Elon Musk
Stephen Lam / Reuters

The auto industry’s fate rides on the answers to three unresolved questions: driven or self-driving? Electric or gas? Private or shared?

As Tesla surged past Ford and General Motors last week to become the most valuable car company in the United States, here was the brusque assessment of Bruce Greenwald, a professor at Columbia Business School: “It’s nuts.”

And, in a way, it is nuts. Particularly, if you ignore the Elon Musk mythology and look at the numbers. Tesla sold 80,000 cars last year. GM sold 10 million, meaning it exceeded Tesla’s annual vehicle sales every three days, on average. Despite the fanfare, Musk’s company lost $780 million in 2016. Ford made $11 billion.

But Tesla is a mountain of superlatives, as the auto industry’s most successful upstart, run by the “greatest living inventor” selling the greatest story of any publicly-traded tech company. Stock prices are, like everything else in life inflected by psychology, more about expectations of the future than about present circumstances. And that’s the metric where Tesla is beating its rivals into the ground. The company’s sales are growing 70 percent annually while the domestic car market has plateaued.

Tesla’s valuation isn’t nuts if, as some investors surely hope, cars are the new smartphones and Musk is the next Steve Jobs. In 2007, when the iPhone debuted, it was in a position much like Tesla, selling just 4 million units in a year when Nokia sold more than 400 million, as Vox’s Tim Lee writes. But 10 years later, Apple is the world’s most valuable company—with 20 percent of the world’s smartphones sales, and the vast majority of the industry’s profits—while Nokia has sold off its cell phone business.

Apple and Amazon got so big because they piggy-backed off of larger movements in tech and culture—the shift of attention to mobile and the shift of retail to the Internet—that created enormous new markets for them to dominate. Investors expect Tesla to dominate the electric future of cars the way Apple gobbles up smartphone profits and Amazon dominates e-commerce.

But the future of cars is a riddle within an enigma, as the industry sits at a crossroads facing several divergent futures—driven vs. self-driving, private vs. shared, gas vs. electric. Here are three questions that will shape the future of cars.

1. Will people drive cars, or will the cars drive themselves?

The self-driving revolution is like a massive West Coast earthquake—experts claim it’s practically inevitable, but nobody can say for sure when or what it will look like. Business Insider Intelligence predicts there will be 10 million self-driving cars on the road in three years. In 10 years, about a quarter of miles driven in the United States could be in self-driving electric cars, according to Boston Consulting Group.

If this self-driving future never fully materializes, legacy car companies will probably benefit from the lack of disruption. But is it so obvious that they would also lose, even in the self-driving scenario?

To be sure, investors are betting against them. The price-earnings ratio—a company’s share price divided by its earnings per share—is a barometer of investors’ optimism in future profit growth. The average P/E for the S&P 500 is in the mid-20s. But the ratios for car companies, like Ford, GM, and Toyota, are all around 10, which suggests that investors aren’t confident that their profits will last. (Tesla has no P/E ratio, since it has no E.) Musk is preparing for the autonomous future by installing self-driving hardware in all of his new cars. This way, when Tesla finally acquires or develops the software for fully autonomous driving, cars bought this year can be retrofitted to drive themselves.

Earlier this month, Navigant Research published a report that declared the worldwide leader in self-driving tech is Ford, followed by GM, Renault-Nissan, Daimler, and Volkswagen—all car companies. Tesla finished 12th. One research report isn’t gospel. But it suggests that the “Tesla Is Apple, and Cars Are Smartphones” thesis has some serious limitations. In 2007, Apple’s competitors thought the iPhone was a terrible idea. But in 2017, almost all of Tesla’s competitors are engaged in a global race to build electric and autonomous vehicles, and some of them are arguably ahead of Musk in software and distribution capacity.

2. Is the future of cars electric, or something else?

The simplest story about Tesla goes like this: It has the best technology, by far, and strongest brand, by far, in the auto market’s largest growth sector.

Indeed, the company already makes the two best-selling electric cars in the U.S.—the Model S sedan and the Model X SUV. Its most promising product, the Model 3, a relatively affordable sedan ($35,000, before government incentives), debuts later this year. Then there’s Tesla biggest tech advantage: its battery technology. Facing a shortage of high-quality and affordable lithium-ion batteries required in electric cars, Musk built his own proprietary “Gigafactory” in Nevada to produce state-of-the-art batteries that could cement a permanent advantage, the way Apple’s hardware has upheld the company reign over smartphone profits. Lithium-ion batteries, which are used in electric and hybrid cars, in addition to everything from spacecraft to smartphones and e-cigarettes.

