Model 3 deliveries are delayed and Tesla’s losses have hit a record high, but there’s no stopping Elon Musk and his ambitious future projects – prime among which is a new 400km/h electric sports car that’ll have a 1,000-kilometre range!
If a company is going through financial troubles, what does it do? It simply raises the stakes and gets around the problem. But, if you’re Tesla – under the leadership of Elon Musk – you choose a different path altogether: divert the attention of the analysts and financers to something that leaves the world awestruck and talk about autonomous driving, sheer horsepower and mad performance numbers to get the job done.
These are perhaps the most difficult days of Tesla’s existence since 2013 – the year when it nearly went bankrupt. But Musk doesn’t seem to slowdown despite the production difficulties of the Model 3. That’s why he’s just pulled a stunner by unveiling the all-new Roadster – one of the fastest production cars of all time. Not only that, this real-life Tony Stark has big plans for the future – which includes a full-size electric truck called the Semi with an 800-kilometre range, along with an all-electric pickup truck. But, realistically, these three products will not see the light of the day anytime before 2019-20. In fact, that’s also an optimistic forecast.
In his biography of Elon Musk, Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future, Ashlee Vance claims that Musk was to sell Tesla to Larry Page, co-founder of Google, in 2013. But the deal was cancelled at the very last moment.
After the results disclosure of the third quarter – the worst ever, with $671 million in net losses – Musk showed no signs of stress as he climbed up on the stage at SpaceX headquarters in Hawthorne, California. Just like the confident CEO that he is, Musk went on to present the second iteration of the Roadster – the car that started it all. And the new one is quite a machine indeed! As mentioned earlier, it’ll register over 400km/h on the speedo, and will have a range of a thousand kilometres. The most astonishing part, however, is its acceleration – 0 to 100km/h in under 2 seconds! As most Americans will tell you, it’s plain rocket science!
Between fiction & reality…
The Roadster, Tesla’s first car, was launched way back in 2008. So, with the second-gen model now unveiled, it isn’t surprising at all that Tesla has decided to return to its origins. In fact, it fits into Musk’s narrative quite well – a surprising future with alien supercars, Hyperloop One and the Boring Company. The Model 3 might be the only exception here, since it’s a mass-market electric vehicle with a planned production of 20,000 units a month. By the end of 2018, Tesla plans to ramp up the entire production to 500,000 units, including that of the Model S and the Model X. If achieved, it’ll be around six times the company’s annual production volume in 2016 (of 83,922 cars).
About those Wall Street injections
In July 2017, at the time of the debut of the Model 3, the future of Tesla was brimming with optimism – $455,000 dollars earned in pre-orders and a production to be supported with over $1.2 billion investment by hordes of enthusiastic investors. It was an unprecedented crowd funding exercise unknown to the automotive industry. And all of this was founded on the promises and charisma of one person. But, the optimistic future crumbled as it clashed with the factual reality, starting with the flow of funds.
The first unit of the Model 3, codenamed SN1 or Serial Number 1, was produced in July 2017. Ira Ehrenpreis, a board member of Tesla, had the rights to the first production unit, but he gifted it to Musk on his 46th birthday.
That money was not enough to guarantee the smooth operation of the lines, and the development of that ‘Giga Factory’ in Nevada. And so, in August last year, Musk returned to raise funds by offering unsecured bonds – a high-risk and high-yield debt offering. In a nutshell, the credit rating agencies call them ‘junk bonds.’ Despite all this, once again the collection surpassed all expectations, closing at $1.8 billion – marking yet another success for the founder’s storytelling. But, shortly after receiving the funds, Musk had to review the future plans of the company. At present, the future of Tesla seems quite bleak, especially if you consider the company’s ambitions. Its large factory in the desert doesn’t seem to be capable of keeping up with the demand for battery packs, while unknown bottlenecks are slowing down the process at the Fremont plant – the same place where Nummi, the old joint venture between GM and Toyota, built 8,300 vehicles a week. The reports from the San Francisco Bay speak of different parts made by hand and how there are insurmountable difficulties in the management of suppliers – something that the company had already faced during the launch of the Model X, at which time it claimed to have learnt a valuable lesson from the experience. And yet, they only produced 260 units of the Model 3 in the third quarter – roughly three cars per day. The latest information, provided by the manufacturer itself, indicates that the production is now close to 500 cars a week and is rapidly rising. However, it still has to go a long way to reach the target of 5,000 cars a week. Moreover, the workforce reallocated on the small electric car has resulted in a production cut of about 10% of the top-of-the-range cars – the Model S and X.
