Does Elon Musk have a dark side?
Tesla bears – many of them are people I respect; some of them – my dear friends – would point out that Elon Musk has another side, a (cheating) side like Elizabeth Holmes.
Holmes was the CEO of Theranos, a Silicon Valley startup with an impeccable board of directors, including two former US secretaries of state, Henry Kissinger and George Shultz. At the height of its hype, Theranos had a $ 10 billion private market value. Holmes graced the covers of business magazines, spoke at a TED conference that was watched by millions, was a role model for young women, and had a reputation as a visionary who set out to improve the lives of billions with a product capable of performing hundreds of medical tests from a tiny drop of blood.
Holmes may have had great aspirations, but the difficulty or impossibility (at least today) of what she was trying to do overtook her and she had to resort to outright deception and fraud. Theranos was burnt in flames.
What Tesla Bears Say
Tesla bears claim that we are blinded by Elon Musk’s Iron Man side and do not see Elizabeth Holmes’s side: that in addition to promises that he does not intend to fulfill, he is actually playing a fraudulent game. Tesla Bears point out that Elon Musk committed a securities fraud (stock manipulation) when he tweeted that he was personally taking Tesla for $ 420, with “secured funding.” It was a lie to scare short sellers in Tesla stock.
On another occasion, Elon Musk personally called the short seller’s employer, threatening the employer with legal action if the employer did not stop the short seller from posting negative research about Tesla on Seeking Alpha and Twitter. (Elizabeth Holmes used a similar tactic.)
Tesla bears also point to Elon Musk’s rescue of SolarCity, a large debt-ridden, unprofitable solar power company with a poor business model run by Elon Musk’s cousin. It would have gone bankrupt in a few months if Tesla shareholders hadn’t bought it. A bankrupt SolarCity would damage Elon Musk’s reputation as an Iron Man who excels at everything, and thus spoil Tesla’s valuation and cut off the company’s ability to issue cheap stock. Rescuing SolarCity, Elon Musk blamed Tesla to burn money and billions of dollars in debt, which was already trying to break even.
Tesla bears questioned Musk’s state of mind (sanity) when he called out a British diver rescuing Thai children trapped in a cave on Twitter.
I want to remind you that I began this essay by quoting F. Scott Fitzgerald and explaining that in our analysis of Tesla and Elon Musk, we needed to keep “two opposing ideas in mind at the same time and still be able to act”.
There are many opposing ideas here
Skeptics have many reasons for their arguments against Tesla. History is on their side. Apart from Tesla, the last car company to be founded in the United States and survived to this day was born in 1930, and two car companies went bankrupt during the 2008 financial crisis. Yes, the manipulation of Elon Musk’s shares with the “funding secured” tweet was simply immoral and illegal. We can talk about it, but the outrage people feel about this behavior (including yours truly) has nothing to do with Tesla’s future. Elon Musk paid the SEC fine and still runs the company. (Any other CEO would probably be fired and possibly go to jail.)
However, this issue raises a more important question: Is Musk an asset or a liability to Tesla? Well, it can be both. On the one hand, he is a genius and visionary who cares deeply about Tesla’s success and is willing to spend the night in a factory to succeed. But he is also an incredible micromanager and benevolent dictator who runs four companies. He’s overworked and exhausted, and that explains to some extent (though doesn’t excuse) his erratic behavior and his tweets.
Tesla and Apple
If something happens to him or is removed from Tesla, what will happen to the company? Will Tesla turn into Apple after firing Steve Jobs in 1985 or Apple in 2011 after Steve Jobs’s death? The 1985 Apple withered because it did not have the breadth of products or depth of management needed to replace the charismatic visionary. Steve Jobs left a leadership and vision vacuum when he was fired, and John Sculley – Pepsi’s chief executive – fell short of the challenge.
Apple in 2011 was in a much stronger position and on a much broader basis, with a stronger leadership team. Tim Cook was chosen by Steve Jobs and has been preparing for years to replace him. And while Apple thrived as a business after Jobs left, the company’s subsequent innovations were highly evolutionary, not revolutionary. He basically improved on the product categories he developed under Steve Jobs, but did not come up with a significant new product category (other than the Apple Watch). In fact, he tried and still failed to manufacture the car.
Apple’s example shows that replacing a benevolent visionary dictator is very difficult, but possible. Success depends on the timing, competitive and financial strength of the company, depth of management, and luck. Tesla today seems to lack management depth – it is losing executives faster than I am losing hair. Today Tesla is closer to Apple in 1985 than it is to Apple in 2011, and can hardly afford to lose his overworked genius-benevolent-dictator.
Tesla’s key to success
Tesla’s success will be determined by the financial viability of its business: can the business finance itself? Tesla’s success as a stock will ultimately depend on the company’s earnings.
