- Tesla’s Q3 earnings were dreadful, but the Model S and X are going to set a sales record for 2017. Tesla is a good position to build a strong business in China. CEO Elon Musk is an inspiring, front-line leader.
CEO Elon Musk says Tesla is in production hell with its Model 3, and last week, the company reported the largest quarterly loss in its history as a public company.
The markets wasted no time in hammering the carmaker’s stock down below $300. Earlier in 2017, Tesla has surged toward $400.
Adding insult to injury, the Republican tax bill, if passed, would eliminate a $7,500 federal tax credit that every new Tesla owner has been able to claim.
It looks like everything is going wrong for Tesla, all of the sudden. But while the headlines are awful, there’s some underlying and overlooked good news.
The lucrative luxury-car business is on track to set a sales record in 2017.
- Carmine gallo
With all eyes on the Model 3 and its production woes – Tesla said it would be building 5,000 a week by December, but that target has been pushed back to next March – it’s easy to lose sight of the rest of Tesla’s business.
Yes, if Tesla can deliver on 500,000 pre-orders for the Model 3, it will rake in a huge amount of revenue. But in 2017, the company is on track to sell 100,000 Model S sedans and Model X SUVs, vehicles that go for around $100,000 on average, much more than the highest-priced $44,000 Model 3.
Tesla’s margins on the S and X are sort of speculative because the company has lost money for pretty much its entire existence. But the profits could be as high as 25%. That’s superb for the auto industry, a margin more like what Apple garners for iPhones.
To savvy observers of Tesla, this means that the company has a life raft, in the event the Model 3 causes so much trouble that it threatens the carmaker’s future. As long as Tesla can maintain S and X demand at around 100,000 annually -and with global sales, that should be possible – it can count on a baseline of roughly $12 billion every year (about $3 billion per quarter).
A successful Model 3 would mean much higher annual revenue, but it’s unlikely that Tesla will make as much money on the vehicle, so it would have to sell a lot of 3s to make up for the profit gap with S and X.
The bottom line is that the “core” Tesla business is, on paper, sustainable. It will have that to fall back on for some time.
Tesla’s China strategy is a departure from business-as-usual.
Automakers such as General Motors and Volkswagen have strong businesses in China. In GM’s case, the automaker has been active in the Middle Kingdom for decades and can now see the potentially gigantic Chinese market – it could represent 40 million in yearly sales – as a counterweight to the US market. US sales can slide, but China will make up it for it.
Tesla could operate according to the same logic. But while GM, Ford, VW, and other automakers have to enter into joint ventures with Chinese companies to sell vehicles in the country, Tesla has been in talks with the government about establishing its own factory in an enterprise zone.
Tesla would still have to pay a 25% tariff on every car it sells, but it would avoid the JV challenge and be able to do things its own way at its own factory. The game plan is to start production in 2020.
As a manufacturer of all-electric cars, Tesla faces an uphill battle in the US. Almost all of the 17 million or so vehicles that will be sold in 2017 will run on gas. It could be decades before the balance shifts.
But in China, the government wants to lead the world in electric cars and will do what it takes to rapidly nurture a big EV industry. Tesla is in an ideal position to capitalize on China’s policies.
Elon Musk hasn’t lost his ability to rally the troops and inspire the world.
- Reuters/Mike Blake
Sure, Musk habitually overpromises and underdelivers, but he doesn’t have much to gain by perfectly living up to expectations. He shoots for the stars because that’s the only way he knows how to roll.
We could complain that, as CEO, he shouldn’t be camping out on the roof of the Gigafactory in Nevada while the Model 3 roadblocks are cleared, and he surely shouldn’t be reprogramming robots on the factory floor.
But his mojo reminds me of a story I once heard about Honda.
Honda is known as an engineering-driven company. Honda also makes everything from lawn mowers to private jets. At an event some years back, an auto executive was showing off some mowers, snowblowers, motorcycles, and cars. An effort was made to fire up a mower, and it wouldn’t start. So the exec took a look at the engine, made an adjustment, and boom! Started right up. Respect!
As Musk put in on a conference call after its most recent terrible earnings, he likes to “lead from the front.” That would be an empty statement if he wasn’t actually constitutionally inclined to get his hands dirty. I have a lot of respect for other major auto CEOs, but most of them aren’t attaching dashboard in assembly plants.
Meanwhile, as Tesla struggles it’s easy to forget that Musk is also launching rockets at an impressive pace at SpaceX and is digging a tunnel under Los Angeles to alleviate traffic. Some critics see his other companies and side projects as distractions, but to the public, they’re inspiring.
More so when we consider that Musk isn’t planning a mission to Mars to elevate his self-image. He genuinely believes humans have to go. My kids know I cover Tesla as a journalist, but they’ll often, out of nowhere, just declare that Elon Musk is a genius. His reputation precedes him and his vision inspires, and in many ways, those are Tesla’s most valuable assets.