Case Study: Causes of the Recent Decline of Tesla

Tesla is a pioneering company that was founded in 2003 by a group of innovative and driven engineers. For years electric cars had a stigma for being worse than traditional gas-powered vehicles. The general public believed that a high-quality electric car could not exist. This is where Tesla stepped in, the firm quickly went to work crafting a high-end electric car and released the revolutionary Roadster sports car. The Roadster was considered a major feat because it could travel very far on a single charge unlike many other electric cars. The Roadster was a very physically attractive car that helped make the idea of riding around in an electric sports car seem like a sleek and cool thing. The Roadster served as Tesla’s coming out party and launched the company to major fame as people began to take notice. Tesla’s next mission was creating the Model S. The Model S was a sedan that had very similar capabilities to the Roadster. What set the Model S apart was the fact that it was a traditional sedan that could seat four to five individuals. The Model S proved to be a critical success as it was considered one of the best performing and most safe vehicles on the road, electric or not. Next, Tesla released the Model X which was essentially a sports version of the Model S. While Tesla was showered with praise there was just one problem: the cars were extremely expensive. In fact, the original Roadster sold for a whopping $109,000 and the Model S starts at $76,000. Tesla realized that there was a strong demand for a more affordable model and began producing the Model 3 for those who could not afford their other high-priced models. The Model 3 starts at $36,200 which is more than half the price of the Model S. The Model 3 proved to be an incredibly sought out car. In fact, demand for the Model 3 was so high that Tesla could not manufacture enough of them.

Causes of the Recent Decline of Tesla

One aspect that gives Tesla a competitive advantage is their Autopilot technology. The firm has been working on this technology for years and continues to add more features to the program. The Autopilot program has been lauded by consumers and is often referenced as a difference maker between Tesla vehicles and their competition. In fact, many Tesla drivers have commented that the Autopilot feature has saved their lives by reacting quickly and properly to avoid crashes. One Tesla owner named Raghu Konka actually caught the Autopilot system’s swift actions on video. Autopilot took control of Konka’s vehicle and performed a move to get his family out of harm’s way. It is clear that the general consensus regarding Autopilot is that it is an incredibly valuable program that is in a class above its’ competitors. The great quality of Autopilot has helped make Tesla vehicles highly desired among consumers.

While Tesla may be known for their flagship electric vehicles, the firm has interests in various other industries. Tesla has long been a proponent of clean energy and they have had a particular interest in solar energy. In fact, Tesla produces and installs solar panels on houses. The firm has also been hard at work on a revolutionary solar technology called a solar roof. This solar roof is literally a roof with solar technology integrated within it. This integration makes installing solar panels unnecessary and acts as a storage for energy. The solar roof is currently still in development. Tesla is facing stiff competition from solar firms such as SunRun and Vivint. Recently, Tesla has significantly slashed the prices of solar panel installations in an attempt to gain market share. Tesla’s solar endeavors have faltered as of late which is a big reason why the firm is lowering costs to consumers. The firm has also attempted to streamline the customer experience so that it is less difficult and time consuming to order a solar panel installation.

When discussing Tesla, it is imperative that Chief Executive Officer Elon Reeve Musk is mentioned. Hailing from South Africa, Musk is a technology luminary that is the head of both Tesla and innovative space exploration company SpaceX. As CEO of Tesla Musk has done a tremendous job of both drumming up support and negative press for the firm. The polarizing executive has had a highly interesting stint as the leader of Tesla. Many see Musk as an innovative genius similar to the late Steve Jobs of Apple. However, unlike Steve Jobs many of Musk’s blunders are very public and have had a massive impact on the firm. In fact, in 2018 Elon Musk posted on Twitter stating that he was considering taking Tesla private and that funding was secured for this to happen. This tweet led to Tesla shares skyrocketing and a massive headache for those shorting the stock. Some of those shorters have decided to take matters into their own hands and file class-action lawsuits against Tesla. The Securities and Exchange Commission also filed suit against Tesla and Musk separately as a result of the tweets. Ultimately, both Elon Musk and Tesla were required to pay 20 million dollars in fines each. This is an example of Musk’s highly irresponsible and impulsive actions hurting Tesla. This is only one example of Musk’s frequently negative impact. In yet another case of immature conduct Musk called a man who helped rescued Thai children trapped in a cave a pedophile. This tweet had an immediate effect on Tesla’s stock as share prices dropped following the tweet.

Despite what Elon Musk may want investors to think it is clear that Tesla is heading down a dark path. While the firm has crafted electric vehicles that are better than their competitors there are some obstacles that will ultimately doom Tesla. Some of these obstacles include a precarious financial situation, an abundance of cumbersome projects and growing competition. It seems that those investing heavily in Tesla are investing in a dream rather than a reality.

Argument 1 – Financial Woes

It is safe to say that 2018 proved to be a tumultuous year for Tesla, in terms of financial performance. For some time, a big problem facing Tesla has been an inability to produce enough vehicles to meet demand. As Tesla navigated 2018, they were able to increase production and are still currently in the process of ramping up their manufacturing power. While production may have increased somewhat, Tesla’s financial profile has only declined.  In fact, Tesla experienced a massive and unexpected loss that rocked investors. Tesla reported a loss of over $700 million in the first quarter of 2019. According to Russ Mitchell of the Los Angeles Times, “The new data add to Tesla’s already bleak financial picture. The $702-million loss followed a $139-million profit in the previous quarter. Sales fell sharply. Automotive revenue plunged 41%, to $3.7 billion from $6.3 billion in the previous quarter, as vehicle deliveries dropped to 63,000 from 90,700 the previous quarter. Operating cash flow turned negative — a net $640 million going out the door over the three months compared to a positive $1.23 billion in the previous period. Cash on hand dropped from $3.69 billion at the end of last quarter to $2.2 billion, including $920 million to pay off convertible bonds.”