Several automakers, like General Motors and Honda, are dabbling in other clean energy, like fuel-cell systems. But hydrogen fueling stations cost about $2 million to build and there are only 34 in the United States today, with more than half in one state—California. Given the technology’s questionable viability, Musk has called fuel-cell systems “mind-bogglingly stupid.”

Still, several things stand in the way of Tesla’s dominance in electric vehicles. First, its technology might be best-in-class, but it’s not one-of-a-kind. Sales of General Motor’s Chevrolet Volt are up 40 percent so far this year, a faster rate of annual growth than sales of Tesla’s Model S sedan. Ford, Nissan, and BMW all make electric vehicles that sold more than 5,000 units last year. It’s too early to say whether Tesla’s technology edge is like Apple’s, a truly wide moat, or like Whole Foods’, whose high-end revolution in groceries inspired competitors, like Kroger and A&P, that easily crossed the river to take back marketshare.

Second, an enduring era of cheap gas might prevent some on-the-fence households from springing for electric. Average gas prices have been under $3.00 a gallon since 2015. In the last three years, Americans have regained their mid-aughts habits, by moving to sunny, cheap suburbs and buying small trucks. Sales of cars are declining in the U.S., while SUVs and pickups are the bright spots in the domestic auto market. This story even holds for Tesla: Ninety percent of its growth in unit sales so far this year came from the Model X SUV. Tesla is expecting big things with its Model 3 car unveiling later this year, but the vast majority of Americans might be happy with bigger SUVs and trucks powered by cheap gas for a long time.


Percent Change in Sales by Vehicle Type, January-March 2017

Third, Tesla currently benefits from significant subsides. For each electric car sold today, Washington offers a $7,500 tax credit, and some states offer even more. This is a well-meaning, but ultimately regressive, subsidy, since Tesla’s cars are, for now, a luxury product. “The top income quintile has received about 90 percent of all credits” for electric vehicles, according to research by the economists Severin Borsenstein and Lucas W. Davis. One can desire very fervently to save the planet and still find that statistic a bit insane. If the Trump administration, or certain states, change this incentive structure, it might discourage Tesla’s growth among upper-middle-class buyers who are the target market for the Model 3, and indirectly promote gas-hybrid cars, like the Toyota Prius, at Tesla’s expense.

3. Will the future of cars be owned or shared?

This is the most speculative question, but it might end up being the most important question for the future of driving.

Several years ago, an engineer at one of the major car companies encouraged me to think about the future of cars along two spectra—from driven to self-driving, and from owned to shared. These weren’t binaries, he said—“they’re light dimmers, not switches”—and there could be many winners in each scenario. But the boldest vision for the future of driving was a fleet of vehicles that is electric, autonomous, and shared. (This sounds like Uber’s vision, although this person was doubtful about that company’s ability to achieve it alone.)

If the future of cars is self-driven and privately owned, then millions of Americans will still want their cars to be beautiful status symbols and top-flight machines, like a Tesla. But if the future of cars is self-driven and publicly owned—for example, if urban residents pay for a municipal fleet of autonomous vehicles that effectively operates as an on-demand, above-ground subway—then a luxury brand like Tesla might not be so lucky. People tend not to care what kind of vehicle they’re riding in for 10 minutes, as long as the trip is safe and efficient and the car doesn’t smell. If the future of getting around is a municipal network of autonomous cars, then local government will mass-order the cheapest, sufficiently safe self-driving vehicles they can. And, given the state of most buses and subways, Americans who take public transit are not particularly fussy its interior aesthetics.

“If we share rides in shared cars, we will only need 10 percent of the cars we have today,” says Robin Chase, the founder of Zipcar. “We have the ability to eliminate congestion, transform the livability of cities, make it possible to travel quickly and safely from A to B for the price of a bus ticket, improve the quality of our air, and make a significant dent in reducing carbon-dioxide emissions.” This is the future that is the most exciting to me. It’s also a future in which cars ironically become public real estate rather than private property—a networked commodity, rather than a status symbol. That might be great for riders, congestion, cities, and the environment, but it’s not obvious that it would be great for any company that relies on enormous per-vehicle profits to justify its stock price.

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