Can Tesla avoid DeLorean’s fate?
Tesla CEO might need to rethink his strategy
Some investors losing faith in Musk’s ability to reinvent automotive industry
The annals of the automotive industry are filled with bold upstarts who failed to reinvent the business after they gravely underestimated how hard it really is to make cars.
Look no further than John DeLorean, for example. DeLorean’s car company flamed out in the 1980s after turning heads with gull-wing doors that bear a striking resemblance to the falcon-wing doors on Tesla’s Model X.
Will Tesla CEO Elon Musk join the Back to the Future carmaker on the list of swashbuckling executives who made a big splash but ultimately failed to reimagine the auto business?
To be sure, Musk already has accomplished more than DeLorean, whose DeLorean Motor Co. built only 9,080 cars before collapsing. That’s as many as Tesla sold weekly last year. But with production of the new massmarket Model 3 electric car struggling to speed up, some investors are losing faith in the billionaire innovator, also CEO of rocketmaker SpaceX.
Tesla stock plunged 23% from March 12 through Thursday, the last day of active trading. At $266.13, shares are 32% below their all-time high of $389.61.
Last week, Moody’s downgraded Tesla’s bond rating and lowered its outlook from stable to negative.
“Tesla’s ratings reflect the significant shortfall in the production rate of the company’s Model 3 electric vehicle,” Moody’s said.
Musk has acknowledged navigating “production hell” with the Model 3, which has been plagued by delays as he tries to adopt advanced factory automation. But Musk remains confident he can revolutionize vehicle making.
“The car industry thinks they’re really good at manufacturing. And actually, they are quite good at manufacturing, but they just don’t realize just how much potential there is for improvement,” he said in February.
Musk bragged that Tesla’s futuristic approach to vehicle manufacturing, which relies heavily on high-tech robotics, will be its “long-term, sustained competitive advantage.” That includes automating not just the processes of stamping, painting and welding, which most automakers already do, but also eventually automating final assembly.
Since launching production in July, the company reportedly has encountered a litany of challenges, such as parts shortages and basic miscues that have forced technicians to scramble to fix assembly-line production errors after the cars were supposed to be finished. Part of the problem is Tesla rushed into manufacturing too quickly, said AutoPacific analyst Dave Sullivan, who formerly worked in an assembly plant. The company appears to be “more concerned with getting butts in seats and fixing the quality issues after the fact,” Sullivan said. “Early adopters will look the other way for now, but that goodwill won’t last for long.”
Tesla did not agree to comment for this story. But engineering chief Doug Field told employees in a March 23 email obtained by Bloomberg that workers should find it “personally insulting” critics are questioning Musk’s strategy.
“Let’s make them regret ever betting against us,” Field reportedly wrote. “You will prove a bunch of haters wrong.”
Investors want to see accelerated production of the Model 3 when Tesla reports first-quarter earnings in a few weeks. At one point, Musk had promised the company would make 5,000 units per week by the end of 2017. The company quickly backed off that goal.
Tesla’s most recent projection was to hit that pace by the end of the second quarter of 2018.
To get Tesla back on track, Musk must confront several pressing matters:
❚ His push to automate might have been a mistake. Warburton said the best manufacturers have learned that automating vehicle assembly is expensive and leads to poor quality.
“Tesla might ultimately need to fundamentally rethink” its entire approach to manufacturing, he warned.
❚ Tesla is burning cash. The company is racking up losses at a furious rate, in part because it has spent more than two times as much as traditional automakers in per-unit manufacturing capacity, Sanford Bernstein says.
Tesla reported a net loss of
$675 million for the fourth quarter, up from $121 million a year earlier. The price of Tesla bonds issued in August plunged to all-time lows last week.
Moody’s said Tesla’s $3.4 billion in cash and securities at the end of 2017 “is not adequate to cover” normal operations, increased production and bond payments.
Speculation that Tesla could soon run out of cash is probably premature because the company still has a market value of about $44 billion and could sell more stock to raise money. But that could come at a cost, potentially pushing shares down further.
If Tesla meets its revised Model 3 production goals of 2,500 units a week by the end of March and 5,000 by the end of June, the prospects for satisfying the company’s cash needs “will be supported,” Moody’s said.
❚ Competitors are catching up.
General Motors beat Tesla in the race to be the first automaker to deliver a mass-market electric car with the Chevrolet Bolt. Hyundai says its new Kona electric compact SUV will get
250 miles of battery range. That’s better than the base-model Model 3’s 220 and the Bolt’s 238. And Jaguar recently showed off its I-Pace crossover with
240 miles of electric range.
❚ Questions linger about a recent crash. The National Transportation Safety Board opened an investigation last week into a deadly crash in California involving a Model X that struck a highway median and flipped into oncoming lanes, where it was struck by two vehicles. NTSB officials will investigate whether Tesla’s partially selfdriving system, called Autopilot, was activated during the crash.