Tesla, the electric vehicle trailblazer, is once again in the eye of the storm. As controversies swirl around the company, Elon Musk finds himself navigating treacherous waters yet again. But just how deep is the cut this time?
When "First Principles" Collide with Business Logic
This time, Musk only held the title of the world's richest for 9 months.
In the latest release of the Hurun Global Rich List, Elon Musk reclaimed the top spot with a net worth of 1.67 trillion CNY. The bad news is, this figure only goes up to January 15, 2024. In just over two months, his fortune has shrunk by over 200 billion CNY due to the decline in Tesla's stock price—roughly equivalent to 30% of Tesla's annual revenue and 2.5 times its net profit (Non-GAAP).
Behind the capital's voting with its feet lie a series of operational challenges facing Tesla: outdated models, slow progress in self-developed batteries, declining profitability, and poor sales in the Chinese market amidst worsening competitive conditions.
Tesla's sales data for the first quarter of 2024 also confirmed the concerns of Wall Street investors.
On April 2nd, Tesla announced that it delivered a total of 386,800 vehicles globally in Q1, hitting a new low for the past five quarters. Deliveries fell by 8.5% compared to the same period last year and over 20% from the fourth quarter of last year.
A commercial company inevitably encounters different problems at different stages of development. When "first principles" collide with business logic, these problems are further amplified. In Tesla's history of growth, there have been two intense collisions that once plunged Tesla into crisis.
Faced with the imminent third crisis, how will Musk respond?
At the end of last year, Wall Street investment banks were still predicting that Tesla's market value would exceed $1 trillion in 2024, making Musk the world's first trillionaire.
At that time, Tesla was still the darling of the capital market, with a cumulative increase of over 100% for the full year of 2023, alongside Apple, Microsoft, NVIDIA, Meta, Amazon, and Google, collectively known as the seven giants of US stocks.
But now, a quarter of 2024 has passed, and not only have these two predictions failed to materialize, but the situation seems to have worsened.
On March 5th, Tesla fell over 7% to close at $188 in the U.S. stock market, evaporating nearly $50 billion in market value in a single day. This directly caused Musk to lose the title of the world's richest.
According to the Bloomberg Billionaires Index, after the plunge on March 5th, Musk's net worth shrunk to $197.7 billion, trailing behind Amazon founder Jeff Bezos by $200 billion, slipping to second place on the rich list. Compared with Bernard Arnault, CEO of LVMH, who ranks third, Musk's net worth is only $1 billion more.
This plunge is just a microcosm of Tesla's unfavorable start in 2024.
At the beginning of March, Tesla's total market value dropped out of the top ten in the S&P 500, becoming the first member of the seven giants to fall behind. As of the end of March, Tesla's year-to-date decline was close to 30%, while the S&P 500 index rose by over 9% during the same period.
The main reasons causing concern among Wall Street investors are the low sales growth expectations for Tesla and the profit decline caused by price wars.
Adam Jonas, an analyst at Morgan Stanley who has always been optimistic about Tesla, led the way in lowering Tesla's target stock price and significantly reducing its net profit per share from $2.86 to below $1 at the beginning of the year.
He believes that 2024 will be a challenging year for electric vehicles, with weakened global demand, intensified competition in China as one of Tesla's main markets, and an outdated product line, thus lowering Tesla's global shipments to 2 million vehicles in 2024, representing only a 10% increase over 2023's 1.8 million vehicles.
Goldman Sachs has also expressed similar views in recent research reports. Analysts believe that the slowdown in car deliveries and profit growth is the main problem Tesla currently faces.
In fact, these issues were already evident in Tesla's 2023 financial report.
In 2023, Tesla delivered a total of 1.8085 million vehicles globally, a year-on-year increase of 38%, failing to achieve the 50% annual growth target. During the same period, Non-GAAP net profit fell by 23% year-on-year to $10.882 billion, and the gross margin level hit a new low in the past 18 quarters in Q4 of last year.
Tesla did not provide specific delivery guidance in its financial report, but it also explicitly stated that the growth rate of car sales in 2024 may be significantly lower than that in 2023.
With BYD initiating a price war in China in early February, Wall Street's pessimism about Tesla's delivery growth for the year further intensified. Fuguo Bank predicted in a recent research report that Tesla's delivery volume in 2024 will remain flat compared to 2023 and will decline in 2025.
Amidst increasing skepticism, Tesla's stock price continues to plummet. As of April 3, 2024, only Tesla and Apple among the seven giants of U.S. stocks have not risen since the beginning of the year, and Tesla's decline (32.94%) is more than twice that of Apple (12.19%). Whether Tesla should be removed from the list of seven giants has become a topic of market discussion.
The crisis of growth for Tesla has begun.
Since its inception, Tesla has faced crises several times, teetering on the edge of a cliff twice.
