Looking Back At 20 Years of Tesla

Elon Musk did not start Tesla Motors. Instead, engineers Martin Eberhard and Marc Tarpenning created the first highway-legal serial-produced electric-powered sports car.

However, research & development in the automotive industry is costly, and the startup needed outside capital. Unfortunately for Martin and Marc, the two were eventually pushed out of the company by their new investor, Elon Musk.

Early on, Tesla succeeded in producing the Roadster (with help from Lotus), but the $100,000 battery-powered sports car had a very small market. Musk did not participate in day-to-day operations but was largely responsible for the shift in material used in manufacturing, and the design language of the company.

As early as 2006, Musk acknowledged the future Model S — a sporty family car. It was a move that eyed a much larger market, but still kept the focus on creating a luxury brand with low-volume production. After all, mass production was still years and billions of dollars in CAPEX away.

The anticipated retail price of $45,000, ballooned to $60,000 before federal tax credits by 2012. These credits would provide a $7,500 tax break for EV buyers, but any residual value did not carry over to future years or provide a tax refund.

The US Government's green energy programs encouraged Tesla further, with early loans and grants from the Advanced Technology Vehicle Manufacturing program just six months before going public.

This move drew a lot of criticism but was not unusual for the auto industry. GM and Ford received billions of dollars through the earlier TARP program, and through ATVM, but Tesla was the first to repay it — a mere four years later.

Apart from R&D efforts, Tesla invested that money into the Fremont factory and expanded into the European market, opening its first factory outside of the US in Tilburg, Netherlands, in 2013. Through development and acquisitions, the company now operates 17 facilities on three continents.

Overcoming Obstacles

Early on, Tesla faced obstacles due to little experience in automotive production. They solved this through partnerships – first with Lotus which provided the majority of the minimum viable product, and then with Daimler, Toyota, and most notably, Panasonic.

While Panasonic provided a $30 million investment with the goal of developing the best automotive-grade battery cells, Toyota invested $50 million and sold them an assembly plant in Fremont. Originally, Tesla ran its own dealerships, but since 2019 the company has cut costs — closing dealerships and moving to a Direct to Consumer model.

Tesla operated at a significant loss until very recently. Although revenue growth was substantial, costs were sky-high. Earnings results were unsurprisingly cyclical — weaker at the beginning of the calendar year before picking up later on, comparable to other auto manufacturers.

After these early expansions, production goals were hit and miss. In 2014, the company missed deliveries, guiding for 33,000 but achieving 31,655. A year later, it narrowly met the projected rangefrom 50-55,000, achieving 50,580.

Production ramped up, hitting its largest growth in 2018 when the company delivered 245,240 vehicles — a significant increase year-over-year but a far cry from the 500,000 vehicles that the company announced in 2016.

By 2021 this grew to 936,172, albeit under tremendous pressure since drastic measures were required to meet this goal. This forced the SEC to launch an investigation into production predictions, after employees reported working in an open-air, improvised tent factory where they reportedly took shortcuts to produce the lowest-priced sedan, the Model 3.

While Tesla became the most valuable car brand in the world by market capitalization, their numbers are not even 1/10th of the runner-up, Toyota, which sold 10.5 million vehicles last year.

The question begs, what sets Tesla so much apart from its competitors?

Reasons for Tesla's Success

Tesla’s early successes came from three key values: innovative technology, a resilient supply chain, and exceptional branding.

Tesla approached the traditional car industry from the angle of a software developer, improving its vehicles while on the road in contrast to the conventional “finished product” approach. Furthermore, through its partnership with Panasonic, it created batteries that outrange its competitors and launched a network of charging stations that dealt with the ever-present EV owner's range anxiety.

Much of the early success can be attributed to the unhinged but unquestionably charismatic Elon Musk, who positioned himself as a magician with a valuable cult of personality — a visionary who seeks to transform the world, very much aligned with his personal brand. This approach resulted in valuable pre-orders at moments when the company still burned cash every year.

The strength of the brand is evident from vehicle reservations. In 2015, there were about 30,000 reservations for Model X. Three years later, the cheaper Model 3 drew over 450,000 pre-orders, and in 2021, the prototype Cybertruck drew over 1 million pre-orders without a completion date. Of note, the pre-order commitment was just $100, which makes the true number of expected deliveries when the truck is finally built questionable.

Finally, its resilient supply chain has shined over the last few years, when other car manufacturers had to slow or even wholly pause production due to chip shortages. Tesla benefited from a fully developed vertical supply chain, with deliveries three times faster than its competitors and in Europe as much as six times faster.

Investor Criticisms

Early criticism of Tesla focused on external factors like government loans, carbon credit sales, and build quality problems. Today's criticisms remain focused on these issues with more attention paid to internal practices and Musk’s relationship with China.

The company has suffered significant delays in production and maintenance.

The company has suffered significant delays in production and maintenance. Early models struggled with MCU (Media Control Unit) failures that impacted models produced up to April 2018. Furthermore, charging in cold weather was problematic, disrupting expansion into Norway, one of Tesla's most popular foreign markets. Eventually, the Norwegian court fined the company for software updates that affected performance.

Still, even the Model X, the newest flagship model, faced similar issues. Musk admitted that they went too far by making the car too complicated and overloaded with tech. This increased the odds of critical failures – as evidenced by poor reliability ratings and nine recalls. By 2019, Musk admitted Tesla was only producing the car for sentimental reasons.

In turn, Tesla was pressured to cut corners and improvise production, resulting in a downgrade for the Model 3 from Consumer Reports in 2019 due to a poor annual reliability survey and the failure of standard safety features.

