Tesla : The 21st Century vs Auto Dealerships – The 20th Century

Congratulations to Tesla Investors

If you bought shares of Tesla in early 2013, and still own them, then first of all, you deserve a round of applause for having picked one of the biggest and ‘most-glamorous’ multi baggers of our time.

Kudos to you. Your investment is already up from a low of $34 in 2013 to a high of $265 in 2014. That’s more than 675% in just over a year. EvenWarren Buffett would be proud of you.

Since its IPO in June 2010, Tesla was up as much as 1200% at its peak. Currently sitting at around 860%.

THE FINANCIAL PAGE

SHUT UP AND DEAL

BY APRIL 21, 2014   The New Yorker

The electric-car company Tesla seems like everyone’s darling these days. Its stock, even amid a pervasive selloff in the tech sector, is up nearly forty per cent this year. It has announced plans to build a five-billion-dollar battery factory, which various Southwestern states are vying to host. And it’s now starting to sell cars in China. But there is one place where Tesla is getting no love: New Jersey. Last month, the state decreed that the company would have to shut down its showrooms. In doing so, New Jersey joined states like Texas and Arizona, where it’s effectively illegal to buy a Tesla. Pretty soon, you’ll be able to get a Model S in Beijing but not in Paramus.

Why was Tesla banned? It sold cars. It built showrooms where customers could check out a vehicle, arrange a test drive, and buy a car. The hitch was that Tesla sold cars directly to the public, without going through independent dealers. In most industries, this would hardly be a radical idea. Dell built its business on selling direct to consumers, and the most successful retail phenomenon of the past decade is the manufacturer-owned Apple Store. But the auto industry is different. In its early years, companies tried all kinds of ways of selling cars; you could buy them right at the factory, or at local department stores, or even from the Sears catalogue. But by the nineteen-twenties the industry’s major players had settled on a system of local, independently owned car dealers. Today, almost every new car in the U.S. is sold this way. In forty-eight states, direct sales by car manufacturers are restricted or legally prohibited, and manufacturers are often prevented from opening a dealership that would compete with existing ones. If Ford wanted to open a flagship store on Santa Monica Boulevard, it couldn’t.

Tesla, since it’s starting from scratch, has no existing dealers, and so in theory it isn’t encroaching on anyone’s turf. But auto dealers around the country have still been lobbying state governments to force the company to change its ways. Dealers like the existing system, and they don’t want other automakers to get any ideas. Fiona Scott Morton, an economics professor at Yale who has written extensively on car dealers, told me, “There isn’t a rational argument for why a new company should have to use dealers. It’s just dealers trying to protect their profits.”

Of course, no one involved presents it like this. State legislators insist that the status quo benefits consumers: the relevant Florida statute claims to be “providing consumer protection and fair trade.” We’re told that only independent dealers can guarantee service and warranty coverage. But look at the Apple Store: manufacturer-owned, and yet famous for the customer service and tech support provided at the Genius Bar. And while the argument is sometimes made that the use of independent dealers lowers prices, it’s hard to see how forcing Tesla to sell its cars through middlemen would make them cheaper. Indeed, a series of studies in the nineteen-eighties found that the various rules protecting dealers led to higher prices—six per cent higher, according to an estimate by the Federal Trade Commission. And in 2001 the Consumer Federation of America estimated that restrictive franchise laws could be costing consumers as much as twenty billion dollars a year. In any case, no one expects dealers to disappear. The question is whether automakers should be legally banned from trying out new ways to sell their cars.

It isn’t just auto dealers. State regulations are littered with provisions designed to protect incumbent businesses. In most states, retailers and restaurants have to buy alcohol from wholesalers rather than directly from producers. And there’s an ever-growing thicket of occupational licensing regulations. For some professions, a licensing requirement makes sense. But, according to a 2008 study, almost thirty per cent of jobs now require a license in some state or other, including many—auctioneer, shampooer, home-entertainment installer—where licensing seems totally unnecessary.

State governments have been looking out for local businesses since way back—in the nineteenth century, they forced travelling salesmen to pay extortionate fees—and they haven’t minded too much when this protectionism comes at the expense of consumers. Besides, as Scott Morton says, “dealers employ a lot of people and they generate a lot of sales-tax revenue, so they have great influence over state legislators.” Auto manufacturers, by contrast, are typically based out of state, while consumers are too amorphous a group to really exert much political pull. And, as the political scientist Mancur Olson famously noted, when the benefits of a regulation are concentrated and the costs are diffuse, the party that gets the benefits is almost certain to win.

