Tesla: When visionaries have to deal with reality
Elon Musk’s Tesla was supposed to be mainstream electric-vehicle maker, but he appeared to have rowed back on this aim over the weekend. Investors are likely to be concerned.
Elon Musk’s last tweet before he went to bed on Monday was: “Just wanted to say thanks to all Tesla supporters. I damn well love you.”
The sentiment is very nice, but one of the most important things for an investor to do is remove any emotion from their decision making. If you “love” an investment it clouds your judgment. This is something to avoid.
Tesla certainly needs some love at the moment, as concern about the rate it is burning through cash mounts. Indeed, Goldman Sachs has said it believes the car group will need to burn through as much as $10bn in additional capital by 2020. Goldman’s analysts reckon that all is achievable – but will come with a cost. Issuing more debt could hit on the company’s credit profile and issuing shares or convertible bonds will dilute current shareholders. However, Mr Musk continues to insist the company will not need to raise any new money.
Henry Ford postponed
Over the weekend, in a bid to boost confidence in Tesla’s finances, Mr Musk appeared to give up on his long-stated ambition to be a mass car maker. He revealed (in a tweet, of course) that shipping its entry-level, $35,000 Model 3, the version that was supposed to propel Mr Musk into Henry Ford’s mass production mode, would cause the company to “lose money and die”. Instead, he announced a faster and more powerful $78,000 version of the vehicle, more than double the price of its base model. A car at this point is certainly not mass market – it would turn the company into a niche player – and, arguably, its $48.3bn would be a little too rich under these circumstances. However, something had to give after the manufacturer officially missed its goal of making 2,500 Model 3 vehicles a week at the end of the first financial quarter of this year.
The lower-cost version has been beset by production difficulties and there have been a number of car reviews that were particularly critical of its build quality. Indeed, just this week the US Consumer Reports magazine said it would not give Tesla Model 3 car its recommendation because of the electric vehicle’s long stopping distances and difficult-to-use controls. The magazine said the Model 3’s 60 miles per hour stopping distance of 152 feet was “far worse than any contemporary car we’ve tested.” It took seven more feet to come to a stop than Ford’s F-150 full-size pickup and the reviewer said the vehicle had many “big flaws”. Tesla responded by saying results varied based on weather, tire temperature and other conditions.
There is a big issue for Tesla evangelists who have stumped up the $1,000 (refundable) deposit for the lower-price model. The continuing production delays means that many could ask for their cash back – and there are hundreds of thousands of orders for the vehicle. This could turn into another exodus of cash for the group if it is not managed well.
Big vs small
Mr Musk is a visionary. He is a big picture man with big ideas of electric vehicle revolutions, travelling to Mars and other such radical plans. Often, this does not combine with the need to focus on the nitty-gritty details that are vital to turn an idea into reality. Indeed, there is a move by some shareholders to rein in his power at the company ahead of the group’s AGM on 5 June 2018. Mr Musk’s current title, according to the Tesla website, is “Chairman, Product Architect and CEO”. Leaving aside the pretention of the “Product Architect” title, it is good corporate governance to separate the role of chairman and chief executive.
“The complexity of large-scale manufacturing and the challenges of successfully commercializing new technologies and new manufacturing and marketing techniques suggest that shareholders would be better served by having Musk focus on running the company, and allowing an independent director to run the board,” shareholder advisory service ISS has said.
It also advised appointing against the reappointment of directors Antonio Gracias and James Murdoch, arguing the former is too close to other directors and the latter is “over boarded”. These were similar recommendations to those of rival Glass Lewis, which also recommended not voting for the reappointment of Kimbal Musk, Elon’s brother.
The shares have also been supported by acquisition rumours. Indeed, Apple has been named as a potential acquirer of the company for quite some time. Sure, Apple has the manufacturing knowhow that appears to be lacking at Tesla, but the iPhone maker’s recently-announced $100bn buyback may ease this speculation. This speculation appears to be just market fantasy, as Apple really isn’t in the business of saving other companies from their own hubris.
Tesla’s new focus on producing a higher-margin vehicle could help ease some near-term cash call concerns. However, it put on hold the dream of producing an “affordable” electric vehicle for the masses. At almost $80,000 a pop, it’s hardly a car for Everyman.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Past performance is not a reliable indicator of future results and that the price of shares and other investments, and the income derived from them, may fall as well as rise and the amount realised may be less than the original sum invested.