Infinite Confidence
In short, the Tesla blanket is still too short. And the promised 500,000 units in 2018 are still a far-fetched figure. Plus, the Model 3, which was presented as the philosopher’s stone of electric propulsion is still the most ambitious project with no apparent progress. At the same time, the Californian carmaker is burning cash at the speed of a SpaceX rocket. According to analysts, Musk will soon have to turn to the market again to ask for another $2.5 billion dollars – or maybe even 3. So far, the stock exchange and investors have remained on board, believing in the Silicon Valley prodigy and allowing him to overcome the capitalisation of the Detroit giants – Ford and, albeit briefly, General Motors. The question is, how long will this unconditional trust last. How long will people believe this idea that Tesla can turn lead into gold?
The Fremont factory, situated on the right side of the San Francisco Bay, was the manufacturing base for Nummi – a joint venture between Toyota and GM – up until 2010. After its shutdown, Musk acquired the site for $42 million.
Stumbles and layoffs
Musk promises a future with more cars. The next ‘distraction’ will be the Model Y, the compact SUV scheduled for 2019 – but the numbers are unequivocal. Since the beginning of its adventure in 2003, the company has almost never delivered on its promises. To make matters worse, the losses, especially in the last three years, have intensified – with the exception of a brief period of three months when there was a profit of $22 million. For the most part, the company’s balance sheet is full of long red strips, with an exception of a few positive instances. In 2017, the shares steadily increased, as there was an appreciation of 40%, up till September, when the stock hit 389 dollars per share. And then, with the emergence of the first report on the Model 3, the stock registered a massive 20% drop. This trend could continue in the future. JPMorgan expects an additional 40% drop in the next year. Even though the big names in finance have always indulged Musk, they cannot be expected to continue to do so. After all, patience is not eternal! It’s impossible to continue to condone the setbacks, which are now becoming the norm. Just think about the autonomous driving race – with the introduction of Hardware Two and the update to version 2.5, Musk had claimed to achieve Level 4 autonomy by the end of 2017. But, by October 2017, the company could only introduce automatic emergency braking, and that too after months of checks. Other tests that will serve to refine the current endowment of the Model S and X are already too expensive and have to be paid up front. The picture is further complicated by the departure of leading employees in the autonomous driving program, along with some of the latest layoffs (the estimate is around 400 to 700 people out of 33,000).
For the SolarCity photovoltaic system, Musk is working on three other ‘gigantic factories.’ One will be in China, and the other two will become a part of the Reno and Buffalo plants. The company will launch the astonishing Roadster in 2020 with a price range of $200,000 to $250,000. It’ll certainly be sold out before the beginning of customer deliveries. On the other hand, by the time the Model 3 finally hits the US market the incentive on electric cars could well be phased out. If the US Congress green lights the new bill, Tesla’s customers, along with customers of other electric vehicles from the likes GM and Nissan, will lose $7,500 in deductions. Judging by the current situation, it seems that conquering the Red Planet would be an easier challenge for Musk than materialising all the Model 3 pre-orders.
MODEL 3
The Cracks Emerge
If you promise to deliver 1,500 cars by a certain date, but you stop at just 260, what does it say about you? Well, it says that you’re inexperienced and that you overpromised and under-delivered. And this is exactly what happened with the Model 3, which affected the company’s production growth. Tesla is now targeting increasing its production target to 5,000 cars a week by the end of March 2018. The company has officially announced that it’ll wait until the goal is reached before planning a further climb to an estimated 10,000 units a week by the end of 2018. However, we’ve received information from anonymous sources at the production department that the progress will be much slower than what the official narrative would have you believe. Reaching 5,000 units per week without any serious quality issues is very unlikely. These doubts surrounding the quality – also highlighted by a Wall Street Journal report dated October 6th – are based on constructive defects. According to the newspaper, the reason for the delay is mainly due to the time required to set up the lines. Another problem is the wide use of steel on the Model 3. Where the Model S and Model X predominantly use aluminium, the steel panels of the Model 3 require a large number of welds. “At this point in the process, the slowness of the lines can only be justified because of the doubts about the quality of the welds,” says Michael Tracy, a manufacturing consultant for Agile Group. “Problems typically occur four to six months before production starts,” says Oliver Wyman, a management consulting firm. “We wonder if the process involves the necessary expertise.”
