When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact - Warren Buffett
Can Tesla save itself from Elon? “Wait a minute! Elon built Tesla” is usually the first response. Yes, but when the builder starts burning down the house, the house must be saved from its builder.
The story of Tesla has parallels to Apple- not today’s Apple, but the Apple Computers from the ’90s. Apple’s core customers were die-hard fanatics - but the business model was flawed - therefore it experienced multiple near-death moments.
Similarly, Tesla has products that are loved by customers, but the business architecture is flawed. And who else can we blame that on if not the chief architect itself, Elon Musk.
Let’s start at the very beginning. Instead of confining the Tesla business as a high-end, niche car manufacturer – ala Ferrari - Elon went the route of a mass market company. The mission of the Company is to ‘accelerate the world’s transition to sustainable energy’. While the mission is admirable, businesses need sound economics to be successful. This was a grave mistake as the capital demands and fixed costs for a mass market operation are in the stratosphere. It’s a long climb to gain scale, and with the slightest slip-up, you slide down to the bottom of the pit. In the past, the generosity of capital markets made up for the slip-ups, but as we all know, Mr. Market has a fickle disposition.
Tesla had a great start with the Models S and X. It should have stopped there. Elon made a splash by announcing the Model 3, without ever knowing if he could deliver on his promise. He bet the future of Tesla on his engineering prowess and on the concept of a fully automated factory floor that could churn out cars at a much higher rate than humans could. The lower operating costs would make the $35,000 price tag work. However, there was no proof of concept. This was another fatal mistake.
The result is a Model 3 where the Company loses money on every sale. While this is a great ‘social’ scheme, what is the business rationale for selling more Model 3’s? Every incremental sale accelerates Tesla’s demise.
But let me explain how it gets worse. The price tag is too high which makes it unaffordable for the masses. The high-end version Model 3 is cannibalizing the sales of Model S – which is a profitable car. It has also led to a slowdown in the sales of Model X. The cash crunch led Elon to unwind its retail store operation. It will be very difficult to convince a mass market customer to purchase a car online without first test driving a vehicle. The early adopters already own Tesla cars. How do you grow the business?
The long list of executive departures over the past 18 months has been a warning sign. But it is also a symptom that the culture of Tesla is rotten at its core. The multiple employee lawsuits also point the finger in the same direction. While a great inventor, Elon is a poor manager. Ultimately, the accountability of a poor company culture rests with the CEO.
Elon Musk has also been adamant that Tesla doesn’t need to raise capital. 4Q18 presented a great opportunity for the Company to raise capital at attractive terms. But believing his own rosy forecasts, Elon passed. This was another colossal failure on Elon’s part. Finally, as the Company is almost running out of cash, Tesla raised $2.8 billion in May 2019. It’s almost too little and too late. At this rate, the Company will need another capital raise by year end. The terms will get more and more onerous.
While most of the equity valuation might not be salvageable, the brand and most of the 40,000 jobs that are on the line can still be saved. What is in high order is for the absentee Board of Directors to step in and act as fiduciaries. The Board needs to act in keeping the long-term interests of the business and employees in mind, not Elon’s fantasies. That requires rationalizing the business by focusing on the profit centers. The purpose of this business, like any other, is to generate economic value, not unprofitable sales. A sustainable business is good for society, not a walking zombie-like Tesla.
I addressed the core issues of demand, employee turnover, lack of capital in Trouble under the Tesla hood last August. These chickens have come to roost. Now, it’s time for the Board to save Tesla from Elon and salvage whatever it can before it’s too late.
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I am an investor and these are my personal thoughts on investing, behavioral finance, markets, and sports viewed through the prism of a Latticework