Mr Musk time for you to buy Intel? Accelerating the EV future
The commodity wars are setting the field for big winners
The rise of this Russian conflict with Ukraine has changed the world order in many ways, but the biggest winners of this conflict will likely be the US as it gets to exercise its might once again.
This war has begun to distort commodity prices in a significant way and that has brought a great degree of uncertainty into the markets. This is leading to greater nationalism as that is often seen as the best geopolitical defense to market instability.
With the significant increase in sanctions and the massive exodus of organizations leaving Russia (250+), it seems like this energy crisis is here to stay for a long time. Today oil is at 131 USD and the Natural Gas at Henry Hub is already at a shocking 4.53 USD/MMBtu and these prices may further rise as the world races towards a scenario where Russian oil and gas taps stare at a future with significantly reduced market access — In either case high or low prices the US wins.
This uncertain commodity market may even cause the oil and gas players to further cartelise beyond OPEC if they choose to take a hint from the approach the shipping lines chose to take; resulting in further straining of prices.
We are already seeing UAE and Saudi Arabia saying they will not budge against US pressure to pump more oil into the market.
This seems to be the moment EVs and batteries finally become the norm
These uncertain conditions will likely renew the world’s focus and desire to reduce dependency on oil and will further increase the momentum to bring about a more sustainable world where each nation produces its own energy.
Many players are looking to enter the EV and battery storage solutions space but Tesla’s manufacturing scale and process of innovation have positioned the organization to be the primary producer and manufacturer of the world — especially at a time where the demands of having cleaner, independent energy sources is growing.
Production capacity is already rising with — Giga Berlin in its final stages of approval, Giga Fest Austin being on April 7th, Giga Shanghai’s 2nd factory to start construction in April 2022 and even plans to expand Fremont.
Tesla’s battery storage solution for homes and businesses are also well positioned to cater to the demands of storing energy which will be more important than ever with rising gas prices. Tesla’s expertise with battery management software gives it an additional advantage in building such microsize solutions.
Tesla can rebuild its sourcing of raw materials
As EVs need many different kinds of metals to be built Tesla will have to rebuild its supply chain to maintain production.
Nickel can be sourced from Indonesia as it is already the world’s largest nickel exporter. Lithium can be found in Chile, Argentina or Bolivia as 58% of the world’s lithium is produced there. Cobalt can be found in DR Congo. Even Aluminum can be sourced from China as it produces 10X of what Russia produces.
There may be other parts that are only available in Russia but at a high level, it looks like the EV and Storage industry may be unscathed with the global disruption — alternate sources seem to exist.
Control of chips gives Tesla a unique 2nd strategic advantage (Along with software)
When the chip shortage last started about a year ago (Late 2020) Tesla swiftly rewrote its software to work with the available chips on the market, while larger auto companies struggled with production. Tesla could even raise prices and retain its orders as demand for EVs is so high.
Now, this begs the question — Is a war for oil or a war for chips going to happen next? The answer is likely both.
Today Tesla’s internalized software engineering capabilities are one of its biggest differentiators in creating EVs at scale — especially due to the rapid feedback loops that become possible. This is what “Factory is the Product” is all about.
In my view Tesla should also consider getting into the semi-conductor business as its other major competitive advantage, manufacturing and software expertise are the 2 biggest factors for the semiconductor business and Tesla is is uniquely positioned as it has both — This is why an Intel acquisition could be interesting. (Intel recently announced their foundry business would focus on making car chips in bulk)
Intel is seen as ageing tech company that needs an innovative jolt. But, it still remains one of the world’s largest chip manufacturers with a behemoth revenue of 79 billion USD.
But, Tesla’s rapid ability to innovate through “Factory is the Product” may be exactly what Intel needs to regain its innovative spirit to connect with its scale. This initiative will likely even be supported by the US govt as it is keen on domestic semi-conductor manufacturing and innovation
Intel may be expensive but Tesla has the financial chops to take control
Tesla’s Plant Asset Value as of Dec 2021 — 39 Billion
Intel’s Plant Asset Value as of Dec 2021–149 Billion
Tesla’s Market cap as of March 2022— 883 Billion
Intel’s Market cap as of March 2022–195 Billion
Assuming Tesla acquires 25% of Intel at a 25% premium with an option agreed to raise its stake to 51% the initial cost would be about 65 Billion USD which seems to be doable given Tesla’s balance sheet.
Tesla is already a machine in terms of profitability and financial strength:
- Revenues grew 71% from 31 billion to 53 billion from Dec 2020 to Dec 2021
- Free cash flow from operations rose 95% from 5.9 billion to 11.5 billion from Dec 2020 to Dec 2021
- Long term debt dropped by nearly 51% going from 8.5 billion in Dec 2020 to 4.2 billion in Dec 2021
The value proposition creates a stranglehold
Tesla could feed its own consumption of chips mitigating the risk of delayed delivery by having to re-write software. As well as get a stranglehold of control over the other players both in the EV and ICE (Internal Combustion Engine) space as cars need become smarter and need more chips. (Look out Rivian and Lucid Motors)
Owning a chip company could be a hedge against any disruption in geopolitics around Taiwan where TSMC controls 54% of the world’s chip manufacturing.
Tesla will gain access to the latest fabs and chip technology by owning a native chip manufacturer. This will boost its own ability to increase the manufacturing speed of its product class of batteries, cyber trucks, charging infrastructure, and even entire factories.
Let us watch this space with interest.
I (Shorjoe Bhattacharya) am a wannabe writer, podcaster, and now dabble in logistics. I am also trying to learn finance. I believe the world moves too fast for me to become an expert at anything and I am comfortable with it. I am passionate about intersections and admire those that connect the dots. I have had the good fortune of having worked in diverse industries ranging from seaports, food, and high-end gears and when I was 17 had driven my city mayor crazy asking him to ban plastic bags in a Texas town. I, therefore, left the town (I hear they are finally “considering” a ban). I am on Linkedin and Twitter.
