Tesla’s big problems

Experts have begun sounding the alarm that automaker Tesla is heading towards bankruptcy. Shares of the company have significantly fallen, ahead of the announcement of its results.

Background

Tesla is an American automaker founded in 2003 by Elon Musk. It 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.

In countries like the US, the sale of electric cars has significantly increased. In 2016, the sale of electric vehicles in the US rose by 37%. California, in particular, was the biggest market for electric cars. Globally, the sales of electric vehicles have more than doubled since 2014. This was due to concerns over growing oil prices and the environment.

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. Best known 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 within the next two decades.

Analysis

On March 2018, a deadly car crash in California resulted in the driver’s death. The car in question was a Tesla model and according to newly released data from the company, it was on autopilot. This has further raised questions about the safety of self-driving technology and the company’s brand. In addition, Nikola Motor Company has filed a lawsuit in Arizona alleging that Tesla’s all-electric semi infringes on the hydrogen truck startup’s patents.

Amidst these problems, there have been additional concerns regarding Tesla’s financial condition. The electric-car maker’s stock TSLA, has slumped 16% since its closing peak this year at $357.42 on Feb. 26 through Tuesday. Tesla was unable to execute orders of more than 400,000 cars and will consequently miss production targets for the second quarter as well.

John Thompson, chief executive of Vilas Capital Management, is one of the people who believes that the share price will collapse and that the company is moving towards bankruptcy due to its multitude of problems. "Over the next three to six months, I've said I think the stock will fall significantly, at which time the capital markets will close to Tesla entirely," he said. "Then it's just a matter of time given their losses and their capital expenditure needs."

However, Musk himself has remained optimistic. Recently he stated that the company could make a profit by the end of this year. It should be noted that in its fifteen year history, the company has not achieved this feat.

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 the automaker’s first mass market vehicle. Initially in 2017, the target for its production 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).

Musk himself has admitted that the company needs to start making profits soon to become viable. “A fair criticism leveled at Tesla by outside critics is that you’re not a real company unless you generate a profit, meaning simply that revenue exceeds costs,” Musk wrote in an email to staff obtained by Jalopnik. “It didn’t make sense to do that until reaching economies of scale, but now we are there.”

Assessment

Our assessment is that Tesla’s present woes could continue in the near term. Struggling financially as well as to meet its targets, the company is likely to lose the trust of the investors and its customers. Elon Musk is considered to be one of the most important visionaries of the 21st century. We believe that he would be able to address these problems through a collaboration with a company with core expertise in manufacturing and supply chain. Tesla’s future would be a little clearer by the end of 2018.