Off to the races
While 2020 for most companies has been plagued with shortcomings, demise and downfall due to the COVID-19 outbreak, Tesla has emerged as a winner on financial markets. In March alone, the S&P fell more than 30% with a lot in the near future unknown and up to sheer speculation. In the past year, Tesla’s value has increased by more than 300% with more than 25% in March alone. Like a lot of things, Tesla’s heroic growth and performance may just be too good to be true. However, under the radar, Tesla is challenged by a lot of obstacles. Enhanced by long-term preventative internal factors mitigating its long term growth, Tesla is in a bubble with a lot of revelations to be made clear in the near future- perhaps leading to a burst.
Tesla has emerged as a premier company in the growing Electric Vehicle (EV) industry. Founded in 2003 by Martin Eberhard and Marc Tarpenning on the premise of building electric vehicles, Tesla has grown in the past 17 years defying odds and pushing boundaries, making technological advancements and breakthroughs in the relatively new EV industry. However, Tesla has grown at unprecedented levels recently, enough to warrant substantial concerns indicating the company being overpriced.
As numerous and established automakers prepare to enter the evolving EV market, estimated to grow at over 22% annually until 2027, EV companies must be able to meet the demands of this evolving sector to withstand unprecedented competition and disruption. There are five key drivers imperative to achieve success in this industry: brand, customer experience, production strategy, talent and business model. Though the ability to meet such demands varies on a company-to-company basis, Tesla has systemic weaknesses which beg the question: is the company overvalued? Poised with numerous faults within its internal production process, rising competitors, a less than optimal business environment and underlying weak finances- it is clear that a lot of Tesla’s faults are overlooked, an oversight which has led to the bubble the company finds itself in today.
In its short but tumultuous history, Tesla has had a poor track record of production- particularly in upholding standard, consistency and quality. From January 2018, over the course of more than twenty months, 66% of new vehicles had problems. These issues ranged from issues with paint, panel gaps, scratches and even improperly attached seats. While issues can be expected for new cars, there is a reasonable expectation for issues to be rectified in the near future, something that has not been the case for Tesla. Despite attempts to take control over supply chain production processes, old problems remain consistent today, suggesting a lack of attention and care in production as the company pursues production quotas. Recently, Tesla has been pushing for the mass production of its Model Y vehicle. Unsurprisingly, this has not been without fault. In addition to recurring past issues, this time around many vehicles are having issues with rear tail lights and loosened or improperly installed seatbelts. This has prompted many customers to outright refuse delivery, taking advantage of Tesla’s 7-day return policy. For Tesla and CEO Elon Musk, this is a major concern and setback which has not warranted equal concern from shareholders and investors.
One large area of concern is Tesla’s methods of production, in particular its over reliance on automation. Since its early days, the company has leveraged the use of automation and advanced technologies- a primary factor of differentiation between itself and other automakers. Though ambitious, Tesla has suffered from over reliance on robots to automate not only the stamp, paint and welding processes but the entire final assembly which has inherently contributed to many of the challenges the production process faces today. Current and future Tesla Models are growing more and more complex- in such production processes, only humans can adapt to the rapid change and modifications sometimes necessary, something which has been neglected.
Evidently, such a track record has resulted in vast recalls; taking away from the image and consumer trust that both Tesla and the EV industry needs.
In addition to underrated use of human talent; Tesla simply doesn't use its workers efficiently. While as much as 95% of the Model 3 was automated, compared to traditional OEM’s, Tesla uses more employees per vehicle manufactured- showing a disarray and failure in human management. NUMMI, a joint lean manufacturing plant between Toyota and General Motors opened in 1984 is the premier industry example for strong manufacturing. Tesla’s factories similar in size, produce ⅕ the capacity of NUMMI and on average leverage 8-14 employees per vehicle manufactured, ⅟₇ the efficiency of NUMMI .
Meet the Contestants
Inevitably, Tesla’s growth and surgence in the growing EV market will soon be further challenged by rising competitors. As more customers look to buy EVs, combined with ambitious global climate change goals, conventional automobile manufacturers are investing and preparing to compete in the EV sector. In 2020 alone, Audi, Toyota and BMW will introduce a combined 14 new EV models. Further ahead, by 2022, Ford is projected to have 40 different EV models! As large original equipment manufacturers (OEM’s) enter the market, the true state of supply and demand becomes rather concerning. For a company like Tesla whose entire focus is on EV’s, incoming OEM’s have greater access to capital and global positioning vs. Tesla. In the world’s largest EV market, China, Tesla has benefited from special dispensations on behalf of the Chinese government. Despite this, Tesla is losing to specialized EV companies such as Warren Buffet backed, BYD company- who until 2019 was the world's largest EV manufacturer. As competition heightens by 2025 the industry by projects to have a surplus in supply, in excess of 5 million EV units. Unfortunately, with increased competitors carving their own competitive advantages, the road ahead simply isn't smooth.