Tesla Bears claim Tesla has quality and service issues. Some Tesla Model 3s that were hastily released to meet production targets were poorly built. It looks like Tesla Model 3 product quality issues have been resolved. Even one of Tesla’s biggest critics, Bob Lutz, the former CEO of GM, raved about the Tesla Model 3’s design and build quality.
Tesla is growing at the pace of a Silicon Valley startup, but in addition to writing a lot of software, it is building Gigafactories, a global network of charging stations (Superchargers), service centers and stores, and is developing its own autopilot system – all of which compete with companies that are better are capitalized and are at the 50th iteration of their ICE (internal combustion engine) products – and therefore have a more stable quality.
Every time Tesla stumbled, and it stumbled many times, it would get up, regroup, and move forward. My personal experience with Tesla has been excellent. But I read that Tesla is still experiencing growing service issues today. It makes sense – its serviceable vehicle fleet has more than doubled over the past year and a half. The Tesla technician who installed my Tesla Model 3 loudspeaker told me that its scheduling software is still in need of work as it is sent to meetings that are 50 miles apart. This doesn’t sound like a permanent problem, though; a quick software fix should fix this problem.
One very important thing Tesla has (and Theranos doesn’t) is an incredible product and people who are fanatical about it. Tesla vehicles are superior to other electric vehicles (EVs) and in fact most of the non-electric alternatives made by competitors at the moment. Talk to any Tesla owner and he (usually he) will rave for hours about how much he loves the car. I have yet to meet a GM or Toyota owner who has the same bigotry as a Tesla owner.
Profitability and the future
This is why Tesla spends nothing on advertising (while ICE (internal combustion engine) carmakers spend billions) but has more sales force than all GM, Ford and Chrysler dealers combined – Tesla has fanatical owners, and its sales force grows with every car sold.
It’s really hard to say today if Tesla will become profitable before investors and capital markets lose patience and willingness to fund their losses. By purchasing SolarCity, Tesla has certainly made its journey more difficult. But the company is not sitting still and is trying to cut costs. Here’s one example. The Tesla Model S had two miles of electrical wires, the Tesla Model 3 has “only” one mile, and the Tesla Model Y is expected (if it is actually implemented) to have only 100 meters of electrical wires.
If Tesla can increase its production, then the cost per car should come down. Let me explain. The cost of a car consists of two components, fixed and variable. Variable costs include batteries, tires, engine, etc. These costs usually do not decrease much (although they do decrease) as more cars are produced.
Fixed costs such as running a Gigafactory and developing software are dropping on a per-car basis as Tesla ramps up production. Assuming the demand for Tesla vehicles continues to grow, the company’s gross margin (per vehicle) should increase and thus achieve profitability.
However, even in the worst case scenario, if Tesla runs out of money and investors in bonds and stocks lose faith in the company, it is unlikely to follow the fate of bankrupt car companies (think DeLorean or Tucker). It will be bought by an ICE carmaker or a Silicon Valley company (Google or Apple). It would save them billions in R&D and scale-up losses. Investors, of course, will still lose money, because at that moment the price of the problem purchase would be only a fraction of today’s price.
This article is part 10 of an analysis of the 11-part series Tesla, Elon Musk and the Electric Vehicle (EV) Revolution.
All parts: part 1, part 2, part 3, part 4, part 5, part 6, part 7, part 8, part 9, part 10, part 11.
CEO of IMA, is the author of Active Value Investing and The Little Book of Sideways Markets. The books have been translated into eight languages. Forbes magazine called him “the new Benjamin Graham.”
(Translation: Vitaly Merkulov, “Shareholder of the XXI century” – myinvestpro.ru)
Read other interesting articles:
The Electric Vehicle (EV) Revolution: Part 9 – Elon Musk’s Bold Promises and Tesla’s Future
The Electric Vehicle (EV) Revolution: Part 9 – Elon Musk’s Bold Promises and Tesla’s Future
The Electric Vehicle (EV) Revolution: Part 7 – A Key Point in Developing and Selling Electric Vehicles
The Electric Vehicle Revolution (EV): Part 6 – ICE Car Survival Is Not An Obvious Fact
The Electric Vehicle (EV) Revolution: Part 5 – Electric Vehicles, the Environment and the Future of Oil
Tesla’s risky battery shouldn’t bother you [Tesla — часть 4]
How electric vehicle range alarm turns into a gold rush for EV charging stations [Tesla — часть 3]
Why a regular car versus an electric car (EV) is like a horse versus an internal combustion engine [Tesla — часть 2]
Tesla, Elon Musk and the electric vehicle (EV) revolution [Tesla — часть 1]
Why I Don’t Believe in Uber: An Analysis of the Economy of Driver Revenue