Tesla Tires? And Why Tesla Might Acquire Goodyear
Tesla, the hottest stock of 2020, has revolutionized the automobile industry and will continue to influence the world’s energy industry.
To fulfill its goal of transitioning the world to sustainable energy and maintaining its lofty stock price, Tesla must continue to innovate on the design and manufacturing process of its cars, while also pushing the price down. Most of the company’s research and development have gone into the battery, as it is the heart of the car and soul of the company, while also being the single most expensive part.
But in the same way that engine power is not the limiting factor in achieving land speed records, batteries are not the main cost of owning a Tesla; tires are. With special high-performance tires, cars can reach higher speeds and accelerate faster without tuning the engine. Similarly, the cost of owning a Tesla could decrease dramatically with improved tires due to lower power draw on the battery and longer tread lifespan. Could Tesla’s next step to automobile domination be innovating in tires? And if so, how would they do it?
In their quest to get an affordable electric car in the garages of drivers everywhere, Elon and company have upended the traditional method of car manufacturing.
Typically, car makers like Ford and GM purchase parts and machines from third parties to create their cars, making the company leaner internally. Tesla, does the exact opposite by creating almost everything from scratch. Elon explained in the most recent shareholder letter that “Tesla is absurdly vertically integrated…We have a massive amount of internal manufacturing technology that we built ourselves.” This means that they control every component at every step of the manufacturing process.
Take the battery for example: In the Tesla Roadster, they purchased batteries and assembled them into packs in-house. Then they partnered with Panasonic to design the batteries. Now, they are planning to create their own batteries via their acquisition of battery startup Maxwell. Therefore, tires could be the next stop for Tesla.
Unbeknownst to many, tires are a $112B market as of 2019. This massive valuation is partially due to the high costs and stable, recurring revenue. If you wanted to replace the stock tires on the 2020 Model 3 (Michelin Primacy MXM4), you would have to shell out $279 each plus an installation fee. Assuming these tires last 40k miles, then you would be spending about $1196 about every 3 years!
Amortizing that cost over the lifespan of the tires yields about 3¢ per mile. Switching gears to batteries, it costs about $100/kWh to manufacture and with a 54kWh capacity, costs around $7000 to replace. Assuming it lasts for 300k miles, this yields a cost of 1.8¢ per mile. This means that already, tires are 50% more expensive than the battery. If we take it a step further and assume that Tesla is able to reduce the cost to $69/kWh and improve lifespan to 1 million miles, as predicted on Battery Day, this reduces the cost to 0.345¢ per mile, just over 10% of the cost of tires.
Since tires are so expensive, Tesla will likely pour some resources into making them cheaper and more efficient. First, it is unlikely they will start from scratch and will probably acquire a tire company to jumpstart production. Moreover, they are unlikely to purchase a small tire startup when they could purchase an old, legacy company that is trading at a massive discount as a result of the ongoing COVID-19 pandemic, especially when cash is so easy to come by for Tesla. With that in mind, Goodyear represents the best acquisition target for Tesla to enter the market.
PRICES AS OF 11/29/20
The three main competitors within the tire market are Bridgestone, Michelin and Goodyear. First, Goodyear is valued at ~$2.5B, while Michelin and Bridgestone trade at ~$19B and ~$23B, respectively. And while Bridgestone and Michelin both brought more revenue and profits over the last 12 months, Tesla would be purchasing ~3.5x more EBITDA for ~7-9x the purchase price. Furthermore, Goodyear is an American company that is more of a pure play on tires, while Bridgestone and Michelin are located abroad and have more complicated business models.
Because tires are a cash-intensive business, the debt of the companies is important to factor into consideration.
All 3 companies have about ~$6B in debt, implying that Goodyear has more debt than its valuation. Normally, this would be a red flag, but considering the favorable interest rate environment and Tesla’s soaring stock price, it would be relatively easy to either refinance the debt, or pay it off by selling stock. Another smaller tire company in a similar price range is Cooper Tire and Rubber, trading at ~$2B. When considering their value as a component of Tesla, Goodyear’s $14B 2019 revenue towers over Cooper’s $2.7B.
Having discussed why Tesla may enter the market and a possible path to get there, we shift our focus to how Tesla could innovate. Tires have largely been the same for decades with only incremental improvements in the manufacturing process and design, such as high performance tires and non-pneumatic tires which don’t use air.
However, for the mass market consumer, today’s tires are basically the same as those of the previous century. The first obvious improvement to consider is engineering a better rubber alloy. While this seems great, it is likely very difficult to do considering tire companies have been trying to accomplish this task for decades. Tesla could also take a play from the trucking industry and figure out how to retread tires -- massively reducing costs. This could mean that Tesla owners never have to buy tires again.
Moving over to more unique improvements that play into Tesla’s advantage, they may be able to decrease costs and increase lifespan by implementing computational modeling of stress and heat on the tires in development.
This technique has largely been successful when Tesla applied it to the body of their vehicles to decrease drag. They could implement AI technology to keep track of the wear on the treads of the tires, so that both the driver and Tesla know when it is time to replace them.
Finally, they could reinvent the wheel in an entirely new way that changes tires from a cost, into profit. Using something similar to the BH03, a concept tire imagined by Goodyear in 2015, tires could use the friction and heat generated by their interaction with the ground to produce electricity that recharges the battery. While this sort of technology is likely years away, it is easy to see how Tesla can continue its pursuit of engineering everything to perfection in-house.
By flipping the standard car maker model on its head, Tesla has been able to garner a cult following and a massive valuation while engineering some excellent cars.
Tesla’s next step to completing its mission of moving the world to sustainable energy involves creating a $25k car to truly capture the mass market. In order to achieve that, Elon and his team must improve upon every component. Tires, which happen to be one of the most expensive components, are ripe for disruption and could go from a massive cost to a cash cow.
Written by Michael Pena
Edited by Alexander Fleiss, Kevin Ma, Gihyen Eom, Calvin Ma, Rohan Mehta, Bryan Xiao