Photo: Matt Henry/Unsplash

Is Tesla Doomed? The cases for and against the electric vehicle pioneer.

, senior policy and legal analyst, Clean Vehicles | July 26, 2018, 1:25 pm EDT
Bookmark and Share

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.

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.

Photo: Matt Henry/Unsplash

Posted in: Vehicles Tags: , , ,

Support from UCS members make work like this possible. Will you join us? Help UCS advance independent science for a healthy environment and a safer world.

Show Comments


Comment Policy

UCS welcomes comments that foster civil conversation and debate. To help maintain a healthy, respectful discussion, please focus comments on the issues, topics, and facts at hand, and refrain from personal attacks. Posts that are commercial, self-promotional, obscene, rude, or disruptive will be removed.

Please note that comments are open for two weeks following each blog post. UCS respects your privacy and will not display, lend, or sell your email address for any reason.

  • Haggy

    There is competition, but it’s not other EVs. It’s ICE cars in the same price range as Tesla models. I couldn’t imagine BMW ever offering the owner of a 3 or 4 series a Tesla Model 3 loaner while the BMW is in for service. Tesla, on the other hand, was selling cars so fast by the end of last year that they didn’t have enough cars to use as service center loaners. So they had Enterprise give their customers cars such as a BMW 4 series. Tesla had nothing to be afraid of, except being chastised after the fact for not having enough Tesla loaners.

    If companies such as BMW are so sure that Tesla isn’t a threat, then they should welcome the opportunity to let their owners drive a Tesla to see how anxious they are to get their BMW back.

  • Electrikleo

    More clickbait – mention Tesla or Elon with a controversial title ………… yawn

  • John Donovan

    The graph above seems to indicate that Tesla has had 3 profitable quarters. One commenter on Cleantechnica (or was it Electrek?) trashed me for saying several rather than two. I was relying on my memory, but maybe I was correct after all?

    • Haggy

      It was two, and they can complain that it’s not “several” but they’d be wrong. One definition of several is “more than two, but not many” but another is “separate and distinct from others.” Both are perfectly valid dictionary definitions. They can be separated (severed) from the other quarters.

      • John Donovan

        Thanks.

        So is cash flow different than profit/loss? I see three green quarters in the chart above, I think.

  • neroden

    You almost get to, but don’t mention, the point which is the bottom line for me. Nobody but Tesla is making enough EVs.

    Because EVs are just a better product than ICE cars, *every* EV manufacturer will sell as many as they can make, basically. There are waiting lists for the Chevy Bolt in multiple countries including Canada; the Hyundai Ioniq is sold out until Hyundai can find a new battery manufacturer to make more batteries; i-Pace and e-tron also have waiting lists; etc.

    Everyone else is planning ridiculously small production numbers: GM refuses to make more than 30,000 Bolts per year, and almost all the other companies are planning 30K, 20K, or even less. Only Nissan is producing in volume… and even they are producing fewer than Tesla.

    Every company will sell as many EVs as they can make — and Tesla is simply making more electric cars than anyone else, and expanding faster than everyone else. It’s a race for market share. Nissan is falling behind and every other manufacturer is standing at the side of the racetrack swigging beer.

    Since Tesla is also documented to have the highest gross margins of any EV manufacturer, this means they have the highest volumes, the highest gross margins, and an endless waiting list.

    All Tesla has to do is expand enough to cover their enormous (several billion dollars a year) fixed costs. As soon as they’re making enough cars per year, they’re golden.

  • Patrick

    Tesla are becoming one of the most well known brands in the world. I don’t think they have tapped this.
    To improve cash flow they could look at merchandising. Use the Tesla brand on other products watches, footwear, clothing the list is endless. They could bring in substantial income without much expenditure as such items would be produced by other companies.

    • Haggy

      Ironically, one of their strengths is that that’s not true. Google did a brand recognition study a year or two ago, and found that among millennials, Tesla’s name recognition was relatively low. But among those who recognized the name, the “coolness factor” of the brand name was one of the highest. What Tesla has going for them is that those who know about the cars (not counting short sellers and those in the oil industry) like them a lot, and there’s an incredible untapped demographic that has yet to notice a Tesla car on the road.

      There are still many Tesla owners who are asked by strangers what kind of car it is, and when they respond, they are asked “who makes Tesla?”

  • Cal

    I always find it funny that those who like to talk about “whiny billionaires” always seem to forget that while doing so, they tend to sound quite whiny themselves. It’s always hilarious to see the press and Wall Street “throwing the toys out of the pram” as their reaction to Musk “throwing the toys out the pram”.

