Tesla’s Walls Are Closing In As Musk Says Survival Requires ‘Hardcore’ Measures
Despite a $2.7 billion infusion of capital just this month, Musk claims the electric vehicle manufacturer could be extinct in less than a year.
Tesla’s continued existence remains littered with obstacles—many constructed by its own hands. The electric vehicle automaker has made it its mission to agitate the century-old, and often lethargic, automotive hierarchy by bringing the first marketable electric vehicles to the masses. And in the decade since its launch, the company has achieved great success. Tesla’s future, however, grows ever dimmer as even with a $2.7 billion infusion of capital this month, Tesla’s outspoken and polarizing CEO Elon Musk, said without drastic cost-cutting measures, the company is liable to join the likes of Delorean, Pontiac, and Saab; dead.
The company’s issues stem from a number of costly problems. Continual manufacturing nightmares have seen delivery timelines on already ordered cars pushed back months and sometimes years. Quality assurance has also been a major sticking point, going so far as to see Musk sleeping on the assembly line floor personally inspecting cars as they leave the factory. Those extraordinary measures to ensure customer satisfaction, however, have largely not worked. Customers have experienced misaligned body panels, incomplete hardware, malfunctioning operating systems, and even some pieces of the car’s exterior not being properly attached. Service, as such, has become backlogged while parts are ordered and fixes for common lineup components devised; i.e. the company’s infotainment screen and its non-automotive-grade design.
Tesla has also seen regulatory hurdles, not due to any of its safety design deficiencies— Tesla’s chassis’ are quite stout—but because of Musk himself. The CEO has had a series of very public battles with the United States’ Securities and Exchanges Commission. The first volley was launched after a late-night tweet by the charismatic, yet often childish, Musk stating he was thinking about taking the company private and implying that he had secured funding to do so. Tesla’s stock price rose, as did the company’s valuation. Yet, the following morning’s news revealed Musk, in fact, had not secured anything. The SEC took issue and levied a charge against Musk and against Tesla that it was attempting to inflate the stock’s worth.
The SEC agreed to settle with Musk and Tesla for a cool $20 million each as well as a series of mandates both must follow in the future. Musk paid both fines out of pocket. In the SEC settlement, though, Musk agreed that a Tesla lawyer would look over any information Musk was set to release to the public—tweet or otherwise—and make sure it didn’t violate the agreement’s set terms. A little over a month after the deal was finalized, and the fines paid, the agency said Musk had breached the contract once again after another set of worldwide tweets. The two parties recently settled, though it’s unclear whether or not Musk and Tesla were forced to once again pay a fine.
Tesla’s Musk caused further issues when in search of cost-cutting methods, he made the announcement that the company would be closing a number of Tesla stores around the world. This came as a shock to many in the company’s executive team and its board, as well as those employees directly affected by the mass closures, as none had been informed prior to Musk’s Twitter announcement. However, the storm of Elon’s making would be made far worse as the company was still responsible for over $1.6 billion in rent for the retail space and breach of contract. Musk later walked back his comments.
Musk and Tesla’s more pressing issues, however, stem from not having enough cash-on-hand to get over production hurdles. Including the aforementioned quality assurance issues, Tesla’s manufacturing wasn’t introduced as streamlined or efficient as other legacy manufacturers—hindsight, and over 100 years of manufacturing, tends to produce honed processes. The company has also had problems scaling its production up to meet the supposed demand for its mass-market Model 3. Inefficiencies and waste led to Musk admitting that the company’s Hail-Mary $35,000 Model 3—the car that Musk promised would start the electric revolution for average consumers—cost the company $38,000 just to produce. As such, in the last six months to a year, Tesla has hemorrhaged cash.
Last month, during the company’s quarterly call that included investors, executives, and members of the media, Tesla and Musk admitted that the company lost a staggering $702 million in just the first quarter of 2019. This loss and the subsequent drop in the company’s stock prices saw Musk make a calculated move and offer up 2.7 million public shares—worth $1.35 billion—as well as another $1.35 billion in convertible senior notes. The gamble was successful and Tesla took the full $2.7 billion and put the gargantuan sum into the company’s coffers. According to a recent statement by Musk, that ludicrous amount of raised capital won’t be enough to ensure the company’s future if measures aren’t taken to reduce the waste and cost Tesla sees daily.
According to a company-wide email sent my Musk and obtained by Reuters, Musk is asking every single Tesla employee to look for ways the company can reduce costs and ease manufacturing expenditures. “As mentioned at the company talk, it is extremely important that we examine every expenditure at Tesla no matter how small, and be sure that it is critical,” said Musk. The CEO continued, “When making hundreds of thousands of cars, battery packs and solar systems, even a ten cent savings could be worth over $50,000 a year. There are over 10,000 unique parts and processes at Tesla, so making small improvements across the board has a giant cumulative impact. At the same time, we must also continue to make our products subtly better in thousands of small ways.”
Musk, however, doesn’t mince words when it comes to the survival of Tesla further in the email saying, “It is important to bear in mind that we lost $700 million in the first quarter this year, which is over $200 million per month. Investors nonetheless were supportive of our efforts and agreed to give us $2.4 billion (our net proceeds) to show that we can be financially sustainable. That is a lot of money, but actually only gives us approximately ten months at the first-quarter burn rate to achieve breakeven.” The wording of this email echoes previous statements by Musk who as late as last year revealed the company nearly went bankrupt during the Model 3’s troubled rollout.
The CEO’s email went further, stating that he and Tesla’s new CFO Zach Kirkhorn would be personally inspecting and verifying each of the company's expenditures including, “expenses of any kind anywhere in the world, including parts, salary, travel expenses, rent, literally every payment that leaves our bank account” is “critical” to Tesla’s continued survival. Musk acknowledged these measures were drastic, saying, “This is hardcore, but it is the only way for Tesla to become financially sustainable and succeed in our goal of helping make the world environmentally sustainable.”
Tesla’s impact on the automotive industry has been one of true disruption. Without Tesla, it’s unlikely that electric vehicles would be being pushed as quickly as they are right now. Whether Tesla weathers the storm is largely up to finding ways to cut costs, reduce inefficiencies, and deliver customer’s cars on time and without issue. It’s also largely dependent on Musk to keep a level head when dealing with the SEC, maintaining his composure online, and to not over-promise in terms of timelines and the technology offered by Tesla—this includes over-promising and over-estimating Tesla’s Autopilot advanced driver assistance system. Only time will tell, though we do indeed hope Tesla makes it through this latest squall. If one thing is certain, Musk has a penchant for finding ways to keep on keeping on. We wouldn’t bet against him.