Tesla left behind in the electric car race it pioneered
The owner of Tesla may be left on the pavement as the automotive giants rev up their ranges of electric vehicles.
Remember the Palm Pilot? Way back in 1996, the handheld “personal digital assistant” was a revelation. It was the first electronic organiser, complete with a touchscreen and handwriting recognition. It showed Palm’s rivals that customers would pay — and pay handsomely — for a handheld computer, paving the way for BlackBerry and, later, the iPhone.
Yet Palm, the company, met an ignominious end. It was lapped by rivals that took the idea and ran with it. Palm, valued at $US50 billion ($72.2 billion) on the day it floated in 2000, was passed from one acquirer to another until TCL, a little-known Chinese manufacturer, bought it in 2014 for an undisclosed sum. A plan to revive the brand has gone nowhere.
It is a cautionary tale Tesla chief executive Elon Musk should heed. His company, which showed the world that drivers would pay — handsomely — for electric cars, is on the ropes. Again. Its stock is down nearly 40 per cent since the start of the year, closing on Friday at $US190.63, and it is burning through more than $US200m every month. Sales of the California company’s high-end models have plunged.
Perhaps most notably, Musk’s rivals have woken up. More than 20 electric car models — from BMW, Nissan, Kia, Jaguar and others — have hit the market or will do so in the next year.
Musk, who has ploughed a lonely furrow for years, finds himself facing an all-out assault from Detroit and Frankfurt.
The billionaire, 47, created the category; now he is at risk of being crowded out. It begs the question: could Tesla become the Palm of electric cars?
More and more investors are asking just that. Dan Ives has long been a Musk believer.
Just six months ago he set Tesla’s price target at $US440 a share and called it “one of the most dynamic technology innovators over the past 30 years”.
Ives, an analyst at the investment firm Wedbush, last week slashed his price target to $US230, saying: “It feels like the walls are caving in.” Meanwhile, in a call with clients, Morgan Stanley’s Adam Jonas said the company had swung rapidly “from a growth story to a distressed credit and restructuring story”. What’s changed? In a word, credibility.
It was only three weeks ago that Musk raised $US2.7bn with shares and convertible loans — money he had spent most of the past year saying he didn’t need.
In a call with investors, he said the cash was a “contingency fund”. He added: “We don’t expect to spend this capital.”
It was no secret that the company was losing money, but all seemed under control. At an “autonomy day” just days earlier, Musk had set out how Tesla would become a $US500bn giant thanks to a plan to turn its global fleet into autonomous robo-taxis.
Then everything appeared to change with extraordinary speed. In a leaked email Musk sent to employees on May 16, he laid down the law on a “hardcore” cost-cutting plan, writing: “All expenses of any kind anywhere in the world, including parts, salary, travel expenses, rent, literally every payment that leaves our bank account, must be reviewed, confirmed as critical and the top of every page of outgoing payments signed by our chief financial officer. I will personally review and sign every 10th page.”
The extreme measures were for good reason, the chief executive explained. The $US2.7bn “contingency fund” had morphed into a lifeline — and a short one at that. Musk wrote that, based on Tesla’s high burn rate, the cash “actually only gives us approximately 10 months”.
He has form for saying one thing, then doing another. Every year since its 2010 float, except for last year, Tesla has tapped investors or banks for more money. Often, the fundraisings have followed Musk’s fervent proclamations of Tesla’s financial strength.
Yet, until recently, investors seemed to be giving him the benefit of the doubt. He was trying to pull off something revolutionary — starting an all-electric car company from a blank sheet of paper. After this month’s fundraising, patience appears to be thinning, mainly because the well-publicised “master plan” that Musk laid out is not working as expected.
The key to Tesla’s hopes of turning a profit and breaking the cycle of bailouts is the Model 3 “electric car for the masses”.
In 2017, Tesla made 2900. Last year, it churned out 180,000. The goal for 2019? At least 250,000, based on production rates from the first few months.
The numbers are impressive — even if the company has been through what Musk has called “production hell” to get there — but the ramp-up is occurring just as Tesla is squeezed by two forces: its own debts and a deluge of new competition.
The company owes about $US10bn, with two big chunks falling due soon: a $US1.1bn payment by the end of the year, and a further $US819m in 2020. After this month’s fundraising, its cash pile sat at $US2.8bn.
Factoring in the upcoming debt repayments, and a $US200m-plus monthly cash burn, it is clear why Musk is checking his coffee receipts. Breaking into the black, and doing so very soon, is vital. “The debt is a noose around Tesla’s neck,” Ives said. “The math doesn’t lie.”
Musk hopes the Model 3 will be the solution. The company has pledged to sell up to 400,000 cars this year — the majority the Model 3. Investors were spooked last month when Tesla revealed that deliveries for all models in the first three months of the year had come in at 63,000 — nearly a third lower than the preceding quarter.
The drop, the company said, was due to the halving of a $US7500 tax credit given by the US government to electric-car buyers. The subsidy is due to be cut in half again in July.
The cuts are based on the total number of electric cars sold by a particular brand, so do not apply to new competitors.
Toni Sacconaghi, the Bernstein analyst famously lambasted by Musk for his “bonehead” questions, said that Tesla’s financial troubles were even worse than they appeared.
That is because, in its most recent financial statement, Tesla revealed it had received a $US200m infusion in the form of pollution credits, probably from a one-off deal it struck with Fiat Chrysler.
The latter paid to pool its fleet with Tesla’s to avoid a multibillion-dollar fine from the EU.
Stripping out the windfall, which equated to about $US3000 for every car sold, Tesla suffered “the largest [margin] decline in [its] history,” Sacconaghi said.
Against that backdrop, Tesla’s rivals are revving up.
Mercedes and Audi are joining Jaguar with new electric SUVs while Nissan, Chevrolet, Hyundai and Kia are going head-to-head with the Model 3.
As the fight for the future of the car industry takes hold, Musk’s unpredictable nature and shifting focus are also worrying investors.
He has grabbed headlines with the barely credible plan for an army of robo-taxis — not to mention new insurance products and other “sci-fi projects”, in the words of Ives. Last week, Musk was exulting on Twitter about the successful launch of a fleet of broadband satellites.
“There’s a lack of focus,” Ives said. “Tesla are concentrating on other issues when they should be focused on the hearts and lungs.
“I can’t look an investor in the eye and recommend a company whose management is disconnected from what is really happening. The bloom has come off the rose.”
When it comes to innovation, being first doesn’t mean you win. Just ask Palm.
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