Elon Musk’s Aggressive Hype Not Enough To Save Tesla Motors
$TSLA, $GM, $F, $TM, $AAPL, $AMZN, $GOOGL
For several years the Bulls and the Bears have waged war over whether the EV manufacture is an extremely overvalued novelty automaker or an undervalued tech company.
The Bulls’ betting that the maker of EVs would be better compared to companies such as (gulp!) Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN), also grossly overvalued, than automakers such as GM (NYSE:GM) and Ford (NYSE:F) has driven Tesla to market valuations that have practical participants baffled.
But, now as CEO Elon Musk struggles to lead his company through a Key transition from mini-maker of luxury electric cars to producer of mainstream volumes, he must realize that Tesla needs to become a lot more like the automakers his investors constantly ridicule.
Recently the praise for the design and performance of Tesla’s vehicles gave way to owner frustration over reliability and quality, with complaints ranging from drive unit replacement in the Model S to wing door latching issues in the Model X.
There are also issues with window seals and premature rust, such issues that 1st delayed and then drove down the quality ratings of Tesla models.
And now we have Mr. Musk putting Tesla up to the biggest manufacturing challenge ever in the car business, vowing to increase production of his novelty EVs from 50,000 units last year to 500,000 units by Y 2018.
Mr. Musk is telling analysts that his “Best Guess” at a Y 2020 production goal is “close to one million vehicles.” This “pronouncement” came on the day his VP’s for Production and Manufacturing ankled the company, leaving him without the core leaders needed to execute such a fantasy goal.
During the earnings call last week, Mr. Musk invited “the best manufacturing people in the world” to join his effort.
For those who believes in Mr. Musk’s potential to turn massive initial investments into equally massive profits, the notion of him manning the production line is brilliant branding. But for anyone with knowledge of the auto industry, it shows how much he does not understand what he is up against.
In automobile manufacturing the long term is the focus the long-term within a very disciplined culture developed by Toyota (NYSE:TM) as it pivoted from automated loom company to global automaker.
By emphasizing continuous improvement through introspection, accountability, and a systemic commitment to eliminating inefficiency in its tiniest forms, it is an ideology of effective auto manufacturing that could not be more different than Elon Musk’s leadership by “hype” style.
One analyst pointed out that Tesla had the perfect opportunity to begin building this kind of culture in Y 2010, when Toyota bought 10% of Tesla and offered to share its manufacturing expertise. But instead of anticipating the task now before it and laying a long-term foundation for success, Tesla’s amateurish arrogance drove Toyota away.
Now, 6 years later, the same qualities make Mr. Musk’s ambition implausible.
OK, let’s say Mr. Musk can whip Tesla into a manufacturing powerhouse overnight, then what happens?
The Big Q that no one is asking is can sell all those cars?
At the core of Tesla’s production goal is the assumption that each of the 400,000 “refundable” $1,000.00 pre-orders the company has received so far will translate into the $35,000 transaction needed to reach the $14-B revenue goal Tesla is touting for Model 3 reservations.
Several keen observers learned that the controls Mr. Musk said would be in place against speculative bulk pre-orders do not exist, increasing the likelihood that a huge percentage of pre-order holders will not be able to buy a Model 3 when the time comes.
Automakers do not solicit refundable deposits.
Essential to production planning is the Art of matching supply with demand, and overly optimistic demand estimates are the leading Killer of car companies.
So, even if real demand for the Model 3 exceeds every other EV on the market, if Tesla overestimates that demand, the resulting overcapacity will kill its business just as surely as it has many others.
Wall Street has begun to question Elon Musk’s leadership.
As he stacks implausibility on top of implausibility, he is slowly turning criticisms of Tesla’s prospects into a litmus test of faith in his personal abilities.
For Wall Street, professional and savvy retail investors Elon Musk’s lack of discipline is revealing a truth behind Silicon Valley’s “disruption” narrative and that is that automakers may be lumbering giants compared to nimble software startups, but they have also evolved through competition to efficiently perform the complex, detail-oriented work they do, creating strong consumer demand for a durable, reliable automobile.
Recently, we have seen Google aka Alphabet (NASDAQ:GOOGL) fading from threatening automakers with disruption to working with them as partners.
Elon Musk, like Nicola Tesla, has staked his firms future on his powers of vision and inspiration. He now walks alone, and will need that sleeping bag that he so proudly announced on the earnings call last week.
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Have a terrific week.