- Screenshot via YouTube
Tesla reported first-quarter earnings last week and dutifully filed a form 10-Q with the Securities and Exchange Commission.
The form contains a section called “Risk Factors,” and Tesla’s reads like a horror story.
For example (and I’ve edited this way down – you can read the entire document here):
- We have experienced in the past, and may experience in the future, significant delays or other complications in the design, manufacture, launch and production ramp of new vehicles … We have experienced delays or other complications in connection with new vehicle models in the past, such as production ramp delays for Model S in 2012 and the All-Wheel Drive Dual Motor Model S, and the launch and ramp of Model X. We may experience delays in realizing our projected timelines and cost and volume targets for the production, launch and ramp of our Model 3 vehicle, which could harm our business, prospects, financial condition, and operating results. We have no experience to date in manufacturing vehicles at the high volumes that we anticipate for Model 3, and to be successful, we will need to develop efficient, automated, low-cost manufacturing capabilities, processes, and supply chains necessary to support such volumes. We may be unable to meet our growing vehicle production and delivery plans, both of which could harm our business and prospects. We have limited experience in delivering a high volume of vehicles, and no experience in delivering vehicles at the significantly higher volumes we anticipate for Model 3, and we may face difficulties meeting our delivery and growth plans into both existing markets as well as new markets into which we expand. If our vehicles or other products that contain our vehicle powertrains or battery packs fail to perform as expected, our ability to develop, market and sell our electric vehicles could be harmed. [W]e do not maintain long-term agreements with a number of our suppliers. This limited supply chain exposes us to multiple potential sources of delivery failure or component shortages for the production of our products. Our future growth is dependent upon consumers’ willingness to adopt electric vehicles, especially in the mass-market demographic that we are targeting with Model 3.
Any of these would be a stunning admission for an established automaker, but for Tesla this is quite literally business as usual. The “Risk Factors” sections of its 10-Qs always look like this; they go on for pages and pages. A big carmaker such as General Motors won’t even go into risk factors on a quarterly basis: GM knocks it all off in a couple of pages in the annual 10-K statement to the SEC, and in 2015, the detailed risks were mostly around issues related to foreign-currency exchange.
Get better at building cars
It’s been obvious for some time that Tesla is having a hard time learning how to build its cars: The Model S was delayed and has endured at least one fleet-wide major recall for a seat-belt problem. The Model X was overdue by three years, and early production was recalled because a third-row seat could collapse in a collision.
The mass-market Model 3 was unveiled in March and promptly racked up 400,000 preorders – nearly all of Tesla’s planned annual production, by 2020, of 500,000 vehicles. So in Tesla’s first-quarter shareholder letter, CEO Elon Musk announced that the timetable on that level of production would be advanced a full two years, to 2018.
- BI Graphics
This from a company that had to run flat out to deliver 50,000 vehicles in 2015. In 2016, Tesla is guiding to a delivery target of between 80,000 and 90,000 vehicles.
Formerly, the Risk Factors listed in Tesla’s 10-Ks always seemed to be so extensive because the automaker is deeply invested in transparency – Musk and his team do their best to answer hard questions rationally and directly – and because it wanted to present itself, even after a decade in business, as a startup facing huge risks but also promising massive gains.
But now they have to be read more closely, and with an eye on Tesla’s evolving status as an aspiring manufacturer of hundred of thousands of electric cars.
And then investors in the company have to ask themselves if they’re being adequately compensated, in expectations of future growth and a much higher share price, for taking on risks that by the standards of the global auto industry aren’t just extraordinary but in some respects are unprecedented.
Let me mention a risk factor that I didn’t list above: earthquakes. Tesla’s factory in Fremont, California, is in an earthquake zone, as is its Gigafactory in Nevada. As we learned from the earthquake/tsunami/nuclear disaster that struck Japan, natural disruptions on that scale can devastate automaking, as Toyota and Honda discovered, losing large amounts of market share in the US alone. The rest of the US auto industry doesn’t operate plants in locations where the ground predictably shakes.
We could continue to overlook many of the risks Tesla confronts if Musk hadn’t so radically advanced the production schedule. That move has intensified everything.
Worse, there’s no way for Tesla investors and observers to calibrate how Tesla will manage the biggest of these risks, which relate to the Model 3. Model 3’s won’t realistically start to roll off the assembly line in volume until 2018.
Sure, Tesla is different. But as far as the risks go, it can’t remain different forever. At some point, many of these risks, which could be catastrophic and destroy upwards of $30 billion in market cap, need to decline.