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In this June 22, 2012 file photo, Tesla CEO Elon Musk waves during a rally at the Tesla factory in Fremont, Calif. Tesla Motors has selected Nevada for a massive, $5 billion factory that it will build to pump out batteries for a new generation of electric cars, a person familiar with the company's plans said Wednesday, Sept. 3, 2014. (Paul Sakuma/AP Photo)
In this June 22, 2012 file photo, Tesla CEO Elon Musk waves during a rally at the Tesla factory in Fremont, Calif. Tesla Motors has selected Nevada for a massive, $5 billion factory that it will build to pump out batteries for a new generation of electric cars, a person familiar with the company's plans said Wednesday, Sept. 3, 2014. (Paul Sakuma/AP Photo)

Tesla Debate

Elon Musk is the P.T. Barnum of the Tesla circus Add to ...

Tesla Motors CEO Elon Musk says his company will be worth as much as Apple one day – $700-billion (all figures U.S.) by 2025. He predicts sales will increase 50 per cent a year over the next decade, the stock will surge 2,700 per cent, and annual profit will hit tens of billions.

If you believe all this, you believe in the Tooth Fairy. Preposterous pronouncements roll off the tongue, if you are a stock promoter anxious to juice the share price.

Now, I believe in global warming and the future of electrified cars. But I also believe that Musk’s outsized claims for Tesla’s future, combined with his many absurd predictions – driving “a two-ton death machine” may be outlawed, for instance – could damn EVs by association.

Tesla’s technology and design story

The Model S (and its successor, the Model S 70D) is a wonderful electric driving machine – fast, nimble, with impressive battery range. But is this car vastly superior to what traditional auto makers can produce? No. The Model S is a fine car, not a game-changer.

In fact, BMW’s more expensive i8 takes the electrified car further with its use of lightweight materials, and while Nissan’s Leaf is less sophisticated, it sells for a fraction of the Tesla. If it made sense to create $100,000 EVs that lose mountains of money, any global car company could build a Model S.

Claims about the Model S’s superiority are legend. Yet, aside from the ideal touch screen in the centre stack, the materials inside a Model S are relatively pedestrian for a car in its price range – more Toyota Corolla than Lexus LS.

While the Model S received top ratings from crash tests in Europe and the United States, it is not a particularly strong performer in its competitive set.

Edmunds.com documented several failures from a long-term drive of the 2013 vehicle: four service-bulletin fixes completed under warranty, two drive units replaced, prematurely worn tires due to a lug-nut issue, and a 12-volt battery replacement. The drive unit issues caused Tesla to extend its warranty from four years to eight, with no limit on kilometres.

Tesla versus the traditional dealer model

Tesla sells in shopping malls and online to eliminate the dealer, appealing to those who don’t like the traditional car-buying process. But the dealer model has endured for 100 years because it works. Dealers take trade-ins and provide service in a timely manner – often advocating for their customers against the manufacturer. The day of the trouble-free car has not yet arrived. Tesla’s premium service practices will not be sustainable if volumes come anywhere close to the projected 500,000 annual sales by 2020.

Tesla the company

The Model S is produced in a former joint-venture factory (General Motors, Toyota) that once had capacity to produce 500,000 units. Tesla produced 35,000 cars in 2014.

The Model S has been in production for 21/2 years. Why hasn’t Tesla aligned supply with demand – or raised prices significantly if demand is so great? In its 2014 shareholder letter signed by Musk and CFO Deepak Ahuja, Tesla pledges to deliver “about 55,000 Model S and X vehicles” in 2015, which would constitute a 70 per cent year-over-year increase.

CVC Research estimates that since 2013, Tesla has produced approximately 5,000 more Model S vehicles than it delivered. Some of the difference can be attributed to vehicles in transit or showroom models – perhaps 2,000 units, says CVC. That leaves 3,000 units of production unaccounted for.

We’ve also been told that the Model X would be delivered in late 2013 (2012 shareholder letter). Then it was supposed to arrive last year. Now it’s the third quarter of this year.

Taxpayer subsidies

How Tesla and other EV makers benefit from taxpayer funding is frightening. At the end of the chain are subsidies for EV buyers – up to $8,500 in Ontario, Quebec and B.C., up to $12,500 in the United States.

Tesla directly received $86-million in “regulatory credit revenue,” including $66-million for zero emission vehicle (ZEV) credits. Thus, about 9 per cent of Tesla’s Q4 revenue was attributable to taxpayer subsidies.

Is Tesla a new-world vs. old-world story?

Tesla fans argue that we’re looking at the next Google or Apple, that Tesla will disrupt old-world car companies . Nonsense. The auto industry is far more complex than the search-engine business or the iPad industry. Global in scope, managed and constrained by a patchwork of regulations on everything from safety to emissions, the industry is capital-intensive and delivers low margins.

Investing in factories requires billions of dollars and political savvy. Currency issues, local sourcing demands and the politics require car companies to build assembly plants and distribution systems worldwide.

Tesla is a small, specialty luxury car company that depends on taxpayers to survive. It lacks the capabilities required to produce and support sales volumes of 500,000 a year.

Is there life after Model S/70-D?

Musk makes many promises, but the balance sheet is frightening. Assets barely exceeded liabilities at the end of 2014: $5.85-billion to $4.94-billion.

Tesla encountered delivery problems in the fourth quarter of 2014 after opening 21 sales/service locations and installing 125 supercharges in the third quarter; it does not use generally accepted accounting principles (GAAP) when reporting, but in the shareholder newsletter the company did disclose a GAAP net loss of $108-million in Q4, and $2.36/share for the full year. We assume expansion will be funded through debt, equity offerings or both. Musk’s bet on Tesla earning billions by, say, 2025, looks to be naively optimistic or utterly misleading.

We are led to believe the Model X will be the volume car to take Tesla to the next level, that it will sell for about half the price of the Model S. Instead, it will likely kill the company, if market forces apply. If Tesla cannot earn profit on its existing luxury car, how will it do so, selling something for half its price?

Conclusion

There is an old saying in the car business: “We lose money on every one, but make up for it in volume.” That seems to be Tesla’s business model. Sell more money-losing cars in order to make incredible profit? Impossible.

Meet Elon Musk, the P.T. Barnum of the auto industry.

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