Tesla can’t stop dreaming big
Musk’s ambitions to turn Tesla into dominant automobile player are liability, not asset
Constant upheaval at Tesla Inc. reflects a company trapped by its own ambition.
The electric auto maker halted online sales of its $35,000 (U.S.) version of the Model 3 sedan last week. The decision came just six weeks after Tesla said it would start selling the car, and said that sales for all of its vehicles would move online.
The about-face is merely the latest sign that Tesla is struggling to live up to its promise as a mass-market auto manufacturer. It followed a Nikkei report that Tesla and its battery supplier, Panasonic, are freezing investment plans at the auto maker’s factory outside of Reno, Nev. A Tesla spokesman disputed the report and said demand for battery cells continues to outpace supply.
Either way, investors are rightfully worried about consumer demand for Tesla’s cars after the company recently reported a 31% sequential decline in first-quarter vehicle deliveries. Analysts expect Tesla will report an adjusted net loss of 79 cents a share when it reports full first-quarter results on April 24, according to FactSet. At the end of last year, analysts expected Tesla’s adjusted firstquarter profit would come to $1.51 a share.
Even Tesla’s once-pristine reputation for building a great consumer product has taken a hit: Consumer Reports pulled its recommendation for the Model 3 sedan back in February, over concerns about the car’s reliability.
Scaling back ambition would seem sensible, since Chief Executive Elon Musk would likely have a healthier, more sustainable business as a smaller player. No auto maker has yet been able to sell an electric car aimed at the mass market with consistent profitability. But Tesla built its brand selling ultraexpensive cars to luxury buyers that consumers loved. That could be the foundation of a profitable business if paired with some cost cutting in the right places.
Obligations that the auto maker took on years ago make returning to that strategy a near impossibility, however. Tesla is on the hook for $18 billion in purchase obligations through 2023, primarily battery cells produced by Panasonic. It owes about $9 billion in debt and interest payments over the same period. That creates an incentive to produce as much as possible, even in the absence of enough demand.
Tesla still has some options, at least in the short term. The company said it has “sufficient” cash on hand earlier this month, but it would help to take advantage of its high stock price and raise more money, particularly if Mr. Musk can impress at a scheduled autonomousdriving investor day later this month. Even that scenario would likely provide only a brief respite for investors, however. Dreams of dominating the auto industry—once Tesla’s greatest asset—have become a liability.