Company needs to raise about $2 billion by mid-year to boost the lagging production of the Model 3
Will Tesla's fate determine the future of the electric vehicle dream?
Elon Musk, chief executive of Tesla and SpaceX, is known for defying gravity. But despite rapid market growth, the electric car company faces major challenges and toughening competition. If Tesla crashes to earth, does this mark a dead end for the battery vehicle dream?
Tesla’s achievement has been to move electric cars from the joke stage of milk floats and the Sinclair C5, and to make them cool. Founded in 2003, the company targeted high-end early adopters able to pay a premium for acceleration and green, high-tech credentials, assisted by lavish subsidies in areas such as California and Norway.
From the Roadster and then the Model S, a nod to Henry Ford’s iconic Model T, and Model X, it then built up the critical mass to reduce manufacturing and battery costs. Last July, it launched the upper mid-market Model 3. It has introduced autopilot features with the hope of fully autonomous driving within a few years. In July, it opened its first Middle East showroom, facing the Burj Khalifa on Sheikh Zayed Road.
Solar City, which installs residential solar panels, merged with Tesla in 2016, and has combined with Tesla’s lithium-ion Powerwall battery to extend the time the sun can power a home. Since then, Mr Musk has moved into transport of all kinds: underground (The Boring Company), on land (the Hyperloop (a pod travelling at 1200 kilometres per hour in a vacuum tube), in the air (a supersonic electric plane), and SpaceX, which launches and lands reusable rockets.
Like Tesla, these promise to make travel faster, easier and – most importantly – much cleaner. Mr Musk’s ventures have certainly taken flight, with Tesla raising $38 billion of equity and debt over its lifetime, and attracting a legion of devoted fans willing to pay deposits for vehicles delivered years later.
But the firm has come under increasing pressure in recent months. Meant to be building 5000 Model 3s weekly last year, it reached 2000 per week in April but had to shut down its production line after automation problems and what Mr Musk called “manufacturing hell”. Consumer agencies have rated the Model X’s reliability poorly, and several crashes of vehicles using the Autopilot function raise safety concerns. Solar City contributes very little to earnings while Tesla’s electric lorry, unveiled with great fanfare in November, has gone quiet.
For now, Tesla sells about 60 per cent of US pure electric vehicles. Yet as batteries approach the mass market, it finally faces real competition. Almost all established carmakers have launched their own vehicles, such as the Chevy Bolt and Nissan Leaf, as well as plug-in hybrids which have a petrol engine for longer range – the plug-in version of the Toyota Prius, and the Chevy Volt.
In response to such concerns, the shares are down 27 per cent since their high a little over a year ago, badly underperforming tech, automakers and the wider market. Mr Musk has responded tetchily to criticisms of the company’s finances and the safety of both its workers and drivers.
Tesla needs to raise about $2 billion (Dh7.3bn) by mid-year to raise the lagging production of the Model 3. If it manages to make that profitable, it will sink cash into the planned Model Y crossover next year. Equity investors have been very patient but may balk at being diluted again, while Moody’s rates its bonds at B3, a junk grade.
The big question over the company is how to justify its valuation. With a bigger market capitalisation than Ford’s, Tesla sold about 100,000 cars in 2017 compared to Ford’s 6.6 million last year. Margins on luxury vehicles are higher, but those alone will not give it millions of sales. It will have to match the manufacturing size and prowess of Toyota, the quality of BMW, the experience in artificial intelligence and self-driving of Google, and the mass-market low costs of China’s BYD.
To keep going, Tesla must keep its fans happy, raise cash, address the safety concerns, ramp up output and stay ahead of its competitors until self-driving battery vehicles dominate the mass market. If it runs into trouble, it could find a deep-pocketed benefactor with an enthusiasm for new technologies and the environment; an alliance with a major legacy carmaker that is lagging in battery vehicles; or a strategic, perhaps Chinese, buyer, if they could overcome likely US hostility. Otherwise, its cash will dry up fast.
Some, such as the conservative columnist Bret Stephens, writing in the New York Times on Friday, have taken the impending failure of Tesla as both the inevitable result and harbinger of the failure of electric cars.
Even if Tesla does implode, the flaw in such an argument is to think of Tesla as the only maker of electric vehicles. Various projections suggest that electric vehicles will be cost-competitive with conventional ones by the mid-2020s and overtake them in sales by the 2030s. Chinese are already by far the leading buyers of electric cars; Tesla is the largest foreign seller there but has only 2 per cent of the market as domestic brands dominate. Cities such as Paris and London may ban petrol and diesel cars by 2030 or 2040.
Mr Musk’s financial engineering may not keep his company aloft. But his blend of vehicle design and salesmanship has moved battery vehicles close to the mainstream. His greatest achievement may be that the success of electric vehicles no longer depends on Tesla alone.
Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis