Tesla May Have Some Growing Pains

1

 

By Macklin Hogan

Here’s the inconvenient truth about Tesla: It’s bleeding cash. Despite all of the publicity, the praise, and the attention, the company manages to lose hundreds of millions of dollars annually. That’s been the case for quite some time, and a new player losing money is not at all unheard of. But Tesla has ridden the wave of startup sympathy for long enough, and at some point we’re going to start looking like them as a business rather than an idea.

The business case is pretty clear. Elon Musk, internet-proclaimed savior of all things, isn’t running a car company. He’s running a marketing department. The self-presenting door handles, the 17 inch screens, the crazy safety, and the falcon doors that grace Tesla’s Model S and Model X serve far more purpose in terms of marketing than actual functionality. Like a Samsung Galaxy phone, Tesla’s are designed around features that get people talking rather. But there’s a problem that’s starting to come to light: Tesla, as it exists now, can never be a big-time automotive money maker.

The first problem comes from their position in the market. They’ve capitalized on a market that has no competition save for a Nissan economy car and a Mitsubishi that looks like an alien. Tesla is the only premium electric vehicle in town, and Musk uses this as a selling point. The novelty of the electric car is what gets people talking — a Tesla is a symbol, a declaration to the world that you are on the cutting edge of technology. That’s great, but Tesla isn’t on the cutting edge. As Bob Lutz pointed out in his column in Road & Track, there’s nothing special about Tesla’s battery chemistry that makes it impossible to replicate. In fact, the constant delays and adjusted expectations we see when Musk talks about an upcoming model proves that the small-time automaker isn’t as efficient in building batteries as they let on. Their inability to effectively mass produce is the main reason why the Model 3 is taking so long — they can’t possibly build that many batteries yet. And the more common these cars become, the less special they seem. Tesla’s growth is self-limiting, because more than any other luxury automaker they are relying on exclusivity. Because at the end of the day, people willing to spend $100,000 on a car aren’t really in it for the gas savings.

Furthermore, as Musk builds up the electric car, he invites more and more competition. As Tesla racks up more and more sales, the big name players are starting to realize that they can sell electric cars. Audi is the first company to introduce a true Tesla-fighter, and though Audis may lack the panache of a Tesla, they are also not plagued with the quality concerns that have caused headaches for Tesla in the past few weeks, as Consumer Reports removed its recommendation for the Model S. Ignoring for the moment that the car already comes with a cheaply-furnished cabin more suitable for an Accord than a $100,000 executive sedan, the quality problems are the biggest indication that Tesla’s are still in the honeymoon phase. We excuse low rent interiors, quality concerns, and useless gimmicks because they’re Tesla. But when we stop giving them a free pass, the big boys are going to steal the market back. The bigger they get, the more of a problem this will be.

Their quest for publicity also poses some interesting risks. While the ability of cars to stay in their lane and avoid collisions with automobiles has allowed semi-autonomous travel since the introduction of the W222 S-Class in 2013, Tesla is the first automaker to market the features as “Autopilot.” The capabilities aren’t new, but unlike in a Mercedes the driver is not required to keep his/her hands on the wheel. Though the fine print does warn that the system is not responsible for any collisions, Tesla’s ambitious marketing has lead to an understanding that the vehicle is autonomous on the highways. That’s far from true, as the system still has extreme limitations that are clearly demonstrated in numerous “Autopilot Fail” videos. Alex Roy, who made headlines by taking the car with two friends cross country in autopilot mode, said that, “[the Tesla] drives like a dick! Had to save our ass like 3 times. It almost went into a ditch!” Not only is Tesla hurting it’s own reputation, but they are making a bad first impression for autonomous cars, putting the entire industry at risk. Had an established automaker endangered lives with their vehicles and marketing campaigns, there would have been mass outraged. If Tesla wants big-time profits, they’ll need to do big-time quality control and deal with big-time criticism.

Finally, Tesla has a distribution problem that will further inhibit growth. For an exclusive, exciting product, company stores make sense. Musk may have looked at iPhones and thought that a constantly sought-after product deserves a fully controlled user experience, including at the store. But for cars, that is easier said than done. Many like to point to attempts by BMW and Ford to make company stores and say that the execution didn’t work out, but it’s a good idea. I disagree, as I believe that this is a fundamentally bad approach to car sales. Somehow, Musk has managed to sell the idea that a fixed-price monopoly will work out for the better for consumers. While I understand that many people hate dealerships, the idea that giving one corporation a monopoly on vehicle sales will help is absolutely ridiculous. When, in history, has less competition ever benefitted the consumer? At Tesla’s current scale, it makes sense to invest in a fully controlled dealership network to expedite the spread of sales, but long term, it’s setting a dangerous precedent. Remember, Ford’s company stores failed because they couldn’t compete with the pricing of local dealerships.

Outside of the consumer problem, the business model of direct sales poses a severe risk to Tesla. As sales grow, there will be demand for inventory in the stores so that people don’t need to wait weeks to get their cars. With a traditional dealership layout, the automaker supports the inventory of a dealership for the first few months that the car is on the lot, at which point the dealership takes financial responsibility. This protects automakers from massive inventory risks, but Tesla’s direct model means that the risk inherent in inventory will be sent straight up the food chain. That puts Tesla at the mercy of the market, as downturns in the economy will force the company to bankroll a bunch of falcon-doored vehicles sitting on lots.

The more Tesla grows, the more we will start treating it as a business. That means less forgiveness from shareholders, an expectation of profits, and an end to the hype that has fueled sales. Tesla’s about to have some serious growing pains, and if Elon Musk doesn’t adapt his strategy soon the company will face a difficult future.