- Tesla will face major challenges as it becomes a mass-market automaker.
- The challenges range from CEO Elon Musk’s workload to the arrival of new competitors.
- Tesla is preparing to meet these challenges, but it might not surmount them all.
Tesla had a wild ride in 2017. The company is worth more than ever, passing Ford and Fiat Chrysler Automobiles in market capitalization and threatening General Motors.
But the “production hell” of a sluggish Model 3 roll-out has tested the patience of customers and investors. And Tesla doesn’t have enough money in its reserve to sustain its current cash burn.
Other challenges await in 2018. Yes, 2017 was wild. But 2018 will be even wilder.
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Cash, cash, and more cash.
Asa Mathat | D: All Things Digital
Relative to its auto-industry “peers,” Tesla has a pitiful amount of available cash. The carmakers that Tesla has challenged in market capitalization in 2017 — General Motors, Ford, and Fiat Chrysler Automobiles — have each amassed war chests. FCA has almost $20 billion, GM has nearly $25 billion, and Ford has socked away close to $40 billion.
Tesla has just over $3 billion
Tesla is also currently burning through over a billion per quarter. If we just go by cash and exclude other financing instruments, such as Tesla’s revolving credit lines, the company can’t make it through 2018.
It’s worth noting that Tesla is running thin on cash at a time when the US economy is at full employment and the US auto market is running near an all-time sales high.
Do the math: Tesla needs more money. And it will likely obtain that funding through another capital raise. It’s past two raises were a return to Wall Street to sell more stock; and a first foray into the junk-bond debt markets.
The smart money, such as it is, would likely bet on Tesla doing another equity raise in 2018, given that shares are still above $300. Each new raise, however, highlights Tesla’s poor execution on the manufacturing front. FCA, Ford, and GM also spend a billion per quarter, but they manage to produce millions of vehicles worldwide. Tesla produces a fraction of that.
There is an assumption among Tesla bulls that this pattern will at some point reverse in the future, as the Model 3 sedan, priced to start at $35,000, ramps toward full production and Tesla starts to draw in revenue from something like 400,000 pre-orders.
But while that would be cause for celebration at Tesla, attention would then turn to how much money Tesla is making on the Model 3. Mass-market sedans have notoriously skinny profit margins and have plummeted in popularity as consumers have turned to crossover SUVs.
There’s no question that cash will be Tesla’s biggest challenge in 2018.
Benjamin Zhang/Business Insider
Tesla’s factory in Fremont has a theoretical manufacturing capacity of 500,000 vehicles annually, although when it was jointly operated by Toyota and GM in the 1980s, it never hit that mark. Still, it topped out at over 400,000.
Tesla is now 14 years old and in 2017, it will finally roll 100,000 vehicles off its assembly line. CEO Elon Musk said that in 2018 it would roll 500,000.
There’s almost no chance that Tesla will hit that mark in 2018. In fact, even if the company were able to build 5,000 Model 3’s per week, and add that output to another 100,000 Model S and X vehicles, production would only be about 350,000 for 2018.
This is ridiculous. Tesla admitted when the Model 3 fell well short of 2017 production that “bottlenecks” at the company’s Gigafactory battery plant in Nevada were to blame. We’ll take Tesla at its word, but the true bottleneck is and always has been at Fremont. No other automaker in the world would be sitting on hundreds of thousands of pre-orders for a single vehicle and struggling to hit production targets.
The reason that we aren’t seeing far more Teslas on the road is simply because Tesla is stubbornly refusing to admit that it’s bad at building cars. I can’t figure out why Musk won’t just throw in the towel and hire somebody else to build the car for him. When carmakers such as BMW can’t meet demand with their existing capacity, they bring in a contract manufacturer to take up the slack.
Fixing Fremont has to be Tesla’s second-highest priority in 2018, next to avoiding running out money.
Recalibrating its product reveals.