The aforementioned doubts were further fuelled by Reuters. In November 2017, the news agency quoted nine ex-employees of the Fremont factory shedding some light on the structural difficulties of the plant. They claimed that, after assembly, around 90% of the Model S and the Model X vehicles ¬– starting from 2012 – are subjected to adjustments necessary to remedy the manufacturing defects (see the photo on the left). If this is true then the problems are really serious for Tesla, for such a figure is way outside the industry average. Toyota, for instance, resorts to subsequent repairs in the manufacturing process on less than 10% of all vehicles produced worldwide.
FINANCIAL FUNDAMENTALS
Stellar evaluation, but losses are steady
A recent financial analysis by Bloomberg revealed Tesla’s ‘cash burn rate.’ It’s estimated that over the last twelve months Tesla has an average cash burn rate of $8,000 a minute! If that continues to be the case, the net liquidity will run out by August 2018. The calculation, although virtual, provides a clear picture of the real structural problem at Tesla – the chronic inability to generate cash. Any doubts regarding this were quelled by the firm’s third quarter results. You can see, in the chart below, that the net losses reached an all-time high when $671 million dollars went up in smoke. The investors, however, don’t seem worried with Tesla’s accounts because of the company’s market value – last year, the manufacturer touched the $60-billion-dollar mark, briefly edging out General Motors. That said, the overall value of the company continues to fluctuate between $50 to 55 billion, which is still more than Ford. But, all this is not enough to free Tesla from its troubles. Many market analysts have suggested that even the Model 3 won’t be able to generate any cash flow until the second quarter of next year. As Kevin Tynan of Bloomberg Intelligence said, “Regardless of the duration of the reserves, which is anywhere between 10-12 months, Musk needs to find money quickly.” And if he fails to do that in coming months, he might as well be ready to lose the company.
REWIND: INTERVIEW WITH MUSK IN 2011
Those are pretty optimistic numbers
In our 2011 interview with Musk, he called himself a pioneer or, at least, someone who’s got enough weapons in his arsenal to become one. Even back then, he was full of promises. The Model 3 – which was still unnamed – will, he claimed, redefine the mass market segment with a $30,000 price tag. He also claimed that the production will soon reach close to one million units per year. But, as of today, it hasn’t.
“We want to be a catalyst,” said the entrepreneur, “that acts as an accelerating force towards electric propulsion. Everything will depend on our ability to make competitive cars. Compared to other big brands, we are faster and more agile.” Talking about the future, he said, “Within 20 years, most low-emission cars will be electric. And after another 20 years, almost all cars will be electric.”
ELECTRIC EVOLUTION
Semi Energy
In the aftermath of the presentation of Semi, the new electric industrial vehicle, Tesla received the first expressions of interest in the form of pre-orders – starting with Wal-Mart’s fifteen units. In the days that followed, other orders were registered, such as ten units from DHL, a recent 100 units from PepsiCo and a huge order of 150 trucks from UPS’, which was placed only a few weeks ago. Unlike what happened after the presentation of the Model 3, Tesla, this time, has chosen to keep quiet and doesn’t seem to be in the mood to publish the figures relating to the truck. A ‘no comment’ was the company’s official answer to the Financial Times. Based on a study done by Aurora Research, the business newspaper revealed that the energy needed to recharge the Semi’s batteries in 30 minutes could power “three-four thousand medium-sized houses!” Other analysts, such as Colin McKerracher of Bloomberg New Energy Finance, have emphasised the lack of technology needed to recharge a truck in half an hour: “Today, the fastest systems in the market don’t exceed a 450kW rating. Musk has not yet clarified how he will reach the necessary speed.”
Tesla Roadster:Cutting-edge future, or a work of fiction?
© Riproduzione riservata
Write your Comment