Published on January 20th, 2019 |
by Steve Hanley
January 20th, 2019 by Steve Hanley
As Tesla was going through “production hell” with the Model 3 last year, Elon Musk tweeted that he had underestimated the value of human workers. The Model 3 assembly line was the most highly automated in the world, but many of the machines were not calibrated properly or broke down, leading to slowdowns. Tesla responded by hiring more workers, expanding its workforce by about 30%.
On January 18, the company announced it is laying off about 7% of its full-time workers and warned that profits in the fourth quarter would be lower than in the previous quarter. Q3 saw a modest profit for the company of just under 4%. For Q4, Elon says the company once again will be profitable but that profit will be “tiny.” The actual numbers won’t be released officially until the next investors conference call in early February. (In the meantime, if you’re interested, Vijay has published his estimates.)
Musk justified the decision to lay off about 3,000 workers by saying the company needs to find ways to reduce the cost of its cars. “Looking ahead at our mission of accelerating the advent of sustainable transport and energy, which is important for all life on Earth, we face an extremely difficult challenge: making our cars, batteries and solar products cost-competitive with fossil fuels.
“While we have made great progress, our products are still too expensive for most people. Tesla has only been producing cars for about a decade and we’re up against massive, entrenched competitors. The net effect is that Tesla must work much harder than other manufacturers to survive while building affordable, sustainable products.
“[T]he road ahead is very difficult. This is not new for us — we have always faced significant challenges — but it is the reality we face. There are many companies that can offer a better work-life balance, because they are larger and more mature or in industries that are not so voraciously competitive. Attempting to build affordable clean energy products at scale necessarily requires extreme effort and relentless creativity, but succeeding in our mission is essential to ensure that the future is good, so we must do everything we can to advance the cause.
“Higher volume and manufacturing design improvements are crucial for Tesla to achieve the economies of scale required to manufacture the standard range (220 mile), standard interior Model 3 at $35k and still be a viable company. There isn’t any other way.”
The news sent Tesla stock into free fall, shedding 13% during the trading day on Friday and knocking Tesla down a few notches on the list of most valuable automakers — from #4 to #7.
And, of course, it brought the usual assortment of “I told you years ago Tesla would never amount to anything” naysayers on Wall Street. One of them is Forbes contributor Jim Collins, who wrote that going backwards on quarterly profits is exactly the opposite of what investors want to hear.
“That margin decrement would indicate that the benefits of scale are not occurring at all at Tesla, and that is a virtual death blow to the bullish arguments for the stock. Auto companies are generally perceived to have some monstrously large mass of fixed costs that can be amortized over production, and thus more output should equal both higher dollar profits and higher profit margins.” (Collins ignored what anyone following Tesla very closely knew — Tesla sold a large number of very high-cost, high-margin versions of the Model 3 in the 3rd quarter, and then many of the more affordable Model 3 Mid Range in the 4th quarter.)
Bret Kenwell, writing for The Street, worried that the decline in share price would make it difficult for Tesla to pay off the $920 million in convertible bonds coming due on March 1. “In the third quarter, Tesla was cash-flow positive and profitable, and so long as that’s the case in the fourth quarter, Tesla should be able to make the payment in March, even if it is all cash. However, it will come at an unfortunate time for Tesla, as it tries to get its Shanghai factory open before the end of the year, continues to expand its Supercharger Network and has a number of new models in the pipeline.”
Tesla has been doing a high-wire act for the past 15 years. Many analysts and journalists were claiming Tesla’s imminent death 10 years ago. Its stock is one of the most volatile and always has been. Chances are, it will continue to be. The conversion price for those convertible bonds is $359.88. “[I]t’s always possible that Tesla stock will be able to rally above that conversion price in time to pay part of the debt with stock. After all, it’s more than a month away and we’ve seen crazier things than a 20% rally in Tesla’s share price in a short time period,” Kenwell writes.
What it all comes down to is, do you trust Elon Musk or not? Some very large investors — like Tencent, Baillie Gifford, Ron Baron, and Larry Ellison — have placed bets on Elon and Tesla. Perhaps jittery stockholders should pay more attention to what the company’s major investors are saying rather than the words of a few so-called analysts who get paid to stir the pot.
As Elon says, the road ahead will be difficult. The 3,000 people getting laid off can’t be very happy about being out of work. Despite the pressure and difficult working conditions, Tesla is still viewed as one of the best places to work in the industry. The bottom line is that Musk knows his overall plan relies on making electric cars that more people can afford. That’s good news for the electric car revolution going forward but the path will not always be smooth.
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