What the hell is happening at Tesla?

Fri, 03 May 2024 04:00:00 +0000
Automotive

Mass sackings, Musk's public outbursts and previously announced plans lying in the gutter

What a difference a year makes. In spring last year, Tesla threw open the doors of its Texas Gigafactory to investors in order to lay out plans for global domination of the automotive industry with sales of 20 million a year.

Now those plans – for a new Mexican plant, for an affordable ‘next-gen’ Model 2, for a new ‘unboxed’ production process, for more gigacasting – essentially lie in ruins.

The ‘deep bench’ of executives who took to the stage to explain their role in the transformation has been decimated amid a series of brutal job cuts. Victims include the chief financial officer, head of charging infrastructure, head of batteries, head of powertrain engineer and the head of HR.

Indeed, the entire Supercharging team was let go this week in one of the most surprising actions as part of the recent announcement from CEO Elon Musk that staff would be cut by 10% globally. It was surprising because Tesla’s charging network is often thought of as the jewel in the crown of the brand’s global operation in terms of attracting new customers.

The catalyst for the upheaval is likely to have been a disappointing set of first-quarter results in which revenues declined 9% on the back of fewer deliveries than in the same quarter last year, while operating margin halved from 11.4% to 5.5%. Meanwhile, inventory (namely, unsold stock) soared from 15 days' supply to 25 days.

Operating expenses, meanwhile, shot up 37% to $2.5 billion (£2bn), while free cash flow reversed from a healthy positive to a negative $2.5bn, although Tesla said it expected that to be reversed in the next quarter as excess stock gets sold and the impact from the lay-offs is felt.

Amazingly, Tesla’s industry-leading market valuation wasn’t dented by the quarterly report or investor call, and in fact went up, likely because Musk added a bit of context to the explosive report earlier in April revealing that Tesla had abandoned the Model 2 in favour of reviving an old promise to advance self-driving to the point where its entire fleet becomes autonomous capable.

“The strong positive market reaction to Tesla’s mixed Q1 in our view represented some relief that Tesla is not completely giving up on selling cheaper consumer models, nor is it staking the company’s entire future on Robotaxi,” Emmanuel Rosner, analyst at Deutsche Bank, wrote in a note to investors.

Nevertheless, Musk’s responses on the company earnings call left “large unanswered questions” around what’s going to happen in place of the Model 2, Rosner warned. In response to the crucial question about Tesla’s future model plan, Musk answered with a painful lack of detail: “We've updated our future vehicle line-up to accelerate the launch of new models ahead.”

He spoke about “new vehicles, including more affordable models” and said they will “use aspects of the next-generation platform as well as aspects of our current platforms”. Delivery for these unspecified models was “early 2025 if not late this year”. Given the lack of prototypes spotted, it seems unlikely these will be all-new models.

The new factory promised in Mexico now seems dead, with Musk saying that new models can be crammed into existing plants. “It’s not contingent on any new factory or massive new production line,” he said. He claimed Tesla could increase capacity to three million annually just from “optimisation”, up from 2.3 million now.

Meanwhile, a somewhat garbled reply from Lars Moravy, head of vehicle engineering, seemed to pour cold water on the unboxing production concept announced last year, calling it risky.

Much of the call was devoted to the expansion of Tesla’s ‘full self-driving’ from its current status as supervised level two-plus semi-autonomy into one that could remove the driver altogether – a dream that has proven extremely hard to make reality, especially with Tesla’s method involving just cameras as sensors.

This was essentially Musk’s pitch to investors. “We should be thought of as an AI or robotics company. If you value Tesla as just like an auto company, fundamentally, it's just the wrong framework,” he said.

The pivot back to robotaxis – Tesla will unveil a ‘cybercab’ model on 8 August – worries investors, given the extremely uncertain timeline for turning capital expenditure into profits.

Tesla’s ambitious claims for the technology have even led some to claim Musk is tricking investors on the scale of Enron, the Texas energy trader that went bust in 2001 after being revealed to have conducted fraudulent accounting on an unprecedented scale.

One of those is Dustin Moskovitz, CEO of work management software firm Asana and a founder of Facebook. “This is Enron now, folks,” he wrote on the social media site Threads recently. “Tesla has committed consumer fraud on a massive scale.”

The boldest claim to back this theory up came in 2019, when Musk promised all Teslas could be operated as robotaxis the following year, earning owners $30,000 a year while their car went to work for them.

Moskovitz’s accusation is too strong, given the scale of Enron’s fraudulence, but it does raise the question of what Tesla is really worth if the robotaxi gamble doesn’t pay off, especially with lower medium-term production ambitions and open questions about the model replacement cycle.

In Tesla’s favour, a meeting between Musk and Chinese premier Li Qiang last Sunday went a step closer to remove hurdles to Tesla’s roll-out of ‘full-self driving’ (FSD) level two driver assistance there. “Musk winning blessing from the PRC for FSD roll-out in the country seems to address embedded fears of Tesla’s China profit,” wrote Morgan Stanley analyst Adam Jonas in a note. The bank reckons Tesla makes half its profits in China.

It has to be noted, however, that local Chinese car makers are the hottest in the world when it comes to level two-plus roll-out, and competition there is so fierce that some are giving away similar level two technologies to help sell cars, including Jiyue, the ‘robocar’ company formed by Geely and Baidu. So Tesla might struggle to sell FSD on top, even at the newly discounted price of $99 a month.

China is also the source of much of the newest and stiffest competition to Tesla’s digital-led EV range, most recently the Porsche Taycan-lookalike SU7 from tech company Xiaomi. Much of the competition, it has to be said, have taken their lead from Tesla but are now executing in ways that are threatening to eclipse the company that inspired them.

What we don’t know is how much the recent upheaval at Tesla is tied to an upcoming shareholder vote to reinstate a board decision back in 2018 – since struck down by judges in Delaware, where Tesla is incorporated – to award a Musk performance-based stock option. If successfully overturned, it’ll hand Musk stock worth an estimated $47bn – something, he has said publicly, he needs in order to feel invested enough to commit to the company.

Musk’s leadership of Tesla – he’s been CEO for the past 16 years, a lifetime in the car industry – is an article of faith with shareholders and online boosters. “I’m doing my small part as a shareholder to support the mission of $TSLA. Only @elonmusk can execute it perfectly,” wrote one on Musk’s X social media site after indicating his voting intentions.

Others, meanwhile, have called for the appointment of ‘Tesla’s Tim Cook’, meaning a successor who can take the company to greater heights in the manner of Steve Jobs’ successor at Apple.

What it all means is that Tesla has again wrong-footed an automotive industry that has long tied itself in knots trying to follow in Tesla’s pioneering footsteps in everything from manufacturing to sales to software development.

However, this new, seemingly weakened Tesla will give them hope that perhaps they can tread their own path, or at least one that allows them to focus more closely on the threat from the Chinese.