- Tesla CEOElon Musk has been right about electric cars needing to be cool, but he’s been wrong about several other major aspects of the transportation business.
- Musk doesn’t like to be wrong, so he’s stuck to his guns when it comes to pitting Tesla against its competition and doubling down on various futuristic ambitions.
- His biggest mistake was in not understanding that self-driving cars would both steal electric vehicles’ thunder and create a new business opportunity that Tesla couldn’t easily pursue.
Tesla CEO Elon Musk is clearly feeling some stress. At Tesla’s annual shareholder meeting on Tuesday, he at times struggled to control his emotions while still rocking a very chic Belstaff motorcycle jacket. (Musk’s fashionable jackets should have their own Twitter account.)
Investors in attendance mostly adored it. And who can blame them? Tesla shares have been very, very good to early risk-takers – they’re up over 1,000% since the carmaker’s initial public offering in 2010.
Musk’s heart-on-his-sleeve – or, more frequently, heart-on-his-tweets – approach is nothing like what we see from other auto industry leaders, who tend to be steely, wizened veterans of what Musk has come to understand is actually a challenging business.
His attitude is refreshing, up to a point. It has been instrumental in leading Tesla to a market cap that’s higher than those of established car companies that sell many more vehicles every year and post regular profits. (Tesla has never notched a year in the black.)
Musk’s critical insight into electric vehicles was his major triumph; I’ll explain exactly what it was in a second. But the CEO is also, by his own admission, prone to hubris, the classical flaw of tragic overconfidence. Of late, Musk has been wielding his hubris – which is by no means an unusual behaviour – as a sort of propaganda tool, to both rally his troops and maintain excitement on Wall Street and in Silicon Valley and the media.
In response, we should give credit where credit is due. But we should also call Musk out on his whoppers. And there were a few on display when he spoke to investors on Tuesday.
The Major Muskian Insight: People want a sexy electric car.
Before Tesla came along, electric propulsion was well understood by the auto industry. Batteries and electric motors had been around for a century, but a variety of technical and economic roadblocks prevented them from supplanting the versatile internal-combustion engine, or really even competing with it effectively.
As Bob Lutz, General Motors’ former product czar and industry veteran, once put it: When you run out of charge, it’s difficult to walk to the local filling station for a five-gallon can of electricity.
Musk couldn’t care less about the traditional auto industry. In the time I’ve been covering the company, I’ve rarely heard him refer to another carmaker or executive, beyond evoking Henry Ford.
That’s obviously a positive and a negative. The big plus is that Musk thought electric cars should look cool and go fast, while everybody else assumed their logical market would be virtuous, environmentally preoccupied customers who placed no value on cool and fast.
For Tesla, this has meant that the company sells expensive, lovely, high-performance vehicles that excite the senses while also saving the planet. They are the playthings of wealthy, tech-savvy true believers – an important market for a company that has satisfied the enthusiasms of its core customers while being objectively pretty bad at actually building cars.
All Tesla cars are halo cars, and that halo excuses everything that goes wrong. Musk knows this and uses it to great advantage. There’s no argument that it’s brilliant.
But sometimes he goes too far.
Where Musk is wrong, big time: Only Tesla’s cars have soul.
Musk likes to take shots at the traditional auto industry, using horribly clichéd David-versus-Goliath rhetoric that’s really beneath him but serves his purposes. Tesla has been around for 15 years and sold 100,000 vehicles last year – but it’s still a plucky startup that big auto wants to kill, Musk claims.
On Tuesday, he rehashed a familiar complaint about carmakers and their cars: that non-Tesla vehicles are the soulless output of bean-counters and marketing departments. He then choked back the tears and thanked his employees for working ridiculous hours to overcome his own inability to smoothly manufacture a midsize four-door sedan in the Model 3 – a genre where, say, Toyota could crank out millions of units with its eyes closed and no extra shifts.
I’ve driven hundreds of cars, ranging from subcompact econoboxes to Ferraris and Lamborghinis (as well as all of Tesla’s vehicles), and I can safely say that it’s insulting to deprive the people who have devoted their lives to automobiles of their souls.
Take a drive to Lordstown, Ohio, for example, and look at the huge banner of the Chevy Cruze sedan that hangs on the side of the factory. Discuss the design of a Lamborghini SUV with the guy who dreamed it up. Aim a Porsche 911 into a corner. Drop the convertible top on a Mazda Miata. Sit back and enjoy a freeway drive in a Cadillac. Witness the whoop and roar of fans when Ford wins Le Mans.
There’s no point in going on, because Musk’s comment was so profoundly misguided. Worse, much of the auto industry, which shares his view that cars are hard and bankruptcy is always just a downturn away, is rooting for Tesla.
As Ford’s chairman, Bill Ford, once told me, it’s a tough business. But the people who have chosen it truly love it.
Tesla will be profitable on simple terms that anybody could understand.
Musk always seems as if he’s weighed down by big thoughts that he struggles to express. When it comes to the stuff he cares about, engineering and design, this makes sense.