In an alarming twist, $200 million of Tesla’s first quarter revenue came from regulatory credits. This is a bad thing because these credits are being cut in both the United States and China. So, the firm is facing massive losses and unreliable credit revenue streams while spending heavily on research and development. Tesla has announced a plan to raise over $2 billion dollars in an attempt to stay afloat, but this is seen as just a temporary fix to keep the collapse of the company at bay. Tesla has done a tremendous job of keeping investors interested in the future of the company and this has helped them gather support when falling on tough times. However, it seems that analysts are beginning to realize that Tesla is not quite as successful as it would like people to think.

Argument 2 – Too Many Upcoming Projects

Tesla has a plethora of high-level upcoming projects. One of these upcoming projects is the long-awaited solar roof. The solar roof has been in development for quite some time and it appears that it will not be completed for a while. There have been no recent announcements made about the Solar Roof and there is a bit of doubt regarding Tesla’s ability to finish the project. This is especially troublesome when factoring in the downward spiral the Tesla’s solar efforts have become. Since 2015 Tesla has experienced a steady and serious decline in solar deployments. While Tesla vehicles are noticeably superior to competitors the same cannot be said about their solar energy technology. As mentioned earlier, Tesla has significantly cut the prices of solar power installations. This reduction in prices is a clear attempt to entice potential customers by charging significantly less than the competition.

Another major upcoming project for Tesla is the building of a Gigafactory in Shanghai. This Gigafactory is expected to be a massive hub for producing Tesla vehicles in China. Tesla believes that this massive Gigafactory will help avoid the uncertainty regarding United States and Chinese trade negotiations and also help mitigate the advantage held by homegrown electric vehicle manufacturers such as BYD. However, this Gigafactory has come with a hefty price tag. In fact, the Gigafactory is reported to cost over 500 million dollars. Tesla has secured the funding for this factory by taking on even more debt because the firm simply cannot afford to buy the property with capital. It is clear that Tesla is expecting to make a huge splash in the Chinese market in order to get back on track financially. Unfortunately, the Chinese electrical vehicle industry is extremely crowded and only getting larger. There are nearly 500 different competing firms and Tesla is making a huge investment by building a factory in Shanghai. After pouring in so much money into the Gigafactory it would be devastating if the fierce competition limits Tesla’s opportunities to gain market share.

Tesla has a slew of upcoming vehicles to add to their roster. These vehicles include a semi-truck, an SUV named the Model Y and a remake of the iconic Roadster. These are all ambitious projects that face their own hurdles as Tesla is still trying to improve the production efficiency of the Model 3. The Model Y was announced in March to a fairly lukewarm reception as many expected Tesla to come up with something a bit more revolutionary in nature. Instead Tesla has decided to try and penetrate the thriving SUV market with essentially a modified version of the Model 3.

Tesla has big plans regarding autonomy and recently revealed their plans for a self-driving rideshare program. This program would be downloaded to the phones of Tesla owners and allow them to either order a ride from an autonomous Tesla or earn income by allowing their car to be used for ride sharing. This is an extremely ambitious plan that requires further software updates and testing before it can be rolled out to the public. When looking at popular ride-sharing companies such as Uber and Lyft we can see that there are numerous pitfalls that Tesla may have to deal with. Both Uber and Lyft have had to battle regulators in order to conduct their business. The fact that regulators are not keen to allow non autonomous ride-sharing is not a good sign for Tesla. Because fully autonomous vehicles do not currently exist, they will have to do an excellent job of proving that the cars are safe and reliable. This combination of software updating and required testing will only add to the mounting costs facing Tesla.

Argument 3 – Tight Competition

Tesla vehicles have been shown to perform better than other electric cars while also receiving favorable reviews by owners. However, the firm is facing increasing competition as other companies begin to increase their spending on electrical vehicles. Companies such as Volkswagen, Audi and Jaguar are making their own pushes into the electrical car market. A big reason why Tesla has held an advantage over its’ competition is the simple fact that it made a full force plunge into the electric vehicle market right away and was able to build up a lead. However, as time passes, and more firms see the attention that Tesla has been receiving that lead is getting slimmer and it will only be a matter of time before the competition begins to create vehicles that are comparable or even similar to Tesla products.

In China Tesla is facing stiff competition as the firm tries to take over the largest electrical vehicle market in the world. Electrical vehicles are experiencing a major boom in China and hundreds of local businesses have joined the fight for market share. One successful Chinese electric vehicle manufacturer is the Warren Buffett backed BYD. BYD recently announced an increase of over 600 percent in profits as it has been selling electric cars at a very high rate. BYD is only one of the many electrical vehicle makers all fighting for market share in China.  One interesting aspect to the battle for dominance in China is the imminent ending of government subsidies. According to Bloomberg, “Another headwind is the subsidy cut announced last month by the finance ministry, a move meant to encourage manufacturers to rely on innovation rather than assistance. Some subsidies that could total $7,500 per vehicle were halved.”

The precious government subsidies that help increase margins are being slashed in an attempt to weed out weaker companies and spur more creativity and evolution from the remaining firms. These lowered margins will make it even more important to have a large market share as selling more vehicles will be crucial to generating a profit.

To conclude, Tesla is facing an uphill battle as the firm continues to push on with expensive and extremely risky investments while experiencing precipitous declines in automotive revenue. A bleak financial picture that shows a company relying far too heavily on speculative revenue is taking shape. It would take a perfect storm of events for Tesla to become the juggernaut electrical vehicle maker it believes it can be. The clock is ticking for Tesla as competitors who have watched the struggles of the firm begin to initiate their own forays into the potentially lucrative market. In due time investors will finally realize the reality of Tesla’s coming downfall.

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