    It’s actually hard to tell if the negative part of this “analysis” is just uneducated regurgitating of FUD memes or deliberately presenting a silly straw man case as due to a positive bias.

    I really wish articles would show more balance by at least keeping the their negative side of Tesla as real, fair and balanced (and the positive too) – but then many are scared of being labelled, “fanboys” for doing so.

    • neroden

      Yeah, nobody reports on the actual negatives of Tesla. Their internal communications are awful — the left hand doesn’t know what the right hand is doing — with the result that communications with customers are also a mess — you call up and the person you’re talking to knows nothing about the problem you called in about last week. Cars literally get “lost in transit” and people can’t get their delivery dates nailed down, which causes problems with third-party financing. Tesla’s software engineering practices are substandard, and they seem to have poor regression testing; they introduce bugs by accident during software updates and often never fix them.

      But nobody reports on the actual negatives. Because while those are *problems*, the company will most certainly survive despite those problems. And the people who are spreading negatives about Tesla are mostly trying to pretend that it will go bankrupt, which it will not.

      • David Hrivnak

        By chance do you have a Tesla? I assume not as you would realize you are spouting nonsense. I have two and they are each the best cars in their class

      • Haggy

        Despite that, they do have problems. It’s just that if we lived in a world that weren’t so full of anti-Tesla commentary and somebody tried to get traction from real world complaints, they’d be laughed off as first world problems.

        It’s downright annoying that the app-as-fob isn’t 100% reliable for the Model 3. If it were any other company, owners would come across as whiny for suggesting that an occasional need to use a card key is an insurmountable ordeal.

        I had a long list of complaints that never made the papers. Fortunately, over the years Tesla has fixed almost all of them with software upgrades. But the pop-up for Homelink blocks part of the rear view camera screen, and covers the calendar and map buttons, which are the three things I’d most likely want when I’m about to back out of the garage. Why isn’t that front page news? Sure, I can tap it to make it go away, but why should I have to? The USB music interface is downright awful.

        The problem is that people like to harp on issues that aren’t real world concerns. I can start each day with a complete charge, and make a 400 mile trip with a 12 minute charging stop. In real life, I’d charge while stopped for lunch and wouldn’t have a delay at all. But that doesn’t mean that there won’t be a comment by tomorrow saying how EVs are impractical because they don’t have enough range, rather than recognizing how nice it is never having to stop for gasoline.

  • John

    A blind spot in this article is the focus on USA (and doubts about its potential sales) to the exclusion of the rest of the world. The US contributes roughly 18% of worldwide auto sales (http://www.oica.net/category/sales-statistics/), so the 200,000 rebate does not apply to over 80% of its potential market. In fact, sales haven’t even been opened to the 79% of the world besides US and Canada.

    And to respond to the comment about profit margin, how can the 3 NOT become more profitable, even the base model, as the cost of batteries inevitably declines, and Tesla’s growth model levels out?

  • realjjj

    You have to understand that 99^% of the Tesla coverage is fake news. Journalists do not understand EVs , are not informed on Tesla and they can’t be bothered to question what others print.
    Pre-orders, you are never going to convert all to orders, that’s a given. Cancellationsfrom folks that wanted the base model at full tax credits is a 1 time item. We always knew about the tax credit being phased out and the trolls have been talking about it for the last 2 years. We also need to remember that the world is a bit bigger than just the US.
    And ofc new orders today, given wait times, are gonna be mostly N America and mostly Long Range model so even 3k new orders per week would be fine at this stage.
    Other EVs, the Bolt is 2 feet shorter, lower perf, lesser looks, lesser everything. It’s not competitive with ICE alternatives. Not that they can make too many as GM loses money with ithe Bolt. M3 is at 35k to twice that, maybe not good enough value to be amazing but not to far from it – could get there in a couple of years. The Leaf is not bad but lacks in range, excitement and it is a different class of vehicle. And Tesla has other assets too,, Superchargers, Autopilot (grated, priced like AIDS meds in Africa but maybe that changes) and more. The EV market will grow much faster than Tesla and much faster than what its competitors are preparing for so Tesla is fine as long as they have good products.

    The cash burn is another press “lie”. The bulk of that cash is CAPEX, they invest in production capacity so there is residual value but the press is not gonna tell you that, their job is to sell papers.

