Elon Musk criticized by investors

Elon Musk, founder, CEO and chairman of automobile manufacturer Tesla, has received increasing criticism for the company’s performance. Investors have argued that the board has failed to hold Musk accountable for Tesla’s failures. There have been calls for Musk to step down from his dual role as chairman and CEO. However, in the most recent shareholder summit, Musk retained his position.

Background

Elon Musk is a South African-born Canadian American business magnate, investor, and inventor. He is listed by Forbes as the 53rd richest person in the world. As of January 2018, his net worth was $20.9 billion. As the founder, CEO and CTO of SpaceX, a private aerospace manufacturing and space transport services company, Musk is known for his aspiration to enable the colonization of Mars and reduce costs of space travel.

Tesla is an American automaker founded by Musk in 2003. Musk is Chairman and CEO of the company. Tesla specializes in electric cars, lithium-ion battery energy storage and more. It is predominantly known for manufacturing luxury electric cars. In 2008, it released the world’s first electric sports car called the Tesla Roadster. One of its models, Model S has been the world's best-selling plug-in electric car in 2015 and 2016.

However, experts have begun sounding alarms regarding Tesla’s financial condition. The electric-car maker’s stock has slumped. Tesla was unable to execute orders of more than 400,000 cars and will consequently miss production targets for the second quarter as well. At the core of these issues, is Model 3, which is facing a production crisis. The Model 3 is a significant barometer by which investors and the industry are measuring Tesla’s capability as an automaker. It is Tesla’s first mass market vehicle. In 2017, its production target was set at manufacturing 5,000 units per week by the year. However, in 2018, the targets keep getting cut. In April, it was producing around 2,250 units per week (less than half of what it had projected).

Tesla’s recent problems have resulted in a number of critical articles and reports. Elon Musk recently aired his frustration with the media on Wednesday, issuing a series of tweets calling out the “hypocrisy of big media companies.” He also floated the idea of starting a website which would allow the public to rate journalists.  Musk has struggled with obstacles in the recent past – many of SpaceX missions have been deemed failures and Moody’s downgraded Tesla’s credit rating. 

Analysis

A number of shareholders and advisory firms had called for Tesla’s board of directors to be restructured after continued production delays of the Model 3. The directors up for re-election this week included Elon Musk’s brother Kimbal Musk, independent director Antonio Gracias, and James Murdoch, CEO of Twenty-First Century Fox.

Proxy advisory firms including Glass Lewis & Co and ISS, as well as CtW Investment Group had advocated for shareholders to vote against Gracias, Kimbal Musk, and Murdoch. Union-affiliated CtW noted that Gracias has long-standing business relations with Musk, while Murdoch has no practical experience in the industry. CtW emphasised that the board of directors had not been able to hold Musk accountable for Tesla’s “strategic and operational challenges” and “deteriorating financial performance”. Despite these objections, the three directors, who were supported by Musk, were re-elected onto the board.

Glass Lewis & Co, ISS, and CtW had also advocated for the appointment of an independent chairman separate from the CEO. "In [current] circumstances, it is important that the board of directors take steps to ensure that management remains focused on resolving the manufacturing challenges, and that the CEO and other executives do not get distracted by outside business interests or Twitter fights," ISS wrote, in an apparent reference to Musk’s recent Twitter rants.

"[Tesla’s] continuing success looks more tenuous than ever. Especially in light of CEO Elon Musk's startling refusal to answer straightforward questions from analysts on a recent investor call, Tesla shareholders need to let the board know that it must raise its game," CtW Investment Group wrote. In a recent earning’s call, Musk had dismissed a number of analysts for asking “boring” questions about capital expenditures.

However, Musk survived the call to strip him of the role of Chairman at Tesla’s annual meeting on 5^th June.

Counterpoint

Musk has maintained that the company will turn a profit in the second half of 2018. He has said that the company will soon be opening a new “gigafactory” in Shanghai. Musk added that Tesla may reach its goal of manufacturing 5,000 Model 3 cars a week by the end of this month. It is currently producing 3,500 a week. In a recent statement, Tesla said, "It is precisely during times when a company must quickly adapt to constant change and outside pressures that board leadership needs to be lockstep with the company's operations. [Tesla] is still at a point in its development where we must execute well in order to realize our long-term goals and separating the roles of Chief Executive Officer and Chairman at this time would not serve the best interests of the company or its stockholders."

Assessment

Our assessment is that Tesla may continue to struggle in the near term. We had previously noted that the company’s financial situation could cause it to lose the trust of investors and customers. Tesla remains dependant on fresh capital to continue functioning. We believe that Musk may have to answer to shareholders about Tesla’s recent manufacturing and performance failures.