Tesla Inc.

Summary

Tesla Inc. is an electric car manufacturer based in San Francisco. It is renowned for its high-end electric vehicles and its highly innovative outlook. It has primarily produced expensive vehicles but its focus is now to break into the mass market.  It hopes to do this with its “Model 3” car. Tesla also develops self-driving cars as well as electric batteries.

Company Facts:

  • Tesla was founded in 2003 by engineers Martin Eberhard and Marc Tarpenning.
  • Elon Musk co-founded the company and became CEO in 2008.
  • In 2017, Tesla posted a 67.98% rise in revenue, amounting to $11.76 billion. Despite this, the company recorded a net loss of $1.96 billion.
  • In the second quarter of 2018, Tesla spent $616 million and posted a net loss $717 million
  • Tesla acquired solar panel maker Solar City for $2.6 billion in November 2016

Share price:

Three key challenges:

Production rate: Tesla has been in “production hell” with its Model 3. It is consistently failing to meet its production targets and is many months behind schedules. In the first quarter of 2018, it fell short of targets by roughly 20% but this was still seen as positive. Analysts expected Tesla to produce only 1,200, less than 50% of the 2,500 target. Production has already been suspended twice in 2018. The first suspension was in February to add more automation to production. The second time was to remove this automation because it was “excessive” and hindered production. In July 2018 however, it finally hit its production target of 5,000 vehicle per week. There is concern whether this can be sustained but Tesla hopes to hit a production rate of 10,000 per week by the end of 2018.

Investment: In the first three months of 2018, Tesla burnt through $1 billion. This was said to be necessary spending to meet production needs. Tesla requires significant amounts of capital to achieve its goals and targets. Keeping investors confident over a sustained period of time is a huge challenge but will be crucial to Tesla’s survival.

Competition: Tesla is far from the only player in the electric car industry. Mercedes, BMW and Jaguar Land Rover for example, all have plans to release hybrid and electric vehicles in the coming years. In order to make strong profits, Tesla must cut into the market share of these big names. In 2016, Tesla hit an annual production rate of 104,000 cars. In contrast, Mercedes sold over 200,000 models in March 2017 alone. In September 2018, Mercedes announced that it would be investing $12 billion in electric car production. With Model 3 production are slow as it is it will be unlikely for Tesla to hit these big numbers anytime soon. If the company does not sort out their production issues, consumers could turn to these more established car makers for their electric and driverless car needs.

Biggest Moments:

Self driving car fatalities: Tesla’s first fatal Autopilot accident occurred in May 2016. The autonomous system failed to spot A crossing lorry. A federal investigation was launched into the incident but found no system defect. Tesla was absolved of liability. In March 2018 however, a Tesla driver was killed testing a Model X SUV in autonomous mode. The car crashed into concrete dividers and burst into flames. The driver did not have his hands on the wheel for 6 seconds prior to the collision. The reputational damage from this tragedy was further compounded by a controversial April Fool’s Joke. Elon Musk tweeted that Tesla had gone bankrupt. He posted a picture of himself passed out against a model 3 car with a bottle of tequila holding up a sign reading “bankwupt”. Some followers were amused but investors were not. Many called this highly inappropriate given the recent death of employee and a 22% fall in share price in the previous month. The tweets themselves sent shares crashing 12%.

Model 3 Production: The Tesla Model 3 is the company’s first affordable mass-market car, retailing at $35,000. It was unveiled in April 2016 and received 325,000 pre-orders in that year alone. This was more than triple the sales of Tesla’s preceding Model S achieved in three years.  The standard Model 3 has a 220 mile range and can do 0-60mph in six seconds. With Tesla’s first vehicle retailing at over $109,000, the Model 3 was a real statement of intent to break into mass market. Tesla’s long term success will hinge on this model.

Tesla on the brink: By 2008, Tesla’s finances were in a dire state. It only had $9 million left in the bank while trying to produce $100,000 cars. In November, the company’s board of directors approved $40 million in convertible debt financing. Tesla was saved by this financing. It allowed the company to continue producing its first model, the Tesla Roadster and shore up its books. Elon Musk recently expressed in a humble moment, expressed that Tesla only survived by the skin of its teeth. The company was only a few days away from bankruptcy so had the financing not been approved when it was, Tesla would not be around today.

Tesla’s Buyout Backlash:  In August 2018, Elon Musk and Tesla were in hot water. Early in the month, Musk tweeted he had secured funding to take the company private once share prices hit $420. This would have involved a $72 billion buyout, the largest corporate buyout in history. Tesla’s shares initially rose 13% in response to the announcement. Crucially however, the funding had not been officially secured. Musk had held discussions with a Saudi sovereign wealth fund who already owned 5% of Tesla and they expressed interest in the transaction. Musk was confident that the deal could be closed. Despite this confidence, regulations require all statements made by officials of public companies to be true. The US Securities and Exchange Commission issued a subpoena to Tesla and began a formal investigation. By the end of the month, Musk issued a statement abandoning plans for the buyout. A number of key institutional investors had explained to Musk that they had could only hold a limited stake in private companies. Collectively, they dissuaded Musk from taking the proposals forward.

Recent News:

Telegraph:  Tesla in turmoil after Elon Musk smokes marijuana on live show and top executives resign

CNBC: Tesla shares surge as upbeat Musk sees profitable second half.

Sky News: Elon Musk sued over proposal to take Tesla private

Bloomberg: Elon Musk’s Funding for Tesla Wasn’t So Secure

Bloomberg: Tesla Marks the Latest High-Profile Bet for Saudi Wealth Fund

Outlook:

Tesla has the potential to be a mass market leader. The automotive industry is beginning to shift towards electrics and hybrids and Tesla is one of the most innovative players in the industry.  When the Model 3 became available, orders were so high that it instantly became the most popular electric car ever produced. Its acquisition of Solar City has expanded its capabilities to develop renewable energy systems. The support and the concepts are there at Tesla but implementing them at a global level will be the key to profitability. In recent years, it has been going through something of a cash burn. In early 2018, Tesla was spending $6,500 every minute, all of which was essential for production. Despite this, it appears unable to meet consistently meet consumer demand. If Tesla can stabilise itself and begin to consistently hit its production targets, it can be the world’s leading electric car maker. Failure to capitalise on its current support could see established competitors fill the market with their own electric vehicles, severely hampering Tesla’s entry to the mass market.