    EV ramp is linked more to awareness and charging rates than cost. It’s not about cost to begin with, it’s about value.EVs are better vehicles, you can’t make an ICE equivalent to a well designed EV. Charging rates are important, we need to add 3h of highway driving in 15 mins ASAP and then go towards better.
    Anyway, the even bigger driver is car as a service, ownership is done for. EV sales will ramp much faster than people expect but car as a service will shift miles to electric and create new miles. Car as a service can easily triple or quadruple the number of miles traveled by car globally and all of those will be electric. For Tesla , that market is more than a few trillions per year and they can work to capture 1-2 trillion $ in yearly revenue long term.

    Beyond the silly noise in the press, Tesla is in a better position today than ever before.
    They exit 2018 at 6.5-8k Model 3 per week.They likely deliver north of 450k M3 next year and depending on margins they have between 2.5 and 5 billion net income in 2019. Assuming they don’t have major upgrades for S&X to push for 150k units per year there as that could increase their income by 1.5 billion.
    Tesla was a start up and it’s now exiting that phase as Model 3 gives them scale to grow into their OPEX. All the noise is a ridiculous last ditch effort from people that have some irrational reason to behave that way.
    Tesla is becoming highly profitable

    BTW EVs are better than ICE in many other ways.
    My list of ICE disadvantages, likely more can be added
    – value going forward
    – air pollution that causes between 3.5 and 7 million premature deaths every year
    – global warming
    – noisy,shaky and smelly
    – higher latency traction control
    – costlier performance
    – lazy, not as smooth and less fun of a ride, not as easy to drive
    – can’t refuel at home, can’t generate your own fuel
    – a lot less efficient so higher fuel costs
    – much more complex powertrain thus less reliable and with higher maintenance and repair costs
    – less freedom for aerodynamics and aeroacoustics
    – less freedom in managing the mechanical volume – to maximize cabin or cargo space
    – engine needs to warm up
    – no AC when engine off
    – will slowly become socially unacceptable – this impacts depreciation

    Drawbacks are few and solvable, awareness, charging rates, cost/range, infrastructure.

    The real problem with Tesla is that people know ICE but do not know EVs and even journalists are not interested in getting informed.

    • John

      I’m a Tesla fanboy too, but you have about 100 unsubstantiated opinions in your long post which any naysayer could pick on (e.g. “[EVs are] easier to drive”; “The cash burn is another Press “lie'” – the cash burn is a fact, but you may rationalize why it won’t be fatal). Suggest you provide facts, not declarations, otherwise your arguments sound arrogant and idealistic.

      • Haggy

        The case that EVs are easier to drive is an objective one. Drivers simply have more control with a single pedal. An ICE gives drivers a way to propel a car to a certain speed, after which it’s a combination of inertia, terrain, and converting excess energy into heat by dissipating it through brake pads, or by downshifting that allows a driver to control the speed. An EV driver simply accelerates as much as needed, decelerates to slow down or maintain speed, and has complete control, even when going down a 6% grade.

        Then there’s the more general sense of ease in that a driver can walk up to the car, open the door, get in the seat, put the car in drive, drive away, eventually press the brake to stop, and literally get out of the car and walk away that makes driving a Tesla easier. You need to add quite a few steps with most cars or you’d never get the doors open, the car started, and it would roll away and careen out of control in the end.

  • chris homan

    Good arguments except for the quote “The Model 3 is the most profitable electric car in the automotive industry, with a margin as high as 30 percent’. I do not think Tesla can make money with this vehicle at the prices required to maintain volume. Time will tell.

    • Let’s unpack your sentence. The most expensive part of a BEV is its battery, and Tesla has the lowest battery costs outside China. As Model 3 volume increases, it should realize lower prices on other components. The teardowns agree that it’s a profitable car to make.

      “The prices required to maintain volume.” Even with cancellations and pessimism, the Model 3 has a backlog of well over 250,000. Until recently it hasn’t been selling the car in stores, the reviews have been pretty favorable, the performance model should be great. *Nobody* else has even announced a mid-size BEV sports sedan. True, everyone is buying SUVs these days, but a lot of BMW 3/Audi 4/Mercedes C drivers will consider the Model 3, and if it gets through their heads that we need to stop burning fossil fuels yesterday, Tesla can take a huge slice of that market from them. The Model 3 is the best-selling BEV in the world, and it’s still getting started.

      • systemBuilder

        I bet they are paying 2x-3x the labor costs for the average north-american car, so 40-60 hours of labor per car.

