Tesla is at a juncture where it faces cash flow problems as well as the need to scale up profitably. And Elon Musk’s personal idiosyncrasies are certainly not helping.
- EV maker Tesla launched its newest model – the Model 3 – at a surprisingly low price point of US$ 35,000
- The company has also announced that it will be closing most stores and sell the model online.
- Analysts question the company’s decision to play the low margin and direct selling game, calling the Model 3 launch an
- Meanwhile, CEO Elon Musk continues to add to Tesla’s problems through his battles with the SEC, apart from his public spats with effectively anyone who comes in his way.
Tesla CEO Elon Musk, widely known as a modern Henry Ford, has had a mixed run of fortune over the past few weeks. Tesla’s Model 3 sedan was launched for a price of US$ 35,000. It can travel 220 miles on a single charge. The price point is well in accordance with Musk’s vision for affordable electric vehicles.
On the other hand, Musk shocked all and sundry when he announced that
Tesla is closing stores, laying off people and shifting to online-only ordering. This is being viewed as a sign that the company is facing cash flow issues.
Besides this, Tesla launched lower priced models of Model S and Model X. It has also admitted that past projections of profitability in Q1, 2019 were misleading and no longer hold true. A deadly crash of a Tesla vehicle in Florida is also under investigation.
The Securities & Exchange Commission (SEC) went back to suing Musk for allegedly being in
violation of a settlement where he was not supposed to publicly communicate any information on Tesla without the company’s approval. He had tweeted earlier that Tesla will make around 500,000 vehicles in 2019. To this, Musk replied that something is certainly wrong with SEC oversight, since this had been announced by the company earlier in its report.
This run of events points to two key challenges that Tesla faces at present. One issue pertains to the challenges with its business model and the other is linked to Musk himself.
Source: Company reports, DKODING Intelligence
Is all well with Tesla?
To its credit, the company’s net loss shrank to US$ 1.4 billion in 2018 from US$ 2.3 billion in 2017. But the announcement of a possible loss in Q1, 2019 coupled with store closures and the low priced Model 3 launch have cast doubts over the company’s cash flow situation.
Analysts have questioned the company’s strategy behind launching the Model 3 at such a low price point. The company’s shares slid by 8% following the announcement. Morgan Stanley analyst Adam Jonas commented:
“While this may stabilize the air-pocket in Q1 sales, we’re concerned it’s a sign of a brand that may be, at the margin,
losing its halo of exclusivity… We think the bears have more material to work with than bulls here.”
Analysts called it the ‘un-iPhone moment‘, because Tesla cars have often been accorded with the respect that the iPhone commanded in the initial years. Investors are also concerned about the impact that such a price point will have on Tesla’s margins.
Also the call to sell the cars directly online can be risky, as analyst firm Bernstein states:
“The move to direct sales is bold, though we are comforted that 70%+ of Tesla buyers in 2018 did *not* test drive prior to purchase… That said, we do believe that salespeople have been important in upselling Tesla customers, as well as selling Tesla solar products. Tesla’s actions appear to be further acknowledgement that Model S and X sales remain challenged, and that the European roll-out has been more difficult than expected.”
Bank of America is doubtful that the cost reduction is due to genuine efficiencies, and projects that it could be more due to factors like lower battery size and range, in short a compromise on the product.
The challenge for Tesla is to continue to increase its volumes at this stage while still retaining a profitable balance sheet. It barely managed to be profitable in the last two quarters of 2018, and its possible reversal to a loss is worrying. Moreover, EV is still not a well established market segment, so a purely online approach may not give the company the desired returns.
A CEO chasing the wrong battles?
The second major challenge for Tesla is the man at the helm. Elon Musk may be up there in the league of superstar CEOs, but he is known to be
a hardcore narcissist. This is evident when we look at his tweets, battles with the SEC and also the way he assesses himself.
If I am a narcissist (which might be true), at least I am a useful one
— Elon Musk (@elonmusk) July 8, 2018
Any other CEO would normally avoid a run-in with the SEC that would go against the best interests of his company, especially after a bad precedent. But Musk seems to actually enjoy
flirting with danger. He has called the SEC the Shortseller Enrichment Commission and openly announced in 60 Minutes that he “doesn’t respect the SEC”.
The problem started last October when Musk tweeted that he was “considering taking Tesla private at $420. Funding secured”. SEC filed a complaint for a ‘
false and misleading’ statement. The result was that Musk was compelled to step down as Chairman, pay a heavy fine of US$ 20 million, allow two more independent board members and get pre-approval henceforth for tweets that could affect Tesla shareholders.
That’s not all. While the problem with many CEOs is too little communication, Musk has a problem of plenty. He has got into public arguments with Wall Street analysts, whistle blowing employees, media, investors, auto unions and nanotechnology researchers. He even got into an ugly verbal duel with Vern Unsworth, one of the British divers who helped rescue the 12 Thai boys whose ordeal made global headlines last year. Vern called Musk’s attempts to rescue the boys a PR stunt, while Musk responded by calling him a pedophile.
If he can’t curb his instincts, then the company may well consider having another candidate for the CEO position. Some voices are already calling for his ouster, including leading shareholder James Anderson, head of global equities for Baillie Gifford, which owns 7.7% of Tesla shares (only second to Elon Musk’s shareholding) comments:
“We wouldn’t be against him (Musk) having a different role. I don’t think he needs to be CEO… We need to differentiate the company from him.”
- Tesla’s Model 3 launch at a low price point poses risks to the company’s exclusivity and premium brand image.
- The company needs to carefully evaluate its decision to go purely online, as salesperson-consumer interface is necessary to get more people to accept EVs.
- Elon Musk must control his narcissistic tendencies and avoid public spats, especially with the SEC.
- Tesla is too big now to get impacted by Musk’s personal idiosyncrasies. If he cannot move beyond them, the company may well need to move beyond him.