The title of this story is a bit misleading — Tesla faces far more than just three major tests in 2017.
But some major tests are more major than others. And how Tesla and CEO Elon Musk deal with this Big Ones will determine whether Tesla makes it successfully through what will be the most important year in the upstart electric automaker’s history.
Even the numerology of the year itself is significant: 2017 is a decade on from 2007 and the period when Musk began to take control of the company, eventually becoming CEO and presiding over the launch of Tesla’s first all-original design, the Model S sedan.
In ten years, Tesla has gone from near bankruptcy in 2008 to a $30-billion-plus market cap company. It’s one of the greatest triumphs in modern American business, made all the more impressive because the auto industry is so well established and difficult to break into.
Tesla’s major tests for 2017 fall into three categories: production, management, and financing. That why I’m arguing that there are only three. Tesla’s overriding objective for the year should be relentless focus on passing these tests. A caveat: Musk himself might be thinking hard about how to execute on these fronts, but they aren’t necessarily related to his overarching vision for his companies — including SpaceX: push humanity into a fossil-fuel-free, multiplanetary future.
Here are the tests:
Launch the Model 3 on schedule
Ironically, this is the most important test — and the easiest to pass. Tesla knows how to build a car, and in the second half of 2016 — assuming it achieves its goal of delivering 50,000 vehicles — it really started to get its production game together.
Musk has begun to develop some potentially revolutionary new ideas about the future of manufacturing, but in the short term, getting the Model 3 mass-market vehicle, slated to price at $30,000 after tax breaks, rolling off the assembly lines in Fremont, CA by the end of 2017 is all about blocking and tackling.
While the Model S was Tesla’s first crack at a “real” car, and the Model X SUV that arrived in 2015, years behind schedule, was by Musk’s admission overly complicated.
The Model 3 is supposed to be designed and engineered to a price-point. That means sheet metal instead of aluminium for the body panels, a smaller battery than what goes into the high-end S and X, and less fancy interior appointments overall.
Traditional automakers would have no difficulty producing tens of thousands of Model 3-type vehicles on schedule. But there are doubts about whether Tesla can pull it off.
It will be easy to to keep track of Tesla’s progress. If the Model 3 starts showing up in the wild, on California roads, being tested in the first or second quarter of 2017, an on-time launch in late 2017 will happen. There shouldn’t be any technically difficulties, either, as Tesla is simply taking all its existing and proven tech and putting it in a smaller, cheaper package.
That said, it’s vital that Tesla passes the Model 3 test. Nearly 400,000 pre-orders, at $1,000 each, mean that the Model 3 represents a massive amount of future revenue.
Integrate SolarCity with Tesla’s other lines of business
Getting the Model 3 rolling on time is a walk in the park compared with this one. Tesla’s $2.6-billion deal to merge with SolarCity, whose CEO is Musk’s cousin (Musk is the Chairman of the Board), brings with it $3 billion debt. But that’s just the impact to Tesla’s balance sheet. The larger challenge is yoking together a carmaker and a solar-panel leaser and installer.
While a “green” automaker and solar company might appear to have connections, and while both fall under the general category of “manufacturers” (although SolarCity has been more of a financier and distributor), there’s a reason why auto companies stick to building mainly cars and truck — that in itself is hard enough.
Don’t forget that Tesla also established, about a year ago, an energy storage business. And Musk and his team are in the process of building a huge battery factory in Nevada, to the tune of about $6 billion.
I didn’t like the SolarCity deal because I thought it would weight Tesla down, interfere with the Model 3 launch, and turn Musk into the de facto CEO of the company, making him the chief executive of three enterprises and further stretching his already stretched attention span — which does seem infinitely elastic.
For what it’s worth, Tesla has acquired in SolarCity a large but weakened player in the solar market, and one that’s going through a fundamental business change. SolarCity’s early success in residential rooftop solar was due to its leasing model; it could outfit homes with solar panels and relieve the homeowner of the purchasing burden.
But the company is shifting to a manufacturing-and-sales model, symbolized by the solar roof product that Musk showcased in late 2016. This could ultimately improve the debt-laden aspect of Tesla’s SolarCity balance sheet. But it is a new thing. And Musk will probably have to drive it forward.
Failure, however, isn’t an option.
Control the cash burn and support the stock price
If launching the Model 3 is the easiest test to pass and integrating SolarCity is a the hardest, the financial side of Tesla 2017 is a test that lives somewhere in the middle.
The degree of difficulty here used to be huge, as the company produced less than 100,000 vehicles per year and was unfortunately subject to the belief that it was a Silicon Valley tech startup and not a carmaker — which led to wild ups and downs for the stock price.
The difficulty now involves SolarCity impact on quarterly financials, but that will take most of 2017 to work out. The bigger issue is cash.
Cars are a cash-intensive business. At the moment, Tesla appears to have done a far better job than it expected in managing its cash in 2016. The company will close out the year with about $1.2 billion in cash, plus some extended credit lines that give it additional breathing room. In the past, Tesla’s goal has been to have a billion in reserve. It has $200 million more.
Musk and CFO Jason Wheeler point to greatly improved manufacturing efficiency, which enables Tesla to get more out of every dollar spent, with the upshot that the accordingly increased revenue will at some point start to improve Tesla’s cash position sort of automatically.
Obviously, it will be expensive to launch the Model 3 in 2017, although a lot of cost may carry over into 2018, when production ramps up. But as far as this test goes, Tesla has kind of “pre-passed.”
The stock is another story. As usual heading into a near year, it’s primed for a decline. Tesla will likely just make, or narrowly miss, the low end of its 2016 guidance of 80,000-90,000 vehicle deliveries. Shares have been rallying at year end, above $200, so investors may have already priced in the miss. But the 2016 full-year and fourth-quarter financials won’t come in until Tesla reports in 2017, and nervousness on Wall Street could send the stock into a swoon
Early this year, it dived from $240 to $140 before recovering.
Tesla would certainly like to maintain shares at or around that $200 mark because it provides the company with a fallback: the opportunity to use Wall Street like and ATM and do a capital raise, as it did in 2015. Musk has said he doesn’t want to do this, and given Tesla’s cash position, it might not be necessary. But the company won’t want to lose it as an option.
Launching the Model 3 and dealing with the financials would be business as usual for a lot of companies. However, those are tough tests for Tesla to pass, albeit far from impossible.
It’s the SolarCity piece that’s the true major test. And critically, Tesla can’t get distracted by it. Otherwise, the two less difficult tests will get a whole lot harder.