disruptive innovation by legacy car companies reminds me of Ross Perot 40 years ago. Perot sold his company, Electronic Data Systems (EDS), to General Motors in 1984. Perot made the sale not only to diversify his wealth, but also to bring his form of entrepreneurial execution to GM, which was struggling with competition and declining profits at the time. As a new GM board member, Perot once said, “the first EDSer to see a snake kills it. At GM, first thing you do is organize a committee on snakes. Then you bring in a consultant who knows a lot about snakes. Third thing you do is talk about it for a year.”
Today, the snake that’s killing legacy automotive is Tesla. This is what investors believe. Like the GM of 1984, legacy automakers have responded to the Tesla snake with incrementalism, unwilling to change in a manner appropriate to new competitive disruptive innovation. Until these automakers face this challenge, investors will continue to sit on the sidelines as legacy automotive shareholders continue to suffer.
Disclaimer
TaaSMaster, LLC is not a registered investment advisor or broker/dealer. All investment opinions expressed by TaaSMaster, LLC are from personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors may occur.
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