Reuters/Mike Blake
- Tesla will face major challenges as it becomes a mass-market automaker.
- The challenges range from CEO Elon Musk’s workload to the arrival of new competitors.
- Tesla is preparing to meet these challenges, but it might not surmount them all.
Tesla had a wild ride in 2017. The company is worth more than ever, passing Ford and Fiat Chrysler Automobiles in market capitalization and threatening General Motors.
But the “production hell” of a sluggish Model 3 roll-out has tested the patience of customers and investors. And Tesla doesn’t have enough money in its reserve to sustain its current cash burn.
Other challenges await in 2018. Yes, 2017 was wild. But 2018 will be even wilder.
Cash, cash, and more cash.
Asa Mathat | D: All Things Digital
Relative to its auto-industry “peers,” Tesla has a pitiful amount of available cash. The carmakers that Tesla has challenged in market capitalization in 2017 — General Motors, Ford, and Fiat Chrysler Automobiles — have each amassed war chests. FCA has almost $ 20 billion, GM has nearly $ 25 billion, and Ford has socked away close to $ 40 billion.
Tesla has just over $ 3 billion
Tesla is also currently burning through over a billion per quarter. If we just go by cash and exclude other financing instruments, such as Tesla’s revolving credit lines, the company can’t make it through 2018.
It’s worth noting that Tesla is running thin on cash at a time when the US economy is at full employment and the US auto market is running near an all-time sales high.
Do the math: Tesla needs more money. And it will likely obtain that funding through another capital raise. It’s past two raises were a return to Wall Street to sell more stock; and a first foray into the junk-bond debt markets.
The smart money, such as it is, would likely bet on Tesla doing another equity raise in 2018, given that shares are still above $ 300. Each new raise, however, highlights Tesla’s poor execution on the manufacturing front. FCA, Ford, and GM also spend a billion per quarter, but they manage to produce millions of vehicles worldwide. Tesla produces a fraction of that.
There is an assumption among Tesla bulls that this pattern will at some point reverse in the future, as the Model 3 sedan, priced to start at $ 35,000, ramps toward full production and Tesla starts to draw in revenue from something like 400,000 pre-orders.
But while that would be cause for celebration at Tesla, attention would then turn to how much money Tesla is making on the Model 3. Mass-market sedans have notoriously skinny profit margins and have plummeted in popularity as consumers have turned to crossover SUVs.
There’s no question that cash will be Tesla’s biggest challenge in 2018.
Fixing Fremont.
Benjamin Zhang/Business Insider
Tesla’s factory in Fremont has a theoretical manufacturing capacity of 500,000 vehicles annually, although when it was jointly operated by Toyota and GM in the 1980s, it never hit that mark. Still, it topped out at over 400,000.
Tesla is now 14 years old and in 2017, it will finally roll 100,000 vehicles off its assembly line. CEO Elon Musk said that in 2018 it would roll 500,000.
There’s almost no chance that Tesla will hit that mark in 2018. In fact, even if the company were able to build 5,000 Model 3’s per week, and add that output to another 100,000 Model S and X vehicles, production would only be about 350,000 for 2018.
This is ridiculous. Tesla admitted when the Model 3 fell well short of 2017 production that “bottlenecks” at the company’s Gigafactory battery plant in Nevada were to blame. We’ll take Tesla at its word, but the true bottleneck is and always has been at Fremont. No other automaker in the world would be sitting on hundreds of thousands of pre-orders for a single vehicle and struggling to hit production targets.
The reason that we aren’t seeing far more Teslas on the road is simply because Tesla is stubbornly refusing to admit that it’s bad at building cars. I can’t figure out why Musk won’t just throw in the towel and hire somebody else to build the car for him. When carmakers such as BMW can’t meet demand with their existing capacity, they bring in a contract manufacturer to take up the slack.
Fixing Fremont has to be Tesla’s second-highest priority in 2018, next to avoiding running out money.
Recalibrating its product reveals.
Tesla
Tesla is stupendously good at keeping its story going. It does this by staging epic new-product reveals that thrill the loyalists and refuel the company’s narrative. This keeps the stock price up, brings in deposits that help with the cash problem, and relieves Tesla of any pressure to spend any real money on advertising.
Lately, however, the reveal-apalooza has been in high gear.
In 2017, we got not just a Semi truck but also a new Roadster. Everyone expects 2018 to see a Model Y compact SUV and a pickup truck.
Pointedly, Tesla can’t currently even build a mid-size sedan on schedule, so the idea that it can handle a big rig, a new sports car, and a pickup without a gigantic new capital investment in additional factories is preposterous.
Still, if Tesla reveals new vehicles, the deposits will probably come. You have to give it to Musk: he’s devised a way to bring in additional operating cash — Tesla doesn’t set deposits aside but rather uses them to fund itself — without having to promise depositors a return on investment. It’s brilliant, and we should expect more of it in 2018.
See the rest of the story at Business Insider
