Tesla: The Future of Automobiles or a Ponzi Scheme Bubble About to Burst

I’m not going to lie, I’m one of the millions of Elon Musk fans out there. I’m very bought into all of his ideas and think that his tech companies play off each other rather nicely. But, if you’ve been following Tesla at all recently, you’ve noticed that it has not been living up to Musk’s expectations and promises.  Because I’m such a big fan, I wanted to dive into what exactly is going on and give a forecast of what the future of Tesla might look like.

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These two charts are concerning. While analysts continue to slash Tesla’s earnings per share, its market value does not accurately reflect this. Why is this the case? Well, for starters, Elon Musk has continuously mislead investors. Although Tesla was making an average of three Model 3s a day in August, Musk told investors he expected production to be 1,500 cars in the third quarter (a mark missed by more than 80%). He knew Tesla could not possibly make 1,500 cars, but did not tell investors until he was forced to in a quarterly report.

So, why is Tesla falling short of Musk’s promises? The short truth is that although Musk may be an expert in tech, he is no expert in manufacturing. Unlike an established car maker that has decades of experience building vehicles, Musk is new to the game. Last year, the Model X suffered serious delays because both management and workers were still figuring out how to make them. Things have not changed; parts of the Model 3 were being made by hand as recently as September. These problems have led Tesla into what Musk referred to as “production hell”. Reports have surfaced that workers are being overworked and worried that these conditions will continue. One report claims that they worked 13 straight days. “They went by with carts and dollies full of Red Bull and threw them out to everybody. It felt like we literally lived there.”

These reports have led to the United Automobiles Workers Union to rent an office within a mile of Tesla’s production plant. They’ve since filed complaints against Tesla, claiming that workers attempting to unionize have been threatened by the company.

https://fortunedotcom.files.wordpress.com/2015/06/gettyimages-173277250.jpg?w=412&h=231

Okay, so maybe Musk lied about production and was a little overconfident in his workers’ ability, but he couldn’t have lied about anything else…right?

Wrong.

Image result for tesla production problemImage result for dr evil

At the Model 3 launch event in July, Musk stated that Tesla received 500,000 pre-orders for the Model 3. On an investors call later that week, Musk revised that number to 455,000, and his excuse was that 500k  “was just a guess”.

Last year, Musk convinced shareholders that an $8 billion purchase of his struggling SolarCity company would be a positive investment that would help Tesla’s charging mechanism and provide millions of home with electricity. Today, there is no evidence of how exactly Tesla is incorporating this technology or that these panels are being installed by the masses.

So, how does Musk plan to fix Tesla’s production difficulties? Why, offshoring of course!

Image result for tesla china

Musk knows he can produce cars at a cheaper price in China. However, in a typical Musk leap of faith, he believes he dominate the Chinese market. Musk expects significant investment in a Chinese factory, likely near Shanghai, in early 2019.  This would make Tesla the first US auto manufacturer to have a fully owned production facility in China (manufacturers typically use joint ventures with local companies).

Establishing a wholly owned factory will allow Tesla to drastically cut production costs, and thus the sales price. Musk preaches that they’ll be able to effectively sell to consumers once they are able to do this. And, for once, Musk has some facts to back this up. Although the Model S is about 50% more expensive in China than it is in the US (due to tariffs), Tesla’s revenue in China tripled to over $1 billion last year (from $319 million in 2015). China is now Tesla’s second largest market, accounting for 15% of its overall revenues.

China has done all it can to become the world’s leader in clean energy, making significant investments in solar over the last few years. Part of this want includes leading the world in electric vehicles. Given that Tesla has an existing presence in China, it should be able to take advantage of government policies (as long as it moves fast enough).

Image result for beijing pollution

After doing this research, my conclusion is that Tesla’s future will be determined by whether or not they can capture the Chinese market. They’re without a doubt currently sitting on a bubble. Even if the manufacturing problems work themselves out (which I believe they will), the company is grossly overvalued. Although the market for electric vehicles is growing in the US, auto makers with brand loyalty are rapidly entering the playing field.

If Chinese consumers, likely without loyalties to other US manufacturers, truly have a preference for Tesla, the revenue and growth potentials there are unprecedented. The emerging middle class will have the money to spend on what they want, and the government, pushing for cleaner energy, is likely to provide subsidies to help this clean revolution happen. It’ll be interesting to see what the future holds for Tesla. For now, I would advise investors to lower their optimism until pieces are put in place.

Sources:

https://www.wsj.com/articles/tesla-faces-labor-discord-as-it-ramps-up-model-3-production-1509442202?shareToken=st3bee7977c4e74cc991c6d94d52d460c0&reflink=article_email_share

https://www.wsj.com/articles/tesla-posts-loss-boosting-pressure-to-speed-output-of-model-3-1509569093

https://www.wsj.com/articles/the-truth-is-catching-up-with-tesla-1507399374

https://www.wsj.com/articles/tesla-drives-farther-off-course-1509571922

https://www.wsj.com/articles/tesla-reveals-time-frame-for-china-factory-1509599003

http://www.businessinsider.com/what-tesla-is-doing-right-2017-11/#teslas-china-strategy-is-a-departure-from-business-as-usual-2

6 comments

  1. It is true that making a car as a new entrant is super difficult. I worked in automotive industry before I went to BC and I have seen many failures of manufacturing cars from new comers. Tesla did a good job about providing new technology and building the new business model. But I will not give too much confidence in Tesla’s development in China for 3 reasons. One is, its brand is still premium to the most population in China which limits its sales volume. The second reason is Tesla will meet fierce competition of electric cars because there are many existed and new brands producing e-cars with lower price now in China. Final reason is the key here : government. I am afraid Tesla has to make so many efforts on the relationship with Chinese government and it won’t even work. Anyway, I think e-car is the future in the transportation way for its energy efficiency and kindness to environment. Thanks to Elon Musk for bringing Tesla to our life!

  2. I agree with many of your points- Tesla is very much overvalued, and Elon Musk has to stop misleading his investors if he wants to see future success. Trying to enter into China and capture the market can be a strategic move on Tesla’s part; however, there are many challenges associated with this. While China has been making significant leaps in the electric car space, Tesla will have to get through the Chinese government as well as compete with the existing electric car companies that are in the country. Even if Tesla solves is production and manufacturing issues, I think Tesla needs to enter into other markets because the demand for electric cars is not as high in the U.S. Tesla should do an extensive external analysis on international markets to see where the highest opportunity lies. In addition, Tesla should do all that it can to ensure foreign government’s support.

    Ultimately I worry about the future of Tesla. With more U.S. and global car manufacturer entering into this space, the competition will only increase. But who knows? Maybe Elon Musk will pull something out of his hat and surprise us all.

  3. Nice contrast between the difficulty of building a scalable tech platform and the difficulties of building a sustainable manufacturing infrastructure. The two are very different, and I think there’s a bit of hubris involved when one believes one set of skills automatically translates into the other. Actually, I think that’s one thing that sets Amazon apart – they can do both of these at the same time.

  4. I thought your blog post was really interesting – and I think the point on whether Tesla will last in the U.S. is also a very valid statement. Like you said many other car manufacturers have begun to make their own electric car models – and these brands are already more established in terms of their manufacturing processes as well as their overall customer loyalty.

    https://www.wired.com/story/general-motors-electric-cars-plan-gm/
    I found this article on GM which essentially promises to have about 18 new models of electric cars out by 2023. I think that Tesla will have a tough time competing with these long-time players in the automobile industry due to a lack of streamlined processing, in addition to the premium price tag on Tesla Model cars. It will be interesting to see how Tesla responds in order to push ahead!

  5. Elon Musk definitely tooted his own horn by saying that Tesla would be able to produce 500,000 vehicles after only making 84,000 Model S and Model X vehicles the year before. It’s been known that there are kinks in their supply chain because of how customized the vehicles are compared to standard cars and I don’t know if offshoring will be an effective solution because customers already have to wait months after placing their order – offshoring will drive lead times up even more. Additionally, brands like Cadillac have already moved into the autonomous car space and have car models on par if not better than what Tesla has to offer. I would say that it’s a bubble that’s going to burst soon because the technology is no longer an innovation.

    Here’s an article about a guy that drove a self-driving capable car from Cadillac if you’re interested:

    http://money.cnn.com/2017/10/12/technology/cadillac-super-cruise/index.html

  6. Great post! It will be interesting to see if Musk can pull it off. I think once he figures out the manufacturing issues and he is able to come up with a more effective and efficient way to produce the cars, he will be wildly successful. If he is able to do this, I believe that Tesla will be the future of transportation and have a large market share of the vehicle industry in the future.

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