Rewriting the rules?13 April 2018 | Ian Henry
Already struggling to hit production targets, newcomer Tesla is pushing on with more model launches and diversifying its activities. Has the company has bitten off more than it can chew?
Tesla’s founder, Elon Musk, wants to change the automotive world – and not just the kind of cars we drive, but also how they are sold and indeed made. Although the company has shaken up the market and encouraged established players to accelerate their electric vehicle (EV) plans, it is losing money and failing to meet its own production targets.
In February 2018, Tesla announced its biggest quarterly loss yet – over $675m for the three months ending December 31. Its financial state has been worsened by continuous production and shipment delays with the Model 3. This mass-market EV was supposed to propel it into volume production, but Tesla is far away from hitting its initial target of making 5,000 a week.
As a result of the Model 3’s delays and attendant cash drain, Morgan Stanley’s analysts have found it “extremely difficult to forecast with any reasonable degree of accuracy the true pace of progress” at the company. Other analysts have suggested that Tesla will need a further capital injection to see its plans come into fruition, and expressed concern at the rate of cash burn and the likelihood of rising losses.
Salaries, solar panels and sales
Despite the company’s financial problems, it is increasing its dependence on Elon Musk. Rather than bring in experienced manufacturing engineers from other automotive companies to help get the company on track, in January 2018 Tesla’s boss changed his contract to running the company for the next ten years without a salary. The upside for him is a $55 billion bonus if Tesla’s market value reaches $650 billion with a revenue of $175 billion and earnings of $14 billion. Payment would be in a series of stock allocations, and to secure each tranche of shares, Tesla’s market value has to increase by $50 billion. The long-term revenue target equates to around 17 times Tesla’s 2017 revenue and, given its current losses, reaching annual earnings of $14 billion will be a challenge. Looking at the company’s multiple production problems and rising competition from existing players in the EV market, perhaps only someone like Musk, with independent wealth or other income streams, can work on such a basis.
Regardless of the mounting losses and production problems, Tesla has continued with its new model launches while diversifying its range of activities. The company wants to change the way in which vehicles are sold and what they are sold with. In December 2017, it opened a showroom in Manhattan to sell solar panels, batteries and cars all under one roof. As well as selling cars, Tesla wants its customers to “produce their own clean energy” for the home and car. To make this possible, Musk confounded many investors and outside observers back in 2016 by buying SolarCity Corp for $2 billion – an eye-watering sum given the company’s $3 billion debt mountain. The solar panel specialist was formerly run by Musk’s cousin, Lyndon Rive; to some observers, this was simply a bailout of a relative’s financially-troubled company, with clear potential for conflict of interest. Few could see any synergies between the two, but since the acquisition, much effort has gone into repositioning Tesla as an energy company rather than a car company. The SolarCity name has been almost entirely dropped, with energy and solar panels now sold under the Tesla brand.
As evidence of the problems with its car manufacturing operations, there was no Model 3 in sight when the Manhattan showroom opened, although would-be customers could configure and order a Model S sedan or a Model X SUV for speedy delivery. The Model 3 can be ordered but buyers will have to wait more than a year, as in December last year the waiting list was over half a million long. Plans to produce 5,000 or more Model 3s a week have been put back several times, so while customers await their new Tesla, competitors are accelerating their own electric model launches. It seems inevitable that that Tesla will soon lose its early-mover advantage and much of the allure which came from being first to market. However, anyone wanting Tesla solar panels can have these installed within a month, local permits and snowfall permitting.
Padding out the portfolio
Not satisfied with being in the solar panel and electric car markets, Tesla moved into the electric truck market after unveiling the Semi in November 2017. It secured a small number of initial customers for its planned truck range, such as the Belgium-based brewing company Anheuser-Busch, which ordered 40 all-electric trucks. These are due for delivery in 2019. The truck has a promised range of 500 miles, and will use a motor on each wheel to increase traction and reduce the chance of jack-knifing. It will also feature a set of semi-autonomous driving aids similar to the one found on the company’s passenger cars. In addition to the Anheuser-Busch deal, another 76 trucks had been ordered, in lower volumes, by Walmart, DHL and a range of freight and delivery companies.
On the other end of the spectrum, Tesla also revealed its new Roadster 2.5 during the same event as the Semi unveiling – a surprise move that was kept from the press. The all-wheel-drive supercar has a range of impressive performance figures: 0-60mph acceleration in less than two seconds, a top speed of 250mph and a 620-mile range, all for $200,000. Launching the car, Musk described it as giving “a hardcore smackdown to gas cars”. Would-be Roadster customers were asked for a $50,000 deposit or a premium payment of $250,000 to reserve one of the first 1,000 models. Some observers saw this is as evidence of the company needing cash to keep its operations going. Production of the Roadster is not due to start until 2020, and there was no indication as to whether the model would share parts with its predecessor or other Teslas.
Thoughts have been mixed in analyst and investment circles regarding the OEM’s portfolio expansion. For example, analysts at RBC saw the Roadster as providing performance comparable to a Ferrari. By contrast, Goldman Sachs criticised the lack of production partners for the truck and expressed concerns regarding production problems and volume forecasts for the Model 3 sedan. Broker-analyst Baird was more dubious; although it recognised the truck’s long-term potential, it did not include any revenue from the truck in its future projections. A key reason for this was the price competition in the truck market, with observers doubting that Tesla will be able to produce the electric truck in the $75,000-125,000 range – the price bracket for existing trucks. There is also undoubted concern that production problems of the Model 3 could be replicated with the truck and Roadster.
While Tesla continues to announce new vehicles, which are still in development and will not be seen on the road until 2019 and 2020, it faces serious problems with building the Model 3. Elon Musk has described the situation within the company’s Fremont plant in California as “production hell”. In addition, Tesla admitted to major problems at its battery module plant in Nevada, which led to some of the manufacturing lines being redesigned. Just 260 units of the Model 3 were made in the third quarter of 2017, falling far short of the target for 1,500 units. By the end of 2017, the figure had grown to just under 2,700 for the year, rather than per week, with around half of the annual total having been made in December alone.
Taking on the world
Many of Tesla’s production problems can be attributed to its decision to carry out all production in-house, rather than contract out to an experienced automotive assembler. Despite the industry being full of examples of joint or contract production, Tesla decided early on that it could do things best on its own. Part of this appears to be down to Elon Musk himself; he told investors during a conference call how he had been working on the assembly line at 2am on a Sunday morning, showing his personal commitment to the cause. Impressive though this may be, it is not at all clear how such a strategy helps Tesla to do what established car companies do – produce cars on time, ship them on time, and ensure that they are made to accepted standards.
The company’s component suppliers have faced problems, too. The seats for the Model X SUV, made by a subsidiary of Adient called Futuris, are said to be difficult to produce due to an overly complex design. To overcome this problem on the Model 3, Tesla’s solution was unusual: rather than turn to an established seat supplier to design a seat which is easier to produce, the company decided to make the seats itself, increasing the extent of vertical integration. It was a move that runs counter to the strategy adopted by almost all other vehicle-makers.
Seating is a relatively low-margin operation with a high degree of manual labour. Having transferred production in-house, Tesla is now trying to automate the whole process – a feat that existing seat assemblers have been unable to achieve. Few, if any, outside observers believe that the company’s vertical integration strategy can work, with most analysts expecting the company to have to adopt the outsourcing strategy for major components. Press commentary in the US suggests that investors and analysts are beginning to doubt if Tesla’s vertical integration and full manufacturing strategy is the best way to proceed.