Don’t be fooled by the shiny objects Elon Musk keeps throwing into the ether. Whether it’s his aggressive stance against working from home, his proclamations that the US economy is in a recession, or the will-he-or-won’t-he drama surrounding his acquisition of Twitter, it’s all just misdirection by a magician.
When Elon gets anxious enough to act out, it’s because something is deeply wrong at Tesla. He did it back in 2018, firing off his “funding secured” securities-violation tweet as the company was on the verge of bankruptcy. And he’s almost certainly doing it now, yammering on about Twitter bots and “raining money” as his company’s competition closes in and the China market — where Tesla derives the lion’s share of its profits — crumbles. If there’s anything that’s giving Elon Musk a “super bad feeling” right now, it’s the threat to his vast personal wealth.
We’ve seen this movie before
Tesla’s persistent problems are the stuff of legend. It has consistently missed deadlines for new products and deliveries and overpromised on the capabilities of its products. It has been profitable for two years of its nearly two-decade existence. And Musk himself has admitted that he’s had to “bet the company” a couple of times.
One of those times was in early 2018, when Musk blew billions attempting to turn Tesla’s Fremont factory into an “alien dreadnought” of machines that would produce his cars with little to no human involvement — something the automotive world warned him would not work. It did not. So in the spring of 2018, Tesla ended up having to go on a hiring spree to make up for lost time, and some of those new hires found themselves hand building cars outside of the Fremont factory at a makeshift assembly line under a tent. Unfortunately, the sudden rush also led to a sudden bust, and by June the company tried to quietly cull 9% of its workforce.
During that time Musk exhibited all kinds of erratic behavior. He insulted a Wall Street analyst on one of Tesla’s calls with investors, saying he asked “stupid boneheaded questions.” He went on Twitter rampages against journalists (myself included) and short-sellers. And in a whizbang performance, Musk unveiled his first Boring Company tunnel, meant to help Tesla owners avoid traffic by letting them drive underground. It was another of his half-baked distractions, and one critic later called the tunnels “sewers with disco lights.” All of this is to say that when Tesla is distressed there is a tell, and that tell is a spasmodic, gloomy Elon Musk.
Are we back in one of Tesla’s hard times? Maybe. The erratic behavior is certainly there. And in an email to Tesla executives seen by Reuters, Musk recently called for a pause of all Tesla hiring around the world and said he needed to cull 10% of its workforce. He later walked those comments back on Twitter (where else?), saying Tesla’s overall head count would increase over the next 12 months, though salaried positions would remain flat.
This year has been nauseating for the company. In general, the market has turned against fast-growing tech companies, bringing Tesla’s stock — a poster child for the past 15 years of Silicon Valley’s exuberance — down by 40% since the start of 2022. Musk’s bizarre crusade to acquire Twitter hasn’t helped either, as Tesla investors have realized Musk’s cash and attention are being siphoned elsewhere.
Tesla’s stock price also reflects the fact that it now has real competition in the US market. The reservation list for Ford’s F-150 Lightning is three years’ long. Deliveries have just begun and are on schedule. In Europe, Tesla has been losing market share to EVs from Renault, Hyundai, and Volkswagen. Tesla’s vehicle mix is getting old, and given the company’s propensity to miss production deadlines, there’s no telling when the Cybertruck — which was supposed to be released last year — will be available. Meanwhile, President Biden seems enthusiastic about helping electric-vehicle makers, but only those who run union shops (so, not Tesla).
The reality is that Tesla’s profitability is still full of caveats, according to Vicki Bryan, the founder of the research firm Bond Angle. Based on her reading of the company’s financial filings, its American business is in ugly shape. Without a hand from electric-vehicle credits paid by combustion-engine carmakers, and without income from Tesla’s China operations, Bryan calculates that the company’s US operations would’ve lost $2.4 billion last year. On paper, its cash position is also helped along by a massive $2.1 billion add back to its profit from paying its employees (especially Musk) in stock.
Stock-based compensation is a nifty trick that allows companies to add employees’ stock back to its balance sheet instead of having to pay those workers in cash, which would be booked as an expense. This makes a company look healthier — as long as its stock is going up. If the company’s stock is going down, the amount of stock owed can suddenly become an albatross. Guess which one it is for Tesla.
Tesla also faces the decline of its lucrative tax-credits business. Automakers are required by various government entities to hit a benchmark for electric-vehicle production. If a company goes over that benchmark, it is given credits by the government for the “excess” EVs it produced; these credits can then be sold to other manufacturers that have failed to hit the regulatory goal. Given that Tesla only makes electric cars, it has made a boatload of cash over the years selling these credits to other carmakers. But as the EV market continues to grow, this income will dwindle as companies regularly clear these benchmarks and have less need for Tesla’s excess credits. That means the pressure is on for Tesla’s foreign operations specifically China to pick up the slack. The company’s life depends on it.