2019 was supposed to be easy for Tesla, but now it’s a circus

Elon Musk on

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Elon Musk on “Meme Review,” a YouTube show from PewDiePie.
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PewDiePie/YouTube

  • For Tesla, 2019 was supposed to be easier than 2018 – a year when the company was pushed “near death” trying to launch its Model 3 sedan.
  • Instead 2019 has been a three-ring circus, featuring yet another run in with the SEC, high-level executive departures, a sinking stock price, and questions from analysts about how the company will finance its operations.
  • Plus, Elon Musk is still tweeting.

The new year has started in a familiar, chaotic way at Tesla. It wasn’t supposed to be like this.

It was supposed to be that the company’s financial success at the end of 2018 changed its destiny and DNA, that it would start to behave like the “real car company” CEO Elon Musk so often talked about.

But just two months into 2019 analysts and former insiders are worrying that these new days aren’t looking much different from the bad old days. And sometimes they were pretty bad.

Recall, if you will, 2018

The beginning of the year was consumed by delays in the production of the Model 3, the upscale company’s more affordable sedan. There was “production hell” to make the cars, and then “logistics hell” to deliver the cars. There was a ramp-up that Musk said took the company “near death.”

Then, of course, there was the $20 million fine Musk had to pay for misleading the public about plans to take the company private, as funding was in fact not “secured,” and the $20 million fine Tesla had to pay for the same infraction. Meanwhile, all year, in a still seemingly never-ending line, executives and engineers and VPs left the company. There were layoffs and leaks, and of course there was that time Musk called a diver who helped rescue a children’s soccer team a “pedo.” It was quite a year.

But now it’s 2019. This year was supposed to be different for Tesla. Musk said there would no longer be any need to take big risks and “bet the company.” In Q3 of last year it turned a profit, and then it did so again in Q4, Tesla’s first consecutive quarters of profitability ever. Musk told investors on a conference call that the company would be profitable going forward. It would be a new day at Tesla Motors.

Recent events have called this turnabout into question. In violation of his SEC settlement, Musk is still tweeting material financial information that contradicts company forecasts. The SEC has given him until March 11 to show how he is not in contempt of the court ruling that followed his “funding secured” debacle.

Both the company’s CFO and general counsel announced their exits. And analysts still worry that the Tesla isn’t holding enough cash to finance its ambitious growth plans.

And in stark contrast to Musk’s statements about Tesla’s profitability going forward, on Thursday Musk told a closed call with select reporters that the company would not be profitable in Q1, maybe Q2. This accompanied the announcement that the company’s long-awaited standard Model 3 (at $35,000) would be available to order – a feat Musk said would require the closing of the lion’s share of its retail stores and Tesla’s third round of layoffs in the last 12 months.

Wall Street, for its part, sounds exhausted.

“Last year featured a number of idiosyncratic events that shaped the Tesla narrative and, just 2 months into 2019, it seems to be another year of significant volatility, driven by both economic factors and company-specific factors,” Morgan Stanley analysts wrote in a note to clients on Friday.

Welcome to a new year.

Have a story to share about working for or interacting with Tesla? Contact Business Insider’s Linette Lopez at llopez@businessinsider.com.

The car comes with caveats

The announcement of the standard Model 3 should’ve been a joyous occasion. The world has been waiting for the car since 2016. Instead, on the day after the announcement, Tesla’s stock fell 8%.

This is because the car came with some caveats. In order for Tesla to achieve financial stability and sell the standard Model 3 at its promised price, Tesla would have to:

  • Shut down all its retail stores and sell strictly online.
  • Have another round of layoffs sometime in March.
  • Forgo profitability for Q1, and possibly Q2.

Tesla also announced it would be cutting the prices of all of its cars 6% across the board. This worried analysts at JP Morgan who were concerned this would delay Tesla achieving a healthy gross margin of 25%. They also worried about the fact that Tesla’s electric-vehicle tax credits dwindle down to zero by the end of the year.

“Another anecdotal sign of softer demand stems from the fact that Tesla’s website Thursday evening was estimating new base version Model 3 orders could be delivered in 2-4 weeks, suggesting limited remaining waitlist,” they wrote.

Musk dodged questions about the vehicle’s margins or its demand on the call, saying that the company was “not going to answer questions like that.” He did mention that he had a “gut feeling” that demand was “probably half a million cars a year,” though.

Similar questions went unanswered on Tesla’s January’s Q4 earnings call as well, when exiting CFO Deepak Ahuja also waved away concerns about Model 3 demand as “not relevant.”

“We still have a long reservation backlog but I don’t think it’s appropriate,” Ahuja said.

But Wall Street thinks it’s appropriate, and the questions keep coming. Analysts already had concerns about Tesla’s cash position before all this, in part because the company paid a $920 million bond in cash, which grabs quite a chunk from the company’s almost $4 billion pile.

“It [the payment] should leave them with approximately $2 billion in working capital,” Gene Munster, the founder of venture-capital firm Loup Ventures, told Business Insider. “They’ll be essentially neutral for the March quarter … they need somewhere between $1 [billion] and $1.5 billion to run the company.”