Tesla is stupendously good at keeping its story going. It does this by staging epic new-product reveals that thrill the loyalists and refuel the company’s narrative. This keeps the stock price up, brings in deposits that help with the cash problem, and relieves Tesla of any pressure to spend any real money on advertising.
Lately, however, the reveal-apalooza has been in high gear.
In 2017, we got not just a Semi truck but also a new Roadster. Everyone expects 2018 to see a Model Y compact SUV and a pickup truck.
Pointedly, Tesla can’t currently even build a mid-size sedan on schedule, so the idea that it can handle a big rig, a new sports car, and a pickup without a gigantic new capital investment in additional factories is preposterous.
Still, if Tesla reveals new vehicles, the deposits will probably come. You have to give it to Musk: he’s devised a way to bring in additional operating cash — Tesla doesn’t set deposits aside but rather uses them to fund itself — without having to promise depositors a return on investment. It’s brilliant, and we should expect more of it in 2018.
Twitter, Twitter, and more Twitter.
Screenshot via Twitter
Musk is a student of the world and of new media, and he’s noticed how effective Twitter has become for President Trump as a way of avoiding traditional news channels and speaking directly to an audience.
Consequently, we should expect Musk to intensify his personal tweeting patterns in 2018. “I Love Twitter,” he recently wrote, as if we needed proof.
Benjamin Zhang/Business Insider
Autopilot is slipping. For several years, it has been the best semi-self-driving system on the road. But in 2018, it was decisively surpassed by General Motors on two fronts.
First, Cadillac introduced its “fully hands-free” highway technology, Super Cruise, which can handle autonomous driving under specific circumstances. It works quite well, better than Autopilot.
Second, GM’s Cruise division demonstrated its urban-mobility self-driving tech in San Francisco. It’s still a work-in-progress, but Tesla doesn’t have anything to compete with it.
These developments are important because they show how a single major automaker can use its heft to quickly surpass Tesla. GM had already decided to beat the Model 3 to market with the Chevy Bolt, which launched last October and is now selling in the ballpark of 3,000 units per month.
Tesla wisely introduced Autopilot when it sensed that self-driving vehicles had taken over from electric cars as the most captivating narrative in the industry. But because of the way Autopilot is designed, using cameras and computers rather than costly laser-radars or intricate mapping technologies, it could hit a developmental wall.
That’s not a sure thing. But self-driving tech is currently very expensive, and Tesla needs to sell it to bring in more revenue. If customers decide that it’s not a necessary option, Tesla will have a serious problem.
Managing the Great Man.
At Tesla, the buck stops with Musk.
The company has a management challenge. Musk is effectively running three companies: Tesla, SpaceX, and SolarCity, which Tesla merged with in 2016.
Tesla has the management talent to run the company without Musk’s constant input, but it’s unclear whether that talent is being fully used. Musk does pretty much all the talking. Not for nothing does Tesla alway highlight its “great man” risk on financial filings with the SEC.
It’s hard to run a modern car company as a one-man show. Typically, the CEO assumes several critical roles — at GM, for example, Mary Barra sets the tone and promotes the company’s bright future while other executives take care of blocking and tackling.
Musk, by contrast, seems to want to control everything at Tesla. This makes him more a powerfully compelling founder than a truly effective manager — and besides, it’s never been obvious that he wants to manage the company anyway, at a nuts-and-bolts level. Still, he does stuff like sleep on the factory floor and camp out on the roof of the Gigafactory.
Inspiring, to be sure, but if it was anybody else in the business did this, the board of directors would be alarmed. Ideally, as Tesla’s business at least doubles in size in 2018 and beyond, it would be great to see other execs taking more prominent roles.
The Wall Street factor.
Alex Wong/Getty Images
There are Tesla bulls and Tesla bears on Wall Street, and for the most part, the bears have been made to look foolish over the past few years.
But the bears won’t be wrong forever, and despite Tesla’s big run-up in value in 2017, the company’s history has been to surge and then fall back, at times dramatically.
