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.

  • Tesla was founded in 2003 by engineers Martin Eberhard and Marc Tarpenning.
  • Elon Musk co-founded the company and became CEO in 2008. He was forced to step down as chairman in 2018.
  • 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 third quarter of 2018, Tesla posted a net profit $311.5 million.
  • Tesla acquired solar panel maker Solar City for $2.6 billion in November 2016
  • Third quarter results were released and it has been described as the most amazing quarter in Tesla’s history. Tesla posted a record profit, surpassed production targets and even sold more vehicles than Mercedes-Benz (link).  
  • Tesla is however, facing a criminal investigation into whether it misled investors over its production rate (link). 
  • Tesla has appointed Robyn Denholm as its new chairman after Musk was forced to step down. (link)

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. It has transpired however, that the $35,000 price tags takes into account tax rebates and savings. The cheapest version of the Model 3 released to date actually retails at $45,000.

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 Tweet Trouble:  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. Crucially however, the funding had not been officially secured. Musk had held discussions with a Saudi sovereign wealth fund who expressed interest in the transaction. Musk was confident that the deal could be closed. A number of key institutional investors dissuaded Musk from taking the proposals forward and the plans were abandoned.

Despite Musk's confidence, the US Securities and Exchange Commission (SEC) sued Elon Musk in September 2018, finding his tweet to be "false and misleading". Musk settled with SEC, agreeing to step down as chairman and pay a fine of $20 million. He was allowed to remain as CEO under the deal. In November 2018, Robyn Denholm was appointed as chairman.

1) Production rate: Tesla was in “production hell” with its Model 3 at the start of 2018. In the first quarter of 2018, it fell short of targets by roughly 20% but this was still seen as positive. In July 2018 however, it finally hit its production target of 5,000 vehicle per week. By the end of September 2018, it was able to surpass its quarterly production target of 50,000 vehicles. 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.

2) 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. Although in late October 2018, Elon Musk said the company did not plan on raising new cash. He did include the caveat that this "may change in the future". Keeping investors confident over a sustained period of time is a huge challenge but will be crucial to Tesla’s success.

3) 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.

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. As of 2018 it had only posted three profitable quarters in its 15 year history.  In the latter half of 2018 however, Tesla was able to meet production targets and turn a profit. If Tesla can stabilise itself and begin to consistently hit its production targets, it can become the world’s leading electric car maker. Elon Musk has developed a unique hype around the Tesla brand and gathered a global following. Failure to capitalise on its current support quickly enough could see more established competitors fill the market with their own electric vehicles, potentially hampering Tesla’s entry to the mass market. 

 

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