Wednesday, February 13, 2019

Tesla Is Rapidly losing Its "Cool Factor"

While Tesla's stock price continues to hang on what seems to be continuing signs of the company's demise continue to leak out. The company already slashed its Model 3 price twice this year to stimulate demand but it is still too high compared with models being produced by its competitors. The $35,000 Model 3 that CEO Elon Musk promised in 2016 remains only a promise with the least expensive Model 3 still sporting a price tag of $42,900. This, when coupled with the federal tax credit of $7,500 being cut in half to $3,750 at the beginning of the year after Tesla’s EV sales rose past the 200,000-threshold in 2018 has cut into sales.

It is estimated that over 100 different electric cars are expected to hit markets by 2025. This translates into the fact that the problems before Tesla are about to become overwhelming. Many of these "Tesla crushers" are months away from hitting showrooms. These new introductions into the rather small electric car market add to the long list of the problems nibbling away at Tesla's credibility and affecting future sales. An article published by Reuters tells of how when Tesla Inc announced last month a second round of job cuts to rein in costs, the automaker more than halved the division that delivers its electric vehicles to North American customers. Some 150 employees out of a team of about 230 were let go in January at the Las Vegas facility that delivers Model 3s into the hands of U.S. and Canadian buyers, this could be a sign the company expects deliveries to significantly slow in the near term.

Two sources, from among those let go, claim that deliveries that have plunged from the pace in the fourth quarter last year. This does not come as a surprise to many Tesla skeptics that claim the company is skating on thin ice and cite issues such as numerous software updates and fixes in response to a number of accidents involving Autopilot, it now appears that the software may not be as innovative, safe or autonomous as Elon Musk has led them to believe. One such example occurred on Monday when a driver in North Brunswick, New Jersey wrecked his Tesla on a highway while the vehicle was in Autopilot mode. According to a report published by News 12 New Jersey, the driver said that the vehicle "got confused due to the lane markings" at a point where the driver could have stayed on the highway or taken an exit. The driver claims that Autopilot split the difference and went down "the middle", between the exit and staying on the highway.

Tesla Crashes Have Drawn Much Media Attention
Tesla naysayers say they have had enough about Tesla being valued at worth more than Ford and all the other automobile producers that have many times its market share. Current supporters of its value even go so far as to claim it is really a tech company masquerading as an automobile company.  As far as the Model 3, Tesla has repeatedly tried to lower expectations and reiterated that it is a downgrade from the model S but many of those buying the car seem to not fully comprehend exactly what this means.

Do not rule out the possibility that once the aura surrounding Tesla leaves, reality may wash over those so eagerly awaiting their new toys and a main driver of sales vanish. Nothing tarnishes a brand faster than producing a lemon or product that becomes synonymous with failure. I hate to tell Tesla lovers that owning a Tesla could rapidly become uncool as the Model 3 fails to live up to the high expectations many of those placing orders have for the car. In a world where few cars sporting the Tesla nameplate exist the car remains a novelty that garners the owner a bit of notoriety. So far the attention gained has been positive, however, if it were suddenly to turn negative not only would many owners lose a bit of bounce in their step but the value of their cars could drop like a stone.

Model 3 Has Left Many Buyers Underwhelmed
As the actual car fails to tantalize buyers and leaves them underwhelmed we are moving to a place where it could be all over. There's a sucker born every minute" is a phrase closely associated with P. T. Barnum, Buying stock in Tesla or one of its cars is the same as going to a casino, it will end with the buyer most likely being a goat rather than a hero. In the back of our minds it would be wise to remember the companies Musk is involved with have been on the government dole and that usually is not a sign of vitality.

Like many high-flyers before him, Elon Musk has a history of promising more than he can deliver which investors and the market has chosen to ignore. I have written several articles about Musk and Tesla not because I'm wowed by either but because they are both poster children of a market which I feel has decoupled from reality. Do not be surprised if looking back someday in the future we view Tesla's stock which continues trading at incredibly high multiples as a reflection of our historically low-interest rates and the luck of being in the "QE moment" rather than the company's financial success. Bears and those that doubted if the company could hold together ironically have pushed up the stock adding to the image that Musk lives a charmed life.

In the past, I and many others have pointed out the uphill battle Tesla is fighting and the many obstacles that could derail its success. In May of 2015 David Stockman wrote; In a world saturated with excess automotive capacity and dominated by some of the most formidable engineering, manufacturing and marketing organizations on the planet—Toyota, BMW and Ford, to name just three–There is no way that an amateurish circus barker like Elon Musk will ever make a profit selling electric vanity cars to the 1%. Stockman went on to state, You might describe Tesla as $30 billion of capitalized hopium, but that would be too generous. In an honest free market, Tesla would have long ago been carted off to the chapter 11 junk shredder.

As a reminder of how sweet and challenging the auto industry is, and how like a fickle mistress it has those in its grasp always on their toes or they will suddenly find themselves crushed by their overconfidence I present the marvelous example of how Ford in the 1950s ambitiously rolled out the car everyone was waiting for. Unfortunately, their ambition gave birth to the Edsel, whose name became synonymous with abject corporate failure and while the nascent brand was killed in 1959, its legacy lives on. The Edsel's short history makes a fascinating cautionary tale for anyone in business–not just the car industry. In the end, the name of Elon Musk may be added to a long list of bold men herald and declared to be "gods gift to business," only to find they flew too close to the sun only to crash and burn.

Footnote; The link below is a recently updated article written since Musk started talking about taking Tesla private and an overview of Elon Musk and Tesla Motors. It gives some of the background stories behind their rise to prominence.

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