By Enrico Verga, a writer, consultant, and entrepreneur based in Milan. As a consultant, he concentrates on firms interested in opportunities in international and digital markets. His articles have appeared in Il Sole 24 Ore, Capo Horn, Longitude, Il Fatto Quotidiano, and many other publications. You can follow him on Twitter @enricoverga.
Mr. Musk has two great virtues: he is a visionary and a magnificent salesman.
However, he also has a problem – he has trouble keeping his promises.
Let’s start from the beginning.
A few months ago, the world was jubilant. The latest rocket of Space X (a company owned by Musk) successfully lifted off from Cape Canaveral, showing that it was now feasible to put useful payloads in orbit at a manageable cost. Mr. Musk added a touch of salesmanship genius: in the upper stage of the rocket, he stashed a Tesla. Once the center booster separated, the car, complete with a mock astronaut named Spaceman as driver, was propelled onward. Spaceman will now drive the Tesla into a stable orbit around the sun, part of the way between Earth and Mars. Brilliant.
Unfortunately, more than one malignant analyst has started to bring up the serious problem that afflicts Tesla, the car company. The typical quip is, “Musk can put a car into orbit but he can’t deliver the ones that he has presold.”
This isn’t the first time analysts have pointed to the risk of Tesla failing – the worry surfaced already in 2015. However, signs are multiplying that Musk is hurrying toward a glorious reentry into the atmosphere, rather like a shining meteor that blazes brilliantly before smashing into the ground.
A few days ago, a hedge fund manger, John Thompson of Villas Capital Management, declared that “unless Elon Musk can pull a rabbit out of his hat, Tesla will go bankrupt in 4 months.” Other articles give the time horizon less definitively as 4-6 months, but the basic message is the same.
Thompson is duly shorting Tesla, and he is hardly the only one.
The issues are straightforward. Musk is a genius of a salesman, but if each quarter he fails to do what stockholders, other investors, or analysts expect him to do, the stock price is in danger. In particular, his promise to produce a Model 3 (a new electric model, but one more within range of the American middle class) looks more and more like merely a promise.
Let’s decompose the current situation.
The Problem of Tax Breaks
Electric cars are bought because buyers want to do something for the environment. They are also bought because they come with tax breaks. When these vanish, some of the buyers vanish, too. Musk is well aware of the issue, given that an end to monetary incentives has already devastated two markets where he had been previously successful. As the Nordic Business Insider reports, in 2015, Denmark represented more than 5% of Tesla’s global sales. End of tax breaks, end of the party.
Changing the continent doesn’t change the game. Take Hong Kong, a sort of modern city-state. In April 2017, it reduced tax breaks for electric cars, and the results were similar: per Fox Business, Tesla sales collapsed.
We come now to the United States. Will the thousands of people getting in line to make down payments on the Model 3 still be able to look forward to tax breaks by the time when (if?) Musk gets around to delivering the actual car?
The Problem of Competition
In any case, tax breaks will affect all electric cars, not just those built by Mr. Musk. In a December 2017 analysis, Bloomberg asserts that in the next five years, there will be more than 100 electric car models on the market – some maybe better looking, maybe newer than the Model 3. And all the while enjoying the same tax breaks. Are we really sure Musk will succeed in selling out his Model 3s, assuming he can even produce them?
Another headache for Musk is that Panasonic (with which Tesla should have collaborated) has announced a partnership with Toyota, who as it happens makes cars.
To really get a sense of the problem, I encourage readers to look at the list – conveniently available at a single website, and with plenty of links – of all the electric car models coming out in the next five years. There one can also find all of the battery producers competing with Tesla, all of the producers of autonomous driving systems, and all of the alternatives to Tesla’s Powerwall. The lists are so long it takes at least three hours to read through them.
The Problems with Other Musk Companies
Musk has been great at selling not just one dream, but several. For example, his idea of a closed cycle of energy production is quite splendid. Here’s how it works. You buy Musk’s solar panels for your roof, then you buy Musk’s accumulator and battery, and finally an electric car that can be recharged with energy produced by the roof panels. Then you no longer pollute!
It all makes sense on paper. Sadly, all of the individual companies making up this “cycle” are in bad straits. Solar City is suffering, Solar Roof is a long way away from production (am I detecting a pattern?), Tesla Powerwall faces trouble on a number of fronts. Forget about Tesla trucks – whatever they are, they don’t seem to be a viable business.
The Problems with Production
By Q4 of 2017, there were already significant worries about Musk’s companies, although they paled compared to what we are now witnessing. To allay concerns, Musk proposed the concept of an “exponential ramp.” The basic idea was “as soon as production gets moving, it will rapidly ramp up in an ever-increasing crescendo.”
The problem is that in the automobile world, the fundamental principle is a chain of production. You get it started, it produces the model, and there you are. It unfortunately seems that Musk has confused the physical world of production with the world of calculations.
Where We Go from Here
I confess that I love Musk. I will love it when he takes me to the moon, to Mars, and when he hooks me up with an electric car at an affordable price.
But what I love most about him currently is his ability to sell dreams with a confidence in himself comparable only to a politician trying to get elected.