Tesla’s growing pains
I am pretty sure we all know one of these: child prodigy, adult burnout. Early promise turned to rust. In the automotive world, there’s very little doubt about the genius of Tesla.
The luxury electric maker is marking its 12th year as a company — the youngest of the auto pack. But it already boasts a car, its Model S, which has been the toast of the industry, breaking every possible record in Consumer Reports’ ratings.
Its founder and CEO, Elon Musk, is a corporate celebrity. Actually, make that celebrity, period.
Fitting its upstart image, the Palo Alto, Calif.-based company has also taken on stodgy North American dealerships, preferring to sell its product through its own shops.
Tesla’s revenue is less than three per cent of General Motors’, but investors value the former at 70 per cent of GM’s market capitalization. That’s about $32 billion (U.S.), nearly 10 times Tesla’s current sales.
What people are betting on is Tesla’s potential, that the company will emerge as a giant, profit-turning automaker (and battery technology producer) sometime in the near future.
Tesla is expanding as expected. It will start delivering the first batch of its much awaited Model X crossover EV late this month. Musk also announced that Tesla’s entry-level Model 3 will hit the market in 2017 and will cost about $35,000.
All looks great at first glance. But Tesla has its demons.
The company makes no money. It’s burning through its cash reserves like a Mobster in Vegas. With its new battery plant and upcoming product lineup, its spending will probably remain pretty high, sinking any chances of turning a profit in the next two to three years.
It has already trimmed its produc- tion targets and desperately needs to raise capital. In essence, it’s still a startup.
Of course, investors will pony up the money, but the question is how long can Tesla coast on its promise and the Elon Musk factor?
I think Tesla is fast approaching its crossroads moment. Both Model X and 3, especially the latter, will be critical.
Nobody buys a Tesla to save gas money. With Model X priced at well above $100,000, it will remain fairly niche.
Model 3 will hold a different kind of appeal, targeted at entry-level luxury buyers with a greenish heart. But with gas prices forecasted to remain relatively low for some time, the affordable Tesla will also need that wow factor to somehow trump cost concerns.
The problem is that conventional automakers are sharpening knives as well.
BMW will keep on improving its i-Series. Audi plans to launch a Model X rival in the next couple of years. You can also expect other mass marketers to polish their products.
Detroit and Germany present only half the threat. There are stirrings in Tesla’s own backyard that could be far more dangerous for the company.
If Google and Apple enter the car market this decade, you can expect them to use some of the same business philosophy and have the same customer appeal as Tesla. And it will be much harder to beat rivals playing your game.
Of course, Musk keeps changing the game itself. He is now steering the company in different directions such as home energy storage and battery development that could broaden its revenue base.
Success or not, expect some kicking and screaming in the coming years. After all, growing up ain’t easy. Kumar Saha is a Toronto-based automotive analyst with global research firm Frost & Sullivan. To reach him, email
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