Of course, you might ask, who really cares if some luxury-sedan maker has to sell through dealers? But what the New Jersey ban exemplifies is the tendency for businesses to use state power to divide the economy between insiders and outsiders. This discourages innovation, raises prices, and makes life hard for people trying to start new businesses—or even just get a new job. Does it really make sense to force someone, as Utah did until 2012, to go through two thousand hours of cosmetology training to work as a hair braider? Such statutes delegitimatize the idea of regulation, by making it look merely like a way for governments to indulge special interests. As the financial crisis showed, there are plenty of areas in real need of regulation. But maybe car buyers can take care of themselves. 

ILLUSTRATION: CHRISTOPH NIEMANN

Westport Innovations Inc. Continue To AVOID

WPRT : NASDAQ : US$16.91 WPT : TSX
AVOID

 Target: US$20.00

We have written about the research company that walks like an investment – and said avoid from – was it $40 down- despite the enthusiasm of Motley Fools- better to engage as a client of Jack A. Bass Managed funds is the lesson here.

COMPANY DESCRIPTION: Westport Innovations is a leading developer of technologies that allow engines to operate on gaseous fuels such as natural gas across light, medium, heavy and high horse power market applications.

Investment recommendation

AVOID

Macro challenges keep share volatility high, while the company works to introduce engine platforms and book orders in ‘14. The recent follow-on offering helps alleviate cash issues near-term ($210.6M cash at year-end vs. burn of $26.9M in Q4). While we continue to favor the strategy (and the nat gas macro), risk/reward stays balanced.
Investment highlights

 Few changes this quarter, as Westport finishes a challenging 2013 and looks to transition from R&D phase to increased product adoption in 2014 (with heightened focus on cost optimization and prioritized investments  goal of breakeven adjusted EBITDA for all three units by year-end).
 The outlook for 2014 implies solid growth (~7-13%), despite a ~$25M headwind from discontinuation of first generation HPDI (as focus turns to roll-out of HPDI 2.0 and expectation of improved warranty accruals – work underway with several OEMs currently).
 CWI and Weichai continue to grow nicely, with both JVs reporting record volumes for the year (2014 expected to benefit from ramp of ISX12G and build-out of additional capacity at Weichai). Early opportunities in rail/mining/marine also continue to progress nicely.
 Our 2014 revenue/EPS estimates go to $184M/$(1.80) from $241M/$(1.90); F2015 is introduced at $300M/$(0.90).
Valuation Our $20 price target (from $28) is derived by applying a 4x multiple to our 2015 sales estimate of $300M

Toyota

English: Early_one_yen_banknote_front_and_reverse

English: Early_one_yen_banknote_front_and_reverse (Photo credit: Wikipedia)

Toyota

(TM : NYSE : US$98.86)
Toyota on Tuesday raised its full-year outlook, as it posted a 23% jump in net profit for the most recent quarter, buoyed by a favourable shift in foreign exchange rates and strong sales of its sedans and SUVs in North America. “Our loyal customers in the U.S. have come back to the fold now that we have plenty of inventory on hand,” Toyota senior managing officer Takahiro Ijichi said.

For the three months ended in December, Toyota posted a net profit of 99.9 billion yen, up from 80.9 billion yen last year but below a mean estimate of 152.81 billion yen in a survey of analysts compiled by data provider Quick. Revenue rose 9.3% to 5.319 trillion yen in the quarter from 4.865 trillion yen. Toyota also raised its full year outlook for operating profit at the parent company level-a measure of its exports from Japan and domestic sales-to 150 billion yen, up from a previous forecast of a 20 billion yen loss.

That would be the first black ink in five business years-and largely reflects a steep jump in profitability as the yen has backed off swiftly from a record highs against the dollar. “We’ve improved our competitiveness to the point we can make a profit even at 79 yen to the dollar on a parent basis,” Ijichi said. He added the Japanese currency‘s decline may allow Toyota to ramp up production of export models that became unprofitable as the yen
surged last year.

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