Tesla is at a crossroads. One path leads to a sustainable business model and the other leads here. Earlier this month the California company hit the limit for the electric vehicle (EV) federal tax credit, meaning the full $7,500 credit will only be available to those who are delivered a Tesla before the end of 2018. The credit then phases down for Tesla vehicles during 2019 and is ultimately eliminated beginning January 2020. Other EV makers, like GM and Nissan, have yet to hit the 200,000-vehicle limit for tax credit eligibility. As a result, Tesla’s already expensive vehicles are set to get even more expensive, especially compared to other EVs that still qualify for the tax credit. This coming dynamic has spooked Wall Street analysts and inflamed hand wringing over whether there will be sufficient consumer demand and vehicle output to make Tesla ultimately profitable.
Here is the phase out schedule for the federal electric vehicle tax credit for Tesla. Note that other EV models from other brands still qualify for the credit. Source: https://www.tesla.com/support/incentives
There are strong arguments for both why Tesla will fail and why they will succeed. And, if marriage has taught me anything, it’s that I’m usually wrong. So, I don’t want to predict what exactly will happen to Tesla. Instead, I can detail why Tesla may succeed or fail irrespective of the broader EV industry, which is set to overtake gasoline-powered vehicles over the next decade.
SCENARIO A: Tesla is doomed. Why the electric vehicle maker will fail.
The coming elimination of the federal tax credit may have prompted some to cancel their Model 3 orders. One report claims that 24 percent of the 450,000 Model 3 deposits have been refunded, though Tesla contends the report doesn’t match its own data. Even if the 24 percent estimate is far off, the elimination of the federal tax credit will impact consumer demand.
You can’t get a Model 3 for less than $49,000 today, so the major Model 3 competitors – the Nissan LEAF and GM Bolt – have now become better bargains as they have both significantly cheaper sticker prices (from $29,990 and $36,620, respectively) and will remain eligible for the full $7,500 federal tax credit beyond 2018. Prospective EV buyers who aren’t charmed by the Tesla allure and want to save a couple “stacks of high society” may forget about their Model 3 deposit and choose one of the dozens of other EVs for sale (though many could be considered inferior when it comes to range, brand prestige or technology add-ons like autopilot).
Tesla may not only face demand problems. Their vehicle production pace hasn’t been quick enough to yield a positive balance sheet on an annual basis and the company has run higher quarterly deficits in the ramp up to Model 3 production. Also, Tesla doles out hundreds of millions a year for solar energy systems, has a burn rate of around $480,000…per hour, and has a $82.5 million debt note coming due in August.
Tesla has consistently become cash flow negative before getting back to the black, so the current cash flow problems should not be a big concern. Source: https://arstechnica.com/tech-policy/2018/05/elon-musk-says-dont-worry-about-teslas-burn-rate-he-might-be-right/
Putting supply and demand aside, Tesla’s outlook has also been impacted by CEO Elon Musk’s recent bout as a whiny billionaire. He got into a social media spat with one of the divers who rescued the kids trapped in the Thailand cave, argued about the value of his donations to conservative politicians and campaigns, and threw a public tantrum about negative media stories. This erratic behavior couldn’t have helped Tesla’s stock price, which dropped 5 percent after Tesla asked suppliers for cash back to help the car maker turn a profit, a milestone that was promised to investors in Tesla’s last shareholder meeting.
$TSLA took a bit of a hit in mid-July, due to concerns about cash flow. Source: https://www.google.com/search?q=%24tsla&oq=%24tsla&aqs=chrome..69i57j0l5.1488j0j7&sourceid=chrome&ie=UTF-8
SCENARIO B: Everybody relax! Here is why Tesla is guaranteed to succeed.
OK, ok. I know there was a lot of negativity in the preceding paragraphs. Take a breath, do this 3-minute meditation exercise then come back. You good? Good. Let’s continue.
Tesla is guaranteed to succeed because of one simple fact. Electric vehicles are a better product than gasoline-powered vehicles. They are cheaper to drive, cleaner to operate, cost less to maintain, drive smoother, can be fueled at home or topped off in a couple minutes on the road, direct fuel spending to regional utilities rather than multinational oil companies, and are simply a blast to drive.
All signs point to the coming electric revolution. The only question remains; how quickly will it happen? The answer depends on vehicle cost parity, which is improving as battery costs decline and EVs are made at larger scales from more manufacturers. The number of globally available EV models is set to jump from 155 at the end of 2017 to 289 by 2022 and the sticker price of EVs could become competitive with gas vehicles by 2024 – even cheaper than gas cars after that. Automakers are extending electric drivetrains to more vehicle segments like CUVs and minivans and, as a result, EV sales are rising in the U.S and around the world.
EVs will succeed and so too will Tesla. The Tesla brand has developed an allure strong enough to get them over any financial hurdle. Despite rarely becoming cash flow positive, the company has already raised $19 billion. That’s just how things roll out in Silicon Valley. And investor enthusiasm for the brand is well-founded. Tesla is the best in the game at marketing their brand of sustainability and cutting-edge technology to buyers of all ages and backgrounds. Both my 60-year old neighbor and 18-year old niece think Tesla’s are cool, for example. Musk is a revered figure (in some circles) and viewed as a prophet who will lead transportation away from fossil fuels and toward the promised land of using rooftop solar panels to capture energy, store it in home-based battery packs, and use it to light our homes and fuel our vehicles. That’s a powerful vision that seems within grasp, and Musk is bold (read: rich) enough to help us make it happen.
This marketing strategy has been backed up by Tesla’s ability to produce cars that turn heads and a profit. The Model 3 is the most profitable electric car in the automotive industry, with a margin as high as 30 percent, and has garnered glowing reviews from some of the toughest auto reviewers. The Model S was the top-rated car in its class by Consumer Reports and the Model Y SUV is set to disrupt one of the most popular vehicle segments in the U.S. Also, Tesla’s can come equipped with add-ons unique to the brand, like “ludicrous mode,” “autopilot” and a network of high-speed charging stations.
Overall, the performance of Tesla’s vehicles combined with the effective marketing of Elon Musk’s vision has given Tesla an “it” factor, and generated tremendous enthusiasm around the brand. This hype is more than enough to continue fueling demand to keep Tesla afloat even after they lose the federal tax credit.
As for cash flow and production? Being cash flow negative is a growing company’s M.O., and Tesla has demonstrated that they can get back in the black once they start churning out enough vehicles to meet demand. Today, Tesla is set to pump out 6,000 Model 3s a week – a record high – and plans to ramp up production even further. Demand isn’t set to wane, either. 450,000 people put down a deposit on a car that they hadn’t necessary seen, step foot in, or read anything about beyond the company propaganda – and demand has steadily risen for Tesla’s other models.
So don’t fret. This electric vehicle pioneer is set to settle in as a market leader in EVs.