1. In March 2018, Tesla recalled 123,000 of its model S cars to rectify power steering bolts that had excessively corroded. (It makes the car harder to drive at lower speeds and therefore also makes parallel parking more difficult.)
2. In 2017, Tesla recalled 53,000 Model X and Model S vehicles due to malfunctioning parking brakes and a faulty locking mechanism.
3. In 2014 the company recalled 20,222 Model S sedans due to a charging defect that posed a fire hazard. This was followed by another recall of 90,000 vehicles of the same model due to a defect in the front seat belt assembly in 2014 the company recalled.
As the company is entering a new and seemingly critical era, having a supportive business environment is imperative to its sustainability and growth. Internally and externally, Tesla has had both frail support and vast shortcomings. Feeble top-down management is often blamed as Tesla ranks higher than competing companies in job stress and turnover. At an annualized executive turnover rate nearing 30%, almost double the average of similar companies, it’s clear Tesla has problems within its leadership and management-indicative through chaotic production, inconsistencies and unusual executive departures. Unlike single high level exits, Tesla has had the misfortune of losing entire divisions over the past few years. Long-term negative implications of such instability include increasing long-term costs, loss of human capital and adverse effects on overall company and staff morale. Further, Tesla’s vulnerabilities within the business environment are not just limited to Twitter and internal leadership; for a growing and evolving industry, business development, support, investment and incentive from the government are also crucial. Unfortunately, the EV environment has lacked the incentives it needs early on to grow in North America. In terms of monetary support, following the recently elected provincial government, almost 60% of EV Zero Emissions rebates were scrapped back in 2018 .
Further, already lacking the initial support from governments critical to growth, in the North American market the EV industry’s scope is quite limited. Within such an industry, private investment is integral in long term growth. The EV infrastructure is a business venture supported with large levels of funding in the Asian and European markets, however, the same cannot be said for North America. With rapid technological change and advancement; driven by consumer choice, both public and private investment in infrastructure systems is needed to support business. In the US, according to The Centre for American Progress, the US needs to add almost 500 000 new public charging outlets by 2025, however, only about 50% of the funding exists to deploy and create the adequate infrastructure. In the US, this gap amounts to $2.3bn. In order for segments with the EV market to grow, private investment is needed and only possible through government incentive and support.
A number's game
The relatively new EV industry is certainly expensive. OEM’s are yet to develop efficient economies of scale and become consistently profitable. The bottom line for Tesla thus far has been a weak showing on financial statements. Operating in a new and expensive market, Tesla has been strapped for cash resulting in liquidity concerns and overwhelmingly bad leverage. In fact, many have speculated the company may turn to financial markets to raise more money- an endeavour which would likely reduce investor confidence. Interestingly, Tesla, the world’s second largest automaker by market cap has no true PE ratio- given that it has yet to be profitable on a consistent or annual basis. Poor financials and stark contrasts between the books and the market suggest Tesla may be in a bubble. It’s fair to consider Tesla as a unique company, not quite the average automaker but also not a tech company. Looking at the company’s Enterprise Multiple (EM), it is computed by dividing EV by EBITDA. In Jan 2020, the average EV/EBITDA for the S&P was 14.14. Generally, a value under 10 is interpreted as healthy and above average, indicating that investors’ willingness to pay up for securities has never been higher. US equities such as Tesla are overpriced and simply too expensive for justification. As of June 2020, Tesla’s EM is ~63x. In comparison, Ford is at 23x, BMW at 9x, and Toyota is less than 1x. Comparing Tesla to tech giants such as Apple (19x) and Facebook (18x) suggests the same- Tesla is indeed overpriced. Further, the EV industry is simply too far at the moment from profitability. Most OEM’s in fact lose money from the sale of EVs. It often costs $12 000 or more to produce comparable EV’s to conventional automobiles. Currently, the cost of production is simply too high and research suggests competitive production costs to be essentially non-existent for another 5-7 years, through which time more and more OEM’s enter the EV market. Though Tesla is indeed unique, bold and one of a kind; investors cannot keep on looking past glaring internal factors and external developments, both inhibiting and questioning its long term growth. Poor production, rising competition, a weak business environment and concerning financial position warrant fair questions to Tesla pertaining to it’s value- and ultimate capability to be a profitable EV company. Considering the facts, and drawing analysis from developments, Tesla is showing clear failures across segments including its brand, customer experience, production strategy, and talent and business model, failures which may ultimately signal Tesla's downfall.