      • neroden

        Even if Tesla is paying their workers more than average, they have less labor hours per car than the average North American car. We know this becaue we know a list of specific things which Tesla has *successfully* automated which nobody else has automated, and ways in which Tesla has massively cut down on the total number of steps in the production line.

        I won’t list them for you, but they’ve been mentioned in major articles.

    • Munro & Associates famously ate crow to confirm the German engineers’ claim that the Model 3 can be profitable, potentially achieving 30% margin. Look up their reports if you want to see the analysis. Porsche is considered to be doing well at 16-20%, so even at “only” 20%, Model 3 will be profitable, corroborating Tesla’s expectation.

      • chris homan

        Their 30% profit margin is inflated because 1) it does not include dealer expenses which they do in fact incur and 2) it does not include R & D which is needed to stay in business. Maybe some of the R&D should be excluded but not all of it. Since Tesla has a lot of expenses that are paid out of the 30% I am not sure it is a meaningful metric. In fact it appears those other expenses are well over 30% resulting in a negative net margin. As I said time will tell. If market demands for the $50k+ model 3s and they are left with demand for cheaper versions that will also diminish the 30% stated gross margin

      • The cred of three independent companies (one in Germany and two in the US), who all agree on a consistent conclusion of profitability based on actually examining the car, easily outweigh the cred one anonymous online poster with nothing to back him up.

      • realjjj

        The way it works is you have revenue, you deduct costs and you get gross margin. Then you have operating expenses and those are R&D, sales and marketing, administrative costs and so on. What’s left is operating income. After that you got interest, tax and one time items and what’s left is net profit.
        When these teardowns say margins, it means gross margins.
        If you wanna add operating expenses for Model 3 only , R&D is gonna be 100-200$ per unit and sales bellow 1k$ per unit but that’s not all the operating expenses.
        Anyway, if you look at Tesla next year. they are gonna have revenues between 35 and 40 billion, gross margins between 20 and 25%, operating expenses between 4 and 4.5 billion and what’s left is operating profit. So that’s between 2.5 billion and 6 billion operating profit. Tax, interest and all else might be 1 billion, not quite sure but you get the idea oh how it works.
        2020 is gonna be 50-60 billion revenue, depending on how fast they ramp Model Y. Margins around 25% or a bit bellow but not as low as 20%. Operating expenses would scale as they need to spend on growth so let’s say 6 billion, although they could afford 8 billion.
        They will provide outlook for Q3 next week so keep an eye on Model 3 gross margins. anything above 10% is passable at this stage but above 20% would be preferable. Close to 0 Model 3 gross margins would be bad.

      • Martin Winlow

        Sorry, but I simply cannot take seriously anything someone says who can’t be bothered to type ‘going to’ instead of ‘gonna’. So, despite its potential merits, all you have said is is ‘gonna’-rhoea, as far as I’m concerned!

      • Haggy

        I can’t take seriously somebody who ignores the fundamental points of an argument because the author uses casual speech terms in a written comment.

      • neroden

        Learn the difference between gross margin and net margin, please.

        When you have a positive gross margin and a negative net margin, what you need to do is *deliver more cars*, period, nothing more. Deliver more cars and you get a positive net margin.

      • Haggy

        Those factors are ones that are overlooked, but ironically are ones that can be favorable to Tesla. Even when the Model S was the only car they made, R&D was higher than the amount of money they lost, by far. They could have been profitable had they not been trying to grow the company. It’s the expense of projects such as the Model 3, which is now being made in quantities several times higher than their other models combined, that were ongoing for years while they had zero Model 3 sales to make up for it. The R&D isn’t so much a cost related to current models as it is related to all models current and future. When they had one model and were working on a second (with slightly lower anticipated sales) it was sign that growth was keeping them from profits. Moving from two to three, where the third is the first high volume one was also an expensive leap. In the future, Tesla will have a lot of cash flow to offset R&D. R&D need not increase proportionally with sales.

        Technically speaking, there are no dealer expenses. You can say that it’s nit picking, but when somebody lacks such a basic understanding of their business model that they’d make such a mistake, it has to make you question what they know about the company.

    • neroden

      Munro’s teardown claimed gross margins of 36% on the current (high-end) variant of Model 3 and predicted gross margins of 18% on the base Model 3.

      It’s becoming evident that Tesla has a lower variable production cost for its electric cars than anyone else. Cheapest decent battery cells, cheapest battery pack, cheapest motor, cheapest power electronics, etc.

      Tesla has very high fixed costs — but all they need to do is manufacture and deliver enough cars to cover them.