China and Elon Musk are giving Tesla big headaches

When Tesla reports its fourth quarter performance on Wednesday (US time) it will provide an insight into the extent to which a slowing of the rate of growth in electric vehicles in its major markets and big cuts to prices have impacted its earnings. It might also provide an update on Elon Musk’s quest to coerce his board into yet another massive compensation package.

In two of its biggest markets, China and Europe, Tesla has slashed prices by as much as 8 per cent after demand, which had been strong through most of last year, fell away in the final quarter in economies battling economic headwinds.

Elon Musk is pushing for more control over Tesla.Credit: Bloomberg

In China, it is also embroiled, and losing, a market share battle with China’s BYD, which overtook Tesla as the world’s largest seller of EVs in the December quarter. BYD sold 526,000 battery-only vehicles in the three months, out-stripping Tesla’s record 484,500 EVs sold.

With its average selling prices falling by more than its production costs, the impact of the price cuts will flow through to Tesla’s margins, which have been trending towards the range inhabited by decidedly less tech-flavoured companies like General Motors and Toyota.

If that trend were to continue, there would be a reasonable question as to why Tesla has a price-earnings ratio of 67 and a market capitalisation of about $US664 billion ($1.01 trillion) while GM trades on a multiple of less than five times its earnings and has a market cap of only $US48.4 billion.

It’s a question that adds a sharp edge to Elon Musk’s threat to build Tesla-relevant technology outside the company. He recently launched yet another new start-up, xAI, to compete in the burgeoning generative AI space.

Last week Musk posted that implicit threat on his social media platform X (formerly Twitter).

“I am uncomfortable growing Tesla to be a leader in AI & robotics without having ~ 25 per cent voting control,” he wrote.

“Enough to be influential, but not so much that I can’t be overturned. Unless that is the case, I would prefer to build products outside of Tesla.”

Musk owns 13 per cent of Tesla’s common stock, worth nearly $US90 billion. He also owns a huge swag of options granted to him in his last, controversial, $US60 billion compensation deal in 2018 (a deal being challenged by shareholders in the courts on the premise that he had too much influence over its design). If those options were exercised, he would control 21 per cent of Tesla.

He could have owned significantly more stock – the issue of effective control probably wouldn’t have been an issue, if indeed, given Musk’s centrality to the company, it could ever be an issue – had he not sold $US39 billion of his shares to pay some taxes and fund his $US44 billion takeover of Twitter, a deal that has cost him the best part of $US30 billion.

China’s BYD overtook Tesla as the world’s largest seller of EVs in the December quarter.Credit: AP

The tweet (or whatever we now call tweets on X) has been interpreted as a Musk ultimatum: either the board gives him another of the world’s most generous compensation deals (as the last one has been described) or he’ll develop the AI and robotics technologies that are regarded as keys to Tesla’s future outside the company.

Tesla is unlike any conventional automaker – and is valued in a different stratosphere – because it is valued as a technology company rather than as a vehicle manufacturer.

Without the prospect of continually improving AI and robotics and a future as a fully autonomous vehicle producer, Tesla would be just like any other carmaker and valued like them. That’s why the implicit threat in his tweet is so potent.

The combination of the falling away of demand in the final quarter of last year and Musk’s provocative tweet have hurt the Tesla share price.

Last year was a very good one for the big tech stocks which were collectively up about 85 per cent for the year. Tesla lagged other members of the “Magnificent Seven”, as the biggest of the tech companies have been dubbed, with a still-impressive gain of nearly 60 per cent.

While the US sharemarket generally has lost momentum in the first few weeks of this year, the mega techs (including Tesla) are still up about 3.5 per cent year-to-date. Tesla shares, however, have fallen 16 per cent since the start of the year. That’s a loss of $US125 billion of its market capitalisation.

Its share price of $US208.80 compares with its recent peak of $US291 last July – and the staggering $US407 the shares traded at in late 2021.

Tesla chair Robyn Denholm and the rest of the company’s board are feeling the pressure from Elon Musk.Credit: James Brickwood

Assuming the Tesla board, chaired by Australian Robyn Denholm, can induce Musk to maintain Tesla’s core technology development in-house, the future of Tesla and its EV competitors isn’t quite as cloudless as once seemed likely as the world scrambled towards net-zero carbon emissions, a target heavy reliant on EVs.

Tesla might be far more valuable than its competitors (BYD has a market cap of “only” about $US75 billion) but Chinese EV manufacturers, led by BYD and aided by state subsidies, have already ended Tesla’s dominance of the vast market in China and, with an ever-increasing range of traditional automakers that have developed EVs, are steadily eroding its lead in Western markets.

That intensifying competition is occurring as issues with build quality, range and the dearth of ubiquitous charging infrastructure are slowing the growth of the market. The price war in the sector and the EV manufacturers’ efforts to drive volumes by significantly dropping their prices aren’t helping.

Hertz recently announced it would offload 20,000 of its EVs, mainly Teslas and some Polestars, citing tumbling resale values and high repair costs. Private Tesla owners would also be experiencing a similar fall in the resale value of their vehicles.

In Europe, the European Commission has launched an inquiry into the state subsidies Chinese-based manufacturers receive, which could have adverse implications for BYD and other Chinese brands – and Tesla’s big Chinese production platform.

Tesla is unlike any conventional automaker – and is valued in a different stratosphere – because it is valued as a technology company rather than as a vehicle manufacturer.

Chinese manufacturers have, so far, been unable to enter the US market because of the steep tariffs they face, although there are signs that they are preparing to circumvent the tariffs by establishing facilities in Mexico.

Tesla is also experiencing rising labour costs, as well as having to re-route its shipments of EVs and components to Europe because of the conflict in the Middle East.

Most of the issues the company confronts (other than those associated with its eccentric chief executive) are industry-wide.

All the major EV companies experienced similar softening of demand and prices that are declining faster than the cost of their raw materials (although the recent savage slump in lithium prices will help).

This period might just be a bump in the road in an otherwise glittering path towards an EV-dominated future in which Tesla’s tech leadership and Musk’s entrepreneurialism gives it a sufficient edge to validate its dizzy price-earnings multiples and the extraordinary gulf between its value and that of any of its EV competitors.

If the scramble for a slice of that future generates the kind of overproduction already seen in China, which is awash with over capacity, however, that pathway will be longer, bumpier and less profitable than might have been anticipated – and which was factored into Tesla’s valuation and, until very recently, drove the excitement and expectation around the sector.

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