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Tesla’s entry into the mass-car market hits a major roadblock

  • Overview of the current issues faced by Tesla
  • Analysis of the key concerns encountered by the company

 

Tesla, Inc., the futuristic electric car company’s share prices continue to defy gravity despite the company not making any profit. Lately, it has faced persistent trepidations including lawsuits, interrogations over safety on autopilot functionality, rising debt burden and most crucially a lag in the production of the highly acclaimed Model 3.

A delay in the production of $35,000 all-electric car Model 3 is the biggest problem faced by Tesla. Hence, the success of Model 3 is very critical for the future prospects of the company as it was supposed to transform the niche electric car maker into a mass-market car manufacturer and bring it on par with big automakers. But the highly anticipated Model 3 has been  behind schedule on production. According to the official numbers released by Tesla, the company missed the goal of rolling out 2,500 units per week by Q1 2018. The car marker’s initial target was to produce 5,000 Model 3 units per week at the end of 2017, but this was revised multiple times since then. This was against Tesla’s early production expectation and a goal of 10,000 units per week by the end of 2018.

In 2017, the automaker delivered only 1,764 Model 3 units. Moreover, in Q1 2018 it produced a total of 9,766 Model 3 cars, while the Model S and X’s combined production was 24,728 units. There were mere 8,182 Model 3 units delivered in the Q1 2018, which is far below the target of 2,500 units per week, while the delivery for the Model S and X stood at 21,815 during the same period. According to the latest reports, Tesla was able to produce only 2,270 Model 3 cars per week in April. The company has an order backlog of approximately 500,000 units of Model 3.

The issues in the production line are the main reason for a delay in delivery. A key problem is a bottleneck in the battery production at its Gigafactory, Nevada. In order to help scale-up the production of Model 3, Tesla made investments, which saw the car assembly being handled by robots. Although it was a wise move, it turned out to be ineffective as there were multiple technical issues that surfaced. Tesla’s CEO admitted that over-reliance on automation led to a delay in the production of Model 3. The company also encountered labour unrest with the auto workers seeking to unionise the Fremont plant pertaining to production issues in the company. On one hand, the car maker was marred by production woes of Model 3, on the other hand, it had to recall 123,000 units of Model S due to malfunctioning of its power steering. Tesla claimed that the snag has been identified and can be easily resolved in around an hour’s time. But this is about 123,000 man-hours of technicians’ time, this could have been utilised and put to better productive hours use for the already delayed Model 3. The recall of the Model S might be a small hiccup for the firm, but it is an additional burden in the ever-growing list of troubles.

There is also a concern over the company’s inability to scale-up production and thereby, there is a feeling that it will be unable to generate positive cash flows, this has raised serious questions on the company’s financial viability. Hence, citing these multiple reasons on Tesla’s production distress and tight financial condition, credit rating agency Moody’s downgraded the company to B3 from B2 (March 2018) ratings, six levels below investment grade, while held a negative outlook, in case production related issues do not improve. S&P also warned of a possible downgrade.

Furthermore, against a revenue of $3.5 billion, the company had over $10 billion of outstanding debt at the end of 2017. Of this, a repayment schedule will be a major concern for Tesla. Even if one takes into account only the notes and term loans maturing in 2018-19, the total value stands at close to $2 billion. If paid in full, this could put a huge dent on the company’s cash reserves, which have been gradually depleting amid continuous losses. Tesla may opt for refinancing on this debt, though it will put a strain on the interest costs, which have been increasing in past few years. In 2017, the company booked an interest expense of $471 million, this was an increase of over $272 million from the previous year (2016). Tesla has not registered profits till date (except for Q1 2013 and Q3 2016). In fact, a high debt has turned out to be an added major concern for the car maker. If one examines the company’s debt to equity ratio, it reveals an increase over the quarters and currently, stands at nearly 2.5x (Q1 2018). While this is not unusual for a company like Tesla with a huge market cap, but considering the production issues and its inability to generate profits on consistent basis draws concern on the liquidity. Further, another debt ratio which is a cause of worry is a debt to EBITDA ratio, which stood at approximately minus 59x during Q1 2018. This indicates its failure to handle the debt burden.

Although, Tesla does not face a demand problem as it maintains very strong orders for Model 3 at the same time sales for Model S and X are also steady. The concern though is over the waiting period for all the three models and Model 3 is the worst hit. Positively, there seems to be a bit of stabilisation in the month of June (2018) with the production of Model 3 registering an increase. Tesla’s CEO Elon Musk stated in the annual shareholder meeting ‘We've made a lot of mistakes with Model 3 production. But we recognise those mistakes and we're confident we know how to address them.’

Televisory believe that managing the demand will be a test for the company in the near future. While the firm currently is a leader in the EV (electric vehicle) segment. In the upcoming years, the entry of mainstream car makers like GM, Ford, Volkswagen, Toyota among others in the EV market will append the competition. Ford is planning $11 billion investment on 40 electric vehicles by 2022, Volkswagen has already unveiled a series of EV concepts for its new generation electric vehicles by 2020. Earlier this year, the company also disclosed its plans to expand the production of electric vehicles on a massive scale. Toyota has announced that it will offer an electric version of every model by 2025. On the technology aspect, Tesla has a first mover advantage and rides highly among most major competitors, although these have deep pockets with huge and sustained cash flows through conventional car sales on which Tesla is presently struggling. Further, on the competition aspect, Televisory is of the view that Tesla stands at this juncture where more than external factors, it has to internally streamline and critically manage the gaps between demand and deliveries. Therefore, considering the issues faced by Tesla on financial and operational fronts, it would be moderately harsh, however, not completely wrong to say that Tesla may go down in the history as the first major global company in the EV space or might remain a major player in the industry would depend upon how it handles the current situation.

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