Whistleblower allegations regarding battery quality assurance further amplified questions regarding durability. According to some experts, Tesla attempted to increase battery density to achieve a higher range at the expense of longevity. Yet, this only amplified maintenance and repair issues.

In the auto world, Tesla is a young company whose first vehicle with meaningful production numbers just reached 10 years of age. Service and Maintenance will soon become a cornerstone of customer satisfaction and likely the easiest way to hurt brand loyalty.

Between autopilot crashes, spontaneous combustions, workplace safety & culture concerns, the questionable acquisition of SolarCity, and a controversial tweet about taking the company private, Tesla is not free of its problems.

Musk’s recent acquisition of Twitter has also reflected poorly on the brand. Anecdotally, surveys indicate some of Tesla’s core demographic have concerns about Musk’s politics or leadership abilities. Tesla board members have grown increasingly concerned about keeping Musk’s attention on the company.

Current State of Affairs

In 2022, Tesla has rarely been in the spotlight, mainly owing to Elon Musk's messy acquisition of Twitter. Tesla was a big part of that as he sold approximately $41 billion in stock since January 2021. The acquisition was partially funded by debt, with $13 billion coming from a consortium of banks, using Tesla shares as collateral.

Interestingly, there are reports of banks trying to unload this debt and receiving bids as low as 60 cents on the dollar. Tying Tesla stock to a questionable acquisition amid the turbulent macroeconomic outlook seems risky.

While the company has been profitable since 2020, it is still worth noting that the sale of carbon emissions credits kept it afloat. In 2021, this contributed to almost $1.5 billion in revenues, while the first three quarters of 2022 brought in $1.3 billion.

Still, most of Tesla's revenue comes from automotive sales, with 2022 projections reaching 1.5 million vehicles — owing to a successful expansion in China, a new factory in Berlin, and supply chain issues affecting them less than other automotive manufacturers.

Finally, energy generation and storage revenue are nothing to scoff at. The division with Powerwall, Megapack, and Solar Roof generated $2.78 billion in 2021 revenues, although this did not offset costs of $3 billion. Yet, the latest Q3 2022 results showed a 62% Y/Y growth with 2.1 Gwh in energy storage deployments, while the solar power deployment jumped to 94 MW, scoring 13% Y/Y growth.

The first half of Q4 has been disastrous after announcements on Tesla’s annual AI day failed to meet expectations surrounding the rollout of further self-driving capabilities and delays in Cybertruck, Semi and Optimus.

Challenges Ahead

Going forward, it is evident that the company will face challenges in all three critical areas of its competitive advantage.

The most substantial external pressure will be to innovate as the company now faces a long line of competitors committed to EV’s. Companies like Ford, GM, Mercedes-Benz, Toyota, Volvo-Polestar, and others have the capacity and the deep pockets required to break into this market — as evidenced by their recent collective R&D expenditures in the tens of billions of dollars.

As the EV market matures, Tesla's domination will subside. Furthermore, these competitors will not only cannibalize market share, but they will also reduce or end their purchase of Tesla's regulatory carbon credits entirely.

Then, there are the internal issues. With competition rising, the company simply will not be able to afford aggressive production goals and unrealistic projections as those competitors use up a constantly decreasing availability of scarce resources required for battery production. Tesla have to improve the supply chain further, as the 2019 Cybertruck and 2017 Semi have yet to arrive to the market.

With the launch of both products delayed multiple times and geographically restricted, tens of thousands of pre-order customers could wait years to get their vehicles. Ramping up production will challenge the servicing network in which the company is at a disadvantage against competitors, many of whom have gone through multiple generations of vehicles while Tesla is still at the start.

The last thing to consider is the high dependence on the Chinese market which according to Morgan Stanley accounts for up to 30% of sales. So far, the collaboration with Chinese industry has been fruitful, but rising geopolitical tensions and increased sanctions from the Biden Administration against Chinese chip manufacturers present a significant political risk to the company.

The Future of Tesla

Over the last two decades, Tesla has been a consumer success story. Although it admittedly brushed with bankruptcy more than once, it eventually became the world's most valuable automotive manufacturer. In the process, it has created intangible asset value and a devoted following that few brands have ever achieved.

Yet, it is hard to shake off the feeling that the company could have created a stronger moat. Tesla had early success focusing on high-end products, but consumers have yet to experience long-term reliability.

Furthermore, vehicles are high-involvement cyclical products with only so much demand for those with a price tag of $50,000 and up. To succeed while shipping millions of vehicles per year, Tesla will have to find a way to profit at lower average prices, while growing its 1.3% global automotive market share against rising competition.

This is a highly unusual model, given that most major automotive manufacturers are not reliant on luxury vehicle sales. Volkswagen Auto Group, the world's number 1 automaker which owns VW, Audi, Porsche, and Lamborghini, certainly does not rely on the latter two brands for the bulk of worldwide revenues. That competitor's brand cache was not damaged by Dieselgate, the 2015 VW emissions scandal, and global EV and PHEV sales have grown.

This choice between a premium brand and a mass market might be a bitter pill for Elon Musk, whose charismatic and eccentric persona leaves nobody indifferent. Yet, it is worth noting that as much as he is an asset, he is also a liability. His impulsive decisions and borderline illegal public comments landed him in trouble with the regulators multiple times. Additionally, his commitment to various projects besides Tesla, alongside the latest episode with Twitter will only spread his time and focus even thinner.

That said, it is hard to envision Tesla growing into a multi-trillion-dollar corporation without a new revolutionary tech breakthrough. The tailwinds the company experienced while being first to market are slowly reversing. And current macroeconomic conditions put pressure on the market segment Tesla needs to maintain its dominance.