"Looking back, no other automotive company would have withstood the attacks Tesla has,” says Professor David Bailey, a car industry expert at Aston University. “To achieve what it has against such odds, it’s remarkable.”
But then Tesla is like no other company.
Is it a tech business, or a carmaker — or a bit of both as the two sectors collide in the arena of autonomous electric vehicles?
And then there’s the strategy.
Tesla boss Elon Musk set this out in 2006 with a blog titled The Secret Tesla Motors Master Plan (just between you and me).
In it, he described his dream of “expediting the move from a mine-and-burn hydrocarbon economy towards a solar electric economy”.
He surmised his essay thus: “Build a sports car, use that money to build an affordable car, use that money to build an even more affordable car, while doing that, also provide zero-emission electric power generation options.”
And he’s gone a long way down that road.
From Roadster to Models S, X & 3
First with the Roadster, then the Model S sedan, next the Model X SUV and currently the Model 3, a vehicle priced from $35,000 (Dh128,537) and intended to make electric cars affordable to the mass market.
Tesla has almost become a byword for the electric vehicle, and the company is also developing sustainable solar power.
In short, Musk wants to change the world. He’s also revealed plans for an electric truck, a new Roadster, a Model Y crossover and raised the prospect of a Tesla pickup.
“Tesla means we think differently about the whole issue of mobility,” adds Bailey. “But it’s open to question whether the company will survive.”
“What Elon has achieved is extraordinary,” says one long-term Tesla investor who knows Musk. “He’s changed the car market to an amazing degree.”
The trouble is, large parts of the financial world don’t like how Musk is going about it. He’s not playing by the rules of how a public company traditionally operates: missing targets he’s set, burning through cash — about $8bn so far — not making a profit and running up almost $10bn of debt. It’s on those measures the financial community judges him — and they hate what they are seeing.
Perhaps it was inevitable Musk should use Twitter to drop the bombshell last week that he was “considering taking Tesla private at $420. Funding secured” — a message suggesting he had tired of the scrutiny that being a listed business entailed. As Tesla shares surged in reaction, Musk explained his thinking, saying he was “trying to accomplish an outcome where Tesla can operate at its best, free from distraction and short-term thinking” and away from “distracting, wild swings” of the stock market.
There’s an industry of Tesla critics, mainly consisting of “short-sellers” who will benefit if the company falters — even fails — having bet that the company’s shares will decline.
“Short-selling is how the capital markets work,” says George Galliers, an analyst at automotive industry specialist Evercore ISI. “But Tesla has faced negative coverage from the investment community, often from the short-sellers who stand to profit.” But while dealing with these speculators is part of efficient capital markets, Galliers says Tesla is particularly vulnerable.
“It’s not just financial damage that Tesla suffers, there could be consumer damage,” he says. “When you buy a car you want to know you will be able to get it serviced, get parts for it — you don’t get that from a bankrupt company.”
Noted critics — and shorters — of Tesla include Steve Eisman, the Neuberger Berman Group investment head, who predicted sub-prime mortgages’ collapse. Earlier this month he described Musk as a “very, very smart man” but warned “there are a lot of smart people in this world and you’ve got to execute. He’s got execution problems.” He also described Tesla as being “nowhere in autonomous driving”.
Others include David Einhorn, the billionaire fund manager of Greenlight Capital, who raised concerns about Musk’s “erratic and desperate behaviour”, while Kynikos Associates’ Jim Chanos said the Model 3 was “not a particularly great car” for its price, saying it is effectively twice the price of luxury cars it competes against.
There’s no doubt that Tesla has problems. It’s spending cash at a huge rate and despite Musk’s assurances it doesn’t need to raise money, many think it will have to if his ambitious plans are to be achieved. Still, despite all the doubt, the shares have soared ever higher. They were trading at about $350 and valuing the company at $58bn at the start of last week — an amazing level considering Tesla has sold fewer than 250,000 cars in its lifetime. And that huge valuation risks massive losses to Tesla shorters.
There’s no doubt Musk is unconventional. Posting a video online of himself drinking whiskey and roasting marshmallows on a fire on the roof of the factory where the Model 3 is built isn’t exactly common behaviour for a chief executive.
Described as “divisive” by one major investor — though he conceded “that’s not unusual for the kind of unconventional and individualistic people in disruptive companies” — it’s hardly surprising that Musk is involved in increasingly bitter public rows on Twitter with his detractors.
Evercore’s Galliers says he can see advantages in a buyout. “One, Tesla’s to-do list is very large and a strategic investor helps you do all those things,” he says. “Two, quarterly reports are a difficulty. The reality is that building cars is not easy — most big car companies have been doing it for 50 years and even then they are not always perfect. Tesla has to do all that in a short space of time exposed to short-term artificial deadlines to keep them markets happy.”
Going private could help make Tesla a viable business, as long as it has the backing of big investor willing to stomach losses until the company’s growing pains are over.
“He wants to get stuff done and that means investing and burning cash — yet he’s hounded for doing it. This shows Tesla can’t be the Tesla Elon wants at the moment,” Galliers says. But it is unlikely Tesla will be able to raise additional funding for its plans from traditional sources considering the state of its finances. Musk himself has said that a buyout doesn’t mean Tesla being private forever, noting that “in the future, once Tesla enters a phase of slower, more predictable growth, it will likely make sense to return to the public markets”.
Shareholders — many of whom have been with Tesla since it listed in 2010 at $17 — were as surprised as anyone at Musk’s plan. “We found out from Twitter like everyone else,” said one investor, adding that while the initial excitement over a potential deal may have “come at Twitter speed, the rest won’t — the board will look at it very closely.”
This is likely to put intense pressure on non-executive directors, who include James Murdoch, not only to protect Tesla from possible litigation, but also because questions have been raised about its make-up.
Earlier this year some investors unsuccessfully opposed the appointment of, among others, Kimbal Musk, the younger brother of Elon, as a director, citing concerns about independence. Even if a release from the constraints of being listed frees Musk to take Tesla down any road he chooses, the company faces huge challenges.
“Tesla’s being valued as a tech company, with an amazing premium — but tech companies bring out new products all the time, and the car industry is so capital intensive. Tesla just can’t do that,” says Bailey.
“Established car companies are catching up and unless Tesla makes an amazing breakthrough it won’t be able to compete because of scale.”
While Tesla is billing the Model 3 as a car priced for the mass market at $35,000, and has taken more than 400,000 orders for it, there are suggestions that the company is only building the higher priced Model 3s — often $20,000 dearer — because these are the ones it can make a profit on.
“The mass market is the big issue for Tesla,” Bailey adds. “It’s ahead of the pack now but won’t be forever. Musk needs to decide whether he wants Tesla to be a niche company that leads the world in a mobility revolution in the rapidly expanding electric vehicle market or does it want to be in the mass market?” Maybe the next edition of Musk’s master plan will have to scale back his ambitions.