Biographer Walter Isaacson attributed these two crises to Musk's personally aggressive style of doing things. But besides this, the objective commercial logic of the automotive industry also played an important role.
Tesla's first life-threatening crisis occurred the year before its first mass-produced car was launched. In that year, Tesla's cash reserves were almost depleted, and the company faced bankruptcy, yet the first mass-produced car had not even been completed. Tesla's first Roadster prototype borrowed the body from a high-end British sports car, the Lotus Elise. However, Elon Musk wasn't satisfied with Lotus's chassis design. To make the car "awe-inspiring," he insisted on enlarging the doors and lowering the door frame by 3 inches to facilitate user entry and exit, which necessitated a redesign of the chassis. The cost of frequent modifications resulted in skyrocketing production costs and worsening financial conditions for Tesla.
The target cost for the Roadster was initially $50,000, but with Musk's repeated design changes, by November 2006, the cost per vehicle had ballooned to $83,000, and production couldn't commence as planned. To make matters worse, by the end of July 2007, Tesla faced a crisis of running out of cash within weeks.
Automotive media even had a column dedicated to the "Tesla Death Watch" to countdown the company's demise.
It wasn't until the end of 2008 that the nearly bankrupt Tesla secured a $20 million financing, followed by investments from Daimler and government loans, barely surviving the crisis.
Musk's radical approach nearly drove Tesla, a company founded for just 5 years without delivering a single product, to bankruptcy. A decade after the Roadster crisis, Tesla found itself teetering on the edge again.
The second crisis occurred as Tesla transitioned from the luxury electric vehicle market to the mass market, famously known as the "production hell."
The Model 3, Tesla's first mass-market vehicle, also bore the heavy responsibility of turning the company's losses into profits after years of financial struggles.
In the lead-up to the Model 3 delivery, Musk aggressively pushed for higher automation rates in Tesla's factories, aiming to replace workers with robots. He believed that producing 5,000 Model 3s per week was crucial for Tesla's survival after calculating the company's costs, overheads, and cash flow.
However, by the end of 2017, Tesla only managed to achieve half of that target. Expensive automation equipment not only failed to increase production speed but also hindered it.
In Q3 2017, Musk openly declared that the company would face at least six months of production hell. Due to capacity constraints, Tesla posted its highest-ever quarterly loss in its financial report, resulting in a more than 10% market value plunge within a month of the report's release.
From Q3 2017 to Q2 2018, Tesla, in the midst of production hell, continuously broke quarterly loss records.
To address production issues, Musk reversed course by dismantling robots and reducing automation. Model 3's weekly production reached 3,500 units around May 2018, and two months later, the target of 5,000 units per week was finally achieved. At that time, Musk sent a message to all Tesla employees, stating, "I think this marks a real turning point for Tesla as a company."
Musk, who adheres to the "first principles" thinking, always sets radical and challenging goals, driving Tesla to break conventions and create miracles repeatedly but also pushing it into life-threatening crises multiple times.
The third crisis facing Tesla, six years after narrowly escaping bankruptcy twice, presents a different challenge from the previous two storms. It's more akin to a slow bleeding.
After Tesla delivered a less-than-ideal Q1 production and sales report, Wedbush analyst Dan Ives commented, "While we expected a difficult quarter for deliveries, these results are a disaster that is difficult to explain."
Tesla's explanation includes the ramp-up production of the Model 3 refresh version at the Fremont factory in California and the factory shutdown due to the fire incident at the Berlin Gigafactory, both impacting production and delivery volumes.
However, even excluding these incidental events, Tesla's declining delivery volumes are a "foreseeable" trend. One significant reason is the aging of Tesla's existing models.
Bank of America Securities predicts that by 2025, Tesla's market share in electric vehicles will plummet from the current 70% to just 11% due to its failure to expand its product lineup quickly enough, while traditional automakers and new entrants in the market are improving their product offerings. In this context, Tesla's problem of having a single product line becomes increasingly apparent, with the currently popular Model 3 and Model Y, released in 2016 and 2019 During the Q3 2023 earnings call, Elon Musk admitted that the development of the Cybertruck was a "self-inflicted wound," acknowledging that it would take one to one and a half years before it could contribute positively to cash flow. Meanwhile, another low-cost new vehicle, aimed at addressing Tesla's aging product line, won't see regular production until at least the second half of 2025.
Looking back at Tesla's three crises, whether it was introducing an electric vehicle accepted by the market during the dominance of gasoline cars or achieving sufficient production efficiency upon entering the mass market, each was a test that every automaker must face.
Now, the challenge facing Tesla is how to continue to grow in scale and profit in a market where the growth dividend is nearly exhausted, after becoming a mature business entity. This time, the problem may not be as severe as the previous crises, but it is destined to be more prolonged.
