WHY IS SAUDI ARABIA INVESTING IN TESLA?

 Sculpture: 'The Accident', by Julio La Fuente on the Corniche in Jeddah

Sculpture: 'The Accident', by Julio La Fuente on the Corniche in Jeddah

Saudi Arabia may have just pulled off a shrewd and brilliant move by taking a meaningful stake in Tesla and by helping the company buy its own shares back. Here's why we think this is such a milestone, both for the Kingdom and for Tesla.

 

It’s all over the news that Saudi Arabia’s Public Investment Fund, the Kingdom’s sovereign wealth pool, reportedly has amassed a $US 2 billion stake in the company.  Elon Musk, Tesla’s audacious founder, and CEO told the world via Twitter that he was considering taking Tesla private at $420 and that he had secured the funding to do so.

 

Our perspective

There is an ongoing debate about Tesla’s future as a feasible business but there is little discussion that it has ushered the automobile industry into a new era by raising the standards for electric vehicles (EVs). 

Tesla is like an icebreaker, opening up new routes for private and commercial transportation. It forced the entire automobile industry to adjust to it’s elevated standards to compete with a challenger that was considered not much more than a ‘crazy’ idea a decade ago. Now it seems that an important faction of its arch rivalry, the oil industry, is siding with Elon to take on the future of EV’s and private battery storage.

There are several reasons why this could turn out to be a brilliant move for the Kingdom. We will get into that in a few paragraphs, but first, let’s take a closer look at what is in it for Tesla.

 

The world's most shorted stock strikes back

 Tesla doesn't only make EVs, it also intends to build a global service infrastructure to ensure their poliferation.

Tesla doesn't only make EVs, it also intends to build a global service infrastructure to ensure their poliferation.

Many critics struggle to see a future for Tesla in a world where turning quarterly profits are the norm.

This situation obviously doesn’t help with the company’s objective of continuing to invest in building an entirely new ecosystem, ranging from the technology that operates the vehicles, the batteries that make them run and the infrastructure to ensure that makes the whole idea work. 

Beyond its vehicles, Tesla also envisions a future where private individuals will commonly monetize the energy stored on their batteries in a peer-to-peer fashion.

Turning quarterly profits and changing the world usually doesn’t go hand-in-hand so getting listed was initially great to raise a chunk of capital and to make a bold marketing statement, but the short-term metrics that come with it have, according to Tesla, created an unnecessary distraction from the execution of a long-term game-changing strategy.

Let’s not forget that it took Amazon 14 years to make, cumulatively, as much profit as it produced in the latest quarter of 2017. Somehow, Amazon managed to force analysts to accept its long-term thinking, then again, the world was quite a different place only a decade ago. Amazon has not only changed retailing forever, it still defines its future.

Tesla already has a reputation for pulling off audaciously innovative ideas, not only when it comes to its products, but also the way it runs its business strategy. What we are seeing here is yet another move from its prolifically creative playbook.

Just when it had allegedly become the world’s most shorted stock, it managed to find that strategic investment partner with matching long-term objectives to ensure its arrival into the bold future it envisions.

This brings us to why this may be one of the smartest moves Saudi Arabia could make. Here’s why:

The assertive Kingdom

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The obvious first: As a leading oil producer, Saudi has an incentive to diversify into electric propulsion and its Public Investment Fund has been already been investing in a variety of strategies to put that vision on the books.

Very simply put, Saudi Arabia is made to produce energy, either by pumping oil or harnessing its vast sun-soaked landscape. 

Furthermore, when you think of it, the rationale behind bankrolling and investing in a business like Tesla make sense beyond just EVs and battery storage. An additional reason for this could well be because the group that controls Tesla also has a strategic position in the future of commercial spaceflight and high-speed terrestrial transportation, among all the other game-changing ideas that may still be on Musk’s drawing board. 

Then there is the topical issue of driving cars in the Kingdom itself. While it is not easy to get the true story that lies somewhere between what the international headlines say about female driving and how the local community sees the lifting of the ban, it is obviously a controversial issue. Regardless, it arguably does create a strong motivation for adopting driverless cars more than anywhere else in the world. In other words, there is a compelling product-market-fit for driverless cars in Saudi Arabia.

Saudi Arabia is changing. It is moving in a direction that investors should be getting really excited about. A strategic partnership with one of the most innovative businesses in the world can only work in the Kingdom’s favor in taking its economy into a more than relevant future.


At Silk Invest we have been actively investing in Saudi Arabia since 2009. Ever since it has been a core market within our Frontier Markets investment strategies.