When it comes to the details of running a business, Musk struggles to express small thoughts that bore him.
Tesla’s potential to sustainably make money is Exhibit A. It has rarely happened. But profits in the car business are well understood. Basically, if you can sell the vehicles for more than it cost you to make them, you produce net income. It really is that simple.
Musk tends to dance around this issue. Recently, he’s been more adamant about Tesla posting profits, arguing that investors are reasonable to expect them. But he doesn’t say, “Tesla will make money, full stop.” He throws in some finance-speak about GAAP accounting and being cash-flow positive. He says the money-losing trend will reverse in Q3 or Q4 of 2018.
That dodges the question of whether Tesla can convert a gross margin of X on its vehicles to a net margin of Y. More importantly, it omits detail on whether that margin will be, for example, 20% or 1%. In the aggregate, Tesla could swing to a profit if it sells emissions credits and doesn’t push for a high level of sustained weekly vehicle production.
Tesla has targeted a weekly production rate of 5,000 Model 3s by the end of June, but being able to build that many cars and actually building them are different things. The game plan now appears to build expensive versions of the Model 3 while staving off the certainly less profitable reckoning with the base version, priced at $US35,000.
By pulling these various levers and pushing off the el cheapo Model 3, Tesla might very well post an optically appealing profit for a few quarters. But at some point, the cash burn will resume, and then all bets are off.
Tesla will create a revolution in manufacturing.
Again, Musk has a vision that isn’t translating into reality.
It’s hard to understand why every Tesla vehicle has to be some kind of nutty science project. The Model S was a relatively basic sedan that went through production agony for years. The Model X’s “falcon wing” doors have been a study in why gull-wing doors have always been a bad idea. The Model 3 is the type of vehicle that Honda and Toyota have been building in mega volumes since the 1980s.
Musk thinks in terms of software, and that means endless debugging in a virtual realm. Manufacturing starts from a different premise: get it right the first time in the real world. Manufacturers who try to disrupt established processes do it by coming in cheap. But they still try to get cheap right.
Musk continues to grapple with getting expensive wrong. The easy fix would be to adhere to auto industry best practices that enable the major carmakers to build millions of vehicles every year.
Instead, Musk wants to reinvent the entire system, using a higher level of automation. It’s been a baffling and expensive botch with the Model 3. Almost a year into production, Tesla is still putting assembly lines together at its factory in Fremont, California. The operational line has gone through a sequence of shutdowns.
It’s a study in how not to build cars, but it has had the effect of focusing ever more attention on Tesla and sucking everyone into the saga. Ford, by contrast, completely redesigned the construction of its F-150 pickup truck a few years back and is now on track to make almost 1 million a year with no drama whatsoever, even in the face of a recent supply-chain crisis.
Musk is good at resetting expectations, so despite the numerous Model 3 production failures, he’s now talking up all the new robot-rich Gigafactories that Tesla will build in China and Europe. Be prepared for them to be thoroughly and hubristically different from what we already have.
Autopilot will keep pace with the competition.
Autopilot, Tesla’s semi-autonomous-driving technology, has always had a bit of a Hail Mary quality. Tesla’s entire narrative was centered in sexy all-electric cars until a couple of years ago when the big story shifted to autonomy.
Musk wisely pushed Tesla in that direction – but in typical fashion, he needed a quickie fix that wouldn’t overwhelm Tesla’s R&D resources. So Tesla went with a camera-based self-driving setup because it couldn’t realistically catch up to the likes of Google (now Waymo), which has developed an expensive laser-radar system and spent years testing it.
The move was smart, and it leveraged what Tesla had: a lot of vehicles on the road that could create a massive visual data stream. With enough computing power, all that information could be crunched and enable Teslas to drive themselves theoretically anywhere, like a human operator. (Lidar functions best in well-mapped, geographically defined areas.)
But Musk also made a huge mistake: He didn’t realise that self-driving should be a business rather than a feature. Tesla’s cars were the future, so when the future became autonomous, of course they had to drive themselves. Owners would demand it.
But the Waymos of the world were thinking in terms of different demands – demands for mobility coming from people who didn’t want to own and who thought of autonomy as part of a service.
GM figured this out by looking at what Waymo might do, and in 2016 it bought a self-driving-car startup, Cruise Automation. That division, after a combined new investment of $US3.4 billion from SoftBank and GM, is now valued at $US11.5 billion, about one-fifth of Tesla’s market cap.
Waymo, meanwhile, could be worth anywhere from $US50 billion to $US70 billion, according to some analysts.
Autopilot might ultimately be a major selling point for Tesla, but Musk currently doesn’t have any way to meaningfully leverage it as a business, apart from telling Tesla owners that they could loan out their $US80,000 car to strangers (the sometimes discussed but as-yet-unfounded “Tesla Network”).
Tesla has always had the luxury-electric-car market more or less to itself and hasn’t had to worry about catching up. The opposite is the case with autonomy and suddenly more clear business models in the marketplace. Tesla might never catch up on this front, unless it acquires a self-driving-car service, and the price tags on those are now going through the roof.
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