Wednesday, June 30, 2010

The Tesla Factory and the Purpose of the Stock Market

Tesla Motors’ stock offering on Monday raised more than $1 billion that the automaker will use to purchase a factory and set up manufacturing for its next car models.

Critics of the stock have complained that Tesla is not a real company — “it doesn’t even have a factory yet,” never mind a track record. I believe these critics have forgotten how capitalism works.

The point of capitalism is not to gamble by buying and selling pieces of companies. It is supposed to create companies by putting all the resources that are needed together to set up something new.

Tesla has had car designs sitting around for years because it hasn’t had a place to build them. Now that will change, and if the designs are half as good as Tesla thinks, it will be a profitable company. And, if its designs are twice as good as anyone expects, the other auto makers will be rushing to catch up. The whole idea of a stock market is supposed to be that a company like Tesla can set up a factory and start making cars.

It depends, more than anything else, on the quality of the engineering work. But none of Tesla’s detractors on Wall Street are offering any criticisms of the engineering. They don’t seem to know the first thing about the engineering that goes into a design of a car. This may be why they are criticizing the company’s limited track record instead.

A track record doesn’t mean as much when the world is changing so rapidly. Investing in a track record is investing in the past — which is to say, it isn’t really investing at all, but more like a faint hope of cleaning up somehow after the real investors have already left the room.