Is Tesla going to crash and burn?

We all know that the Tesla roadster which Elon Musk fired into space in 2018 will at some point come back through the atmosphere and crash and burn.  However that is estimated to happen in millions of years whereas investors and the automotive industry at large are much more interested in what's going to happen to Tesla as a company over the next two or three years.  The last few weeks have seen a series of headlines which have caused the Tesla share price to fall by 2/3 over the last year.  Whilst that is a dramatic fall it's worth pointing out that even at the depressed value, Tesla is still capitalised at twice the value of Toyota and almost four times that of the Chinese BEV specialist BYD or newly independent Porsche, both valued at just over US$100 billion.  That suggests that despite the recent news, investors still attach a substantial premium to Tesla and what it stands for.

The headlines in recent weeks related to price cuts, production cutbacks and shortfall on 2022 sales versus forecast.  There has been a lot of speculation that Tesla is now suffering from the onslaught of new BEV product from established manufacturers and the Chinese newcomers.  Some blame a shift of focus by Elon Musk from Tesla to Twitter as being a contributing factor, whilst others say (possibly in hope) that it is the beginning of the end, and that Tesla will now be wiped out by the competition that they did not face to any significant extent in the first ten years of the company’s life.

There is no doubt that they do face competition which is much more intense and that will only become worse as the electric offer from other players increases.  Although there is evidence to suggest that it still has a technology lead on some aspects of electric powertrain, the claimed lead in autonomous driving technology has proven to only be for those who are brave, foolish or suicidal.  Musk has taken a much more relaxed approach than typical senior executives to the risk of litigation from drivers or their relatives who have taken the claims about the promised functionality at face value.  On the positive side, the success of Tesla is related to the simpler management enabled by the extremely limited product offer, but the business has been surviving for some months on only two models with the face lifted Model S and Model X only just returning to the European market.  Mercedes already has seven distinct EQ pure electric product lines.

Despite the suspension of Model S and X production, Tesla still achieved sales last year of 1.37 million units including production from newly added facilities in Berlin, Texas and Shanghai.  This was seen as a fail because the company had a target of 1.4 million in order to achieve the 50% year on year growth that they hoped for.  I'm not sure what the growth rate was in your company last year but there are not many who even dream of 50% annual organic growth let alone come within a whisker of achieving that.  More intense competition certainly was one influence that is unique to Tesla relative to its previous history, but most global markets are also in deeply uncertain economic times and there were specific factors in the US related to federal tax credits that meant the logical thing to do was to postpone the purchase of a BEV until 2023.  In those circumstances, a 30,000 miss against target is arguably a success rather than a failure.

The production cutbacks and price cuts are a reflection of these challenges but also the reality of operating a direct sales model.  Without dealers and independent importers in place to act as a shock absorber, then weak sales demand can only be managed by reducing prices as a stimulus and/or cutting production.  This may be headlines news today at Tesla but it is going to become an everyday challenge for those manufacturers who move to the agency model.  Cutbacks in production grab the headlines more then an increase in importer or dealer inventory for a traditional franchise based manufacturer but they are only two sides of the same coin.  What Tesla has not managed well is to adjust the pricing in a more progressive and subtle way that did not also grab the headlines.  Under a franchise model, pricing support is hidden in the background as far as possible through subvention of finance deals, for example zero deposit or subsidised interest rates.  In Tesla's case, they launched US$7,500 money off offers and changes to the headline prices in China and Europe to pull the customers in.  This clearly caused huge resentment amongst recent buyers at the previous price and immediate adjustments to the used car residual values.  It had all the subtlety of one of Elon’s tweets…

My view is that this is not the beginning of the end for Tesla but a sign that their business environment has changed and they can no longer take for granted that there will be a customer for every car.  They will need to take a more dynamic pricing approach, and even the famous $0 marketing budget might come under pressure as the ambitions stretch beyond the Tesla fanbase and previous Tesla owners like myself who may find themselves more attracted to the BEVs from other brands.  Tesla has already adapted its distribution model to switch from mall outlets to a larger number of more traditional dealer sites, often rebranded from existing manufacturers, but they may also find that they need a louder voice in the local marketplace and ICDP has predicted that they may appoint agents to operate some sites on their behalf.  Even if there was a further dramatic fall in the Tesla share price it is still not a realistic target for an acquisition by another brand, and even with compressed pricing and some marketing budget, I do not see any indicators that suggest that it will fail financially, particularly as they will benefit for at least another two or three years from the income of selling emissions credits to other brands who are at earlier point in their electrification journey.  So Tesla may be singed, but they should avoid a crash and any burns will soon heal.