Tesla’s lofty market cap is bound up in the idea that it will be a major force in the future of mobility. It may well be a major force, but I think it will be a force among forces. Many of the company’s biggest boosters aren’t really auto-industry experts, but rather tech enthusiasts who struggle to understand the extremely competitive nature of the global car business.
Weirdly, Tesla pays almost no attention to Wall Street, while Wall Street pays an enormous amount of attention to Tesla. The coming year might test this imbalance. Tesla has been able to get away with strategically overpromising and underdelivering for several years. For the Street, 2018 will be all about Tesla delivering more effectively than in the past.
The charging problem.
A Tesla Model S parked at a Supercharger station. Alexis Georgeson/Tesla
Tesla is caught between a rock and hard place with its recharging infrastructure.
The company wants owners to install level 2 charging at home and re-juice their cars in the same way they charge their smartphones: plug in overnight.
But owners were in the past given unlimited access to free Supercharging — very fast charging at Tesla-operated locations — and they treated it like the Tesla gas stations.
Tesla has dialed that back ahead of the Model 3 roll-out. With potentially millions of Teslas hitting the road in coming years, the specter of long lines at Superchargers evokes a negative image of a sort of Tesla gas crisis.
Supercharging is supposed to be used for long trips, but there’s a level at which it doesn’t seem to fair to provide it, charge for it — and then continually throttle its use. Some customers will be happy to pay extra for it, and that will crowd out the less financially successful Model 3 owners on their road trips.
The solution is a much bigger Supercharger network, but that will obviously add yet another cost for 2018 and beyond. The Supercharger network is great and a hugely competitive advantage for Tesla, but it’s nothing like what the gas-powered car business has to deal with. Toyota doesn’t have to build and operate gas stations.
I actually think Tesla will sort this out in 2018, and that new Model 3 owners will lead the way — many will be suburbanites with garages and they’ll get better at developing charge-at-home habits.
The design conundrum.
Tesla Model 3. Timothy Artman/Tesla
The Model S sedan has been around since 2012 and has only received a single modest design refresh. The Model X SUV launched in 2015 and is coming due for one.
In the auto industry, a vehicle will get a so-called “mid-cycle refresh” after a new design has been around for a few years. A complete redesign can come every five to seven years.
Teslas definitely look like Teslas and continue to have a “Wow!” factor on the street, but eventually, the Model S at least will need a grander update, especially if new electric cars from the likes of Porsche hit the market.
This doesn’t necessarily have to be an exterior revamp. The most exciting thing about the Model 3 is the ultra-minimalist interior, with almost all controls and instruments moved to a single central touchscreen. The Model S and Model X could get a similar treatment.
The inevitable sales downturn.
Tesla’s entire history as a company that sells cars of its own design has happened since the financial crisis, as the US auto market surged from a nadir of 10 million annual sales to a peak of over 17 million.
The boom has been stunning, but the auto industry is cyclical, so a sales decline will arrive at some point. In 2018, we should see US sales slip below a 17-million annual pace, and in 2019, they could fall below 16 million.
For Tesla to be attacking the mass-market ahead of this dynamic is unlucky timing. Electric vehicles are still completely marginal in terms of overall sales, making up less than 1% of global orders in a booming market. The best case in a downturn is that such shares hold; the more likely scenario is that it slips. And Tesla sales will slip with it.
On the plus side, a market slide will probably kill off a lot of speculative Tesla competition, just as the downturn of 2009-2010 took out numerous electric-car startups. The major automakers aren’t going to greenlight electric cars if nobody wants to buy them, although some might continue with production to meet federal regulatory compliance goals.
Tesla was extremely vulnerable to a cyclical downturn several years back, but now that it seems to be able to reliably sell 100,000 cars a year, it has a sales-downturn life raft. But the cost could be the Model 3, if it doesn’t achieve good market penetration in 2018.