Tesla Case Analysis General Environment/Industry Analysis

The automobile industry is changing quickly with more and more competitors entering into the EV market. Jaguar is introducing its I-Pace, a premium EV with a base model price under $70k. Audi is introducing its E-Tron Quattro E-SUV this year and an E-Tron Sportback next year. Porsche is bringing its Mission E Cross as its second EV. Mercedes plans a 2018 EQC Electric SUV. And then there are the lower priced models—the 2019 Hyunai Kona Electric, which will have a 250 mile battery charge range. The Chevy Bolt EV has a base MSRP of $37,495 this year. GM, Nissan and Volvo all have plans for EVs—as does Volkswagen, BMW, Toyota, Mazda, Infiniti, Peugot, Citroen and Ford. Virtually every major auto manufacturer is entering the EV space either this year or next—which means Tesla’s novelty is soon to be no more (Spiegel, 2018). Tesla was the first to bring the all-EV to market—but the market has seen Tesla’s popularity and is responding accordingly. All major manufacturers are investing in EV, so that even if it does turn out to be only a passing fad, competition will be stiff for as long as the trend lasts.

A look at the global economy, the industry, what competitors are doing in the field of EVs, and what sort of following or interest their vehicles are having on consumers all show that the industry is changing rapidly and that Tesla by no means holds a dominant position. While investors are happy to invest in a growth company that is forward-looking and promoting sustainability, consumers may not be so enamored of one EV brand over another if they all produce the same level of style, luxury and efficiency.

Company Analysis

Tesla is a forward looking company and one of the reasons its stock has enjoyed such a significant run-up is that so many stakeholders view it as a growth company. Musk continuously sets high goals for the company and though they are not always met on time, stakeholders are pleased with the forward-vision of the CEO. Tesla is viewed as having a high degree of interest in corporate social responsibility and the need for companies to “go green” so as to save the world from global warming and climate change. Musk has stated as much in the vision and mission statements of the company over the years. Tesla’s mission statement is: “to accelerate the advent of sustainable transport by bringing compelling mass market electric cars to market as soon as possible” (Tesla, 2013).

By building its brand around the idea of sustainability, Tesla has identified both a market and a product for its aim. With the notion of sustainability serving as its reason for being, Tesla aims to meet the needs and desires of its green consumer base, which wants above to see the company remake the modern world in their image and likeness. The only problem is that they may be far more idealistic and utopian in their vision than reality will care to tolerate—at least at present. Tesla’s CEO and supporters show no signs of being abated by reality, however: they are driven and adamant about promoting the sustainability concept. Sustainability serves as the foundation of the company’s mission and vision, but reality shows that Tesla faces significant hurdles in terms of liquidity, operating efficiency, capital structure and profitability. These are the real challenges that Tesla must address in order to achieve sustainability—not only for the planet but for its own business model.

Problem Analysis

In March, 2018, Tesla’s credit rating was downgraded by Moody’s due to the firm’s incessant cash burn, failure to meet production goals, and the likelihood that it would soon need to raise more capital (Weinstein, 2018). Tesla bonds have been sinking ever since, with Smith (2018) reporting a veritable “free fall” with Tesla notes hitting “a low of 86 cents on the dollar.” Moody’s analyst Bruce Clark stated that Tesla “faces liquidity pressures due to its large negative free cash flow and the pending maturities” (Weinstein, 2018).

Tesla is expected to undertake a substantial “near-term capital raise in order to refund maturing obligations and avoid a liquidity short-fall” (Weinstein, 2018). The problem is rooted in the fact that after 15 years of operating, Tesla has yet to make an annual profit. The $2 billion it will likely need to raise this year to cover its cash burn along with its $1.2 billion...

According to Morgan Stanley’s projections, Tesla’s short-term liquidity crisis is just around the corner. Tesla’s working capital is negative—substantially so--$2.27 billion as of March, 2018 (Denning, 2018). The Economist estimated Tesla would need upwards of $3 billion in capital injection by the end of the year. Musk responded with taunting tweet: “The Economist used to be boring, but smart with a wicked dry wit. Now it’s just boring (sigh). Tesla will be profitable & cash flow+ in Q3 and Q4, so obv no need to raise money” (Durden, 2018). Tesla pointed out in its 10-Q nonetheless: “We may need or want to raise additional funds in the future, and these funds may not be available to us when we need or want them, or at all. If we cannot raise additional funds when we need or want them, our operations and prospects could be negatively affected” (Tesla Form 10-Q, 2018, p. 41). Tesla clearly has to get its house in order, if only to meet its financial obligations. To get the house in order, Tesla may need to clean house—starting first and foremost with Musk and anyone else preventing the company from staying focused and on track with the here and now.
Recommendations and Implementation

Recommendation #1: Make Good on Promises

Tesla has to make good on its promises. Musk promoted the Model 3 as an EV for the middle class consumer—an affordable variation of the more upscale Model S, but still stylish enough to pack a wallop. The company took deposits that helped boost the share price for shareholders—500,000 pre-market orders placed with a reserve of $1k for each car, which brought in a quick, cool half a billion dollars (Morris, 2018)—but those waiting on the $35,000 EV have yet to be satisfied (Trefis, 2018). Delays in production and design have restricted Tesla to only bringing to market a higher-priced Model 3. The base model that was promised has yet to materialize, and if it does not appear soon, Tesla may find itself at the rear of the EV pack—especially as new entrants into the field come with EVs that match Tesla’s products stride for stride. Tesla was the first mover, but drawing first blood in the market doesn’t always predict the winner. Tesla and Musk both have to cease with the endless promotions of products that are still years down the line (an EV semi, for instance) and focus on fulfilling its promises to the middle class—right now. “Production hell,” as Musk has called it (Boudette, 2018), is no excuse and should not be offered as one when both investors and consumers are beginning to question Musk’s veracity. The latest Twitter stunt in which he pledged to take the company private at $420 a share just so he could “burn the shorts” proved how unreliable he can be when it comes to making promises of a high order. Was Tesla lying when it claimed it would be offering a $35,000 EV—just like it was lying when it claimed it had “funding secured” (Levine, 2018)? For the sake of the company’s future, it has to get that $35,000 EV to market now and it has to be able to sell it at a profit. Making up margins in volume is no guarantee at this point, especially as the competition has heated up, with every company from Nissan to Toyota to BMW getting involved in the EV market.

Recommendation #2: Either Lobby for More Tax Credits—or Quit Depending on Them to Move Vehicles

Tesla has been relying on tax credits to incentivize buyers. Currently in Norway, which is Tesla’s biggest European market, consumers pay no import tax or any of the purchase taxes that apply to non-EV cars—which is a big incentive (Tesla 10-K, 2018, p. 22). In the Netherlands, sales are soaring this year because the tax incentive there is ending and companies want to obtain a Tesla Model S under the current tax rate of 4%, which is climbing to 22% in 2019. Unless something happens to keep these incentives in place, Tesla’s luxury EVs may be unaffordable to its target market. The same problems are being encountered in the U.S. and in Canada, where Tesla has recently sued the government for discrimination in…