Tesla isn’t just running the company in 2019, though; it’s expanding it. It’s building another Gigafactory, in China, where it plans to build Model 3s by the end of the year. It has not disclosed any details about financing or capital expenditures for the project.

In 2020 Tesla says it will start manufacturing the Model Y – a crossover based on the Model 3 – in its Nevada Gigafactory, but a source inside the factory told Business Insider a Model Y line has yet to be built. Tesla declined to comment on this point.

In February, Morgan Stanley analysts told clients that all these expenses mean Tesla will need to raise about $2.5 billion in capital in Q3 2019. They improved their forecast for 2019’s free cash flow from a loss of $809 million to a loss of $246 million in part because the company is guiding to such low capital expenditures for the year, regardless of expansion plans.

But, you know, that was February, and things are happening fast.

Failure to launch

That’s Tesla’s 2019 financial drama. Here’s its 2019 legal drama.

One of the men who was supposed to keep Tesla’s CEO Elon Musk out of trouble with the law this year just left the company, and within a week of that Musk was in trouble again.

On Tuesday, February 20, Musk tweeted that Tesla would make 500,000 cars in 2019, contradicting figures given to investors during the company’s quarterly earnings report in January (his tweet set the production rate about 25% higher).

Hours later Musk tried to correct the tweet, saying he meant this as an “annualized rate” and that “deliveries for year still estimated to be about 400k.”

But the damage was done. In his 2018 settlement with the SEC over a tweet claiming he had funds to take Tesla private (when he did not), Musk agreed not to be promiscuous with numbers on Twitter. In fact, his tweets were supposed to be approved by something of a Twitter czar – someone who would make sure they were legally on the up and up.

The SEC now claims that there is no such person, and that Musk is in violation of his settlement. This 500,000 tweet isn’t the only evidence the agency has presented either. In an interview with “60 Minutes,” Musk admitted there was no such person. That interview was included in the SEC’s filing to a judge arguing that Musk was in contempt of court. He has until March 11 to prove he is not.

Dane Butswinkas.

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Dane Butswinkas.
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Williams & Connolly

This situation calls for an experienced white-collar trial lawyer, and Tesla had one in Dane Butswinkas – a veteran attorney who was hired as the company’s general counsel in December.

Unfortunately, less than 24 hours after Musk sent that 500,000 tweet, The Wall Street Journal reported that Butswinkas would be leaving the company after just two months. The seasoned litigator from prestigious firm Williams & Connolly said Tesla wasn’t the right culture fit for him, and he went back to Washington, DC, where he said he’d continue to help the company from the outside.

A few days later, Bloomberg reported that Williams & Connolly would no longer represent Musk or Tesla, and that a new firm – Hueston Hennigan LLP – would take its place.

Naturally, this has worried Tesla investors.

“What has been clear over the past year is that Elon’s difficult to work with. I wish it was different but he’s not going to change,” Gene Munster, the founder of Loup Ventures, told Business Insider by phone. “The real problem with Tesla isn’t cash flow or hardware or competition … the problem is recruiting and maintaining talent.”

(Also earlier this month, Tesla’s Model 3 lost its Consumer Reports recommendation citing problems like loose door handles, cracked windows, and paint defects. The stock fell.)

It’s worth noting here that the SEC and Department of Justice are still investigating Tesla for whether the company misled investors and the public about Model 3 production numbers.

Star search

Butswinkas isn’t the only key figure who has left Tesla in the first few weeks of 2019. In that short time, Tesla also lost its VP of Global Recruiting and announced it would replace Ahuja, with a 36-year-old named Zach Kirkhorn, at the end of January.

Butswinkas will be succeeded by Jonathan Chang, an eight-year Tesla vet who once said, in a US courthouse, that the Tesla was “everything. Wow – it’s so much … ” and called it “the Apple of the car industry” and “much more” than a car company.

One former Tesla vice president, who spoke with Business Insider on the condition of anonymity, said these events are all too familiar.

The former VP, who left Tesla in 2016, said during their time at the company it was not uncommon for outside people to leave soon after starting, and for Musk to then appoint an internal “loyal follower” to replace them.

“People who have been [at Tesla] a while are very used to it. It’s shocking when people step in from outside.”

The former VP also said that they believe there’s no one at the company who can say no to Elon Musk, and that the appointment of Oracle cofounder Larry Ellison to Tesla’s board as an independent director won’t help matters.

Ellison “knows how to play the game,” they said, and is known in Silicon Valley for “pushing limits and interpreting laws and regulations in a beneficial way.”

Tesla declined to comment on this matter, instead pointing Business Insider to its press release welcoming Ellison. An email to Oracle regarding these comments went unanswered.

Ellison was an adviser to Elizabeth Holmes, the founder of now defunct fraud Theranos. Back in 2005, he gave $100 million to charity after shareholders accused him of dumping $900 million in stock ahead of a bad earnings report.

Ellison and Musk have been friends for years too, ever since Musk bought a McLaren after his first big business success in 1999. Ellison also had one of the rare sports cars, and so the pair would race together.

Musk eventually crashed his McLaren while showing it off to PayPal founder Peter Thiel.

Have a story to share about working for or interacting with Tesla? Contact Business Insider’s Linette Lopez at llopez@businessinsider.com.