The guest commentary below was written by Christopher Whalen. It was originally posted on The Institutional Risk Analyst.
New York | We were in the car last week heading to Washington for the gala celebration for The American Conservative’s 15 years in existence. During the trip, we heard former auto industry executive Bob Lutz take down Tesla’s (TSLA) economic model live on CNBC.
Talking to Carl Quintanilla, Lutz – who worked in senior management for all three US automakers – basically made two interesting points: that Tesla spends too much for its larger batteries and that the company’s labor costs are six times the industry average.
Lutz repeated his view that examination of the company’s financials by “anybody who knows anything about the automobile business” must lead to the conclusion that “this cannot possibly work” with reference to TSLA’s costs and revenues. He predicted bankruptcy for the company.
“[Musk] doesn’t want to talk about the numbers, which are a disaster,” former GM Vice Chairman Lutz told CNBC (“Elon's costs are way higher than his revenues: Bob Lutz”). He says let’s talk about the future… He wants to talk about anything but the disastrous business.”
Suffice to say that Lutz generates a LOT of controversy, both from the supporters of Tesla and its charismatic CEO Elon Musk and from auto industry aficionados, as we discovered on our twitter thread upon posting his interview. But Musk does not cut a very impressive figure as a corporate CEO, behaving like a cranky child a la Facebook’s (FB) Mark Zuckerberg. He either needs to play the role as CEO of a public company or stand down.
Come to think of it, Musk reminds us a lot of Henry Ford, a difficult man who had a vision and largely kept his own counsel. Ford was not known for his patience with mere mortals, preferring the company of other visionaries like Thomas Edison, Harvey Firestone and Charles Lindbergh.
In fact, Henry Ford was an appalling manager who was not even an officer when Ford Motor Co was started. He would have failed for a third time in business but for his partners like James Couzens, Horace Dodge and Charles Sorenson. What we can definitely say about autos having researched Ford Men: From Inspiration to Enterprise over many years is that manufacturing passenger vehicles in the 21st Century is a very tough, often times irrational business with modest and frequently negative equity returns.
Watching Ford Motor (F) decide last week to stop making “cars” is a reflection of this economic reality. Ford and all the global automakers must follow the evolving preferences of consumers when it comes to product design and discard products that don’t fit that target. reen is good, but consumer preferences for SUVs are really about utility, a trend Ford itself helped shape by introducing truck-based passenger vehicles like the Bronco and Explorer several decades ago.
When Toyota responded in 1998 with the Lexus RX300, that marked a key step in the evolution and feminization of luxury sports utility vehicles. The 2000 model year Ford Explorer was still a big, dangerous truck, but the Lexus RX was a round, beautifully finished, if underpowered, passenger vehicle that rode high, had a big cabin, rear hatch and great visibility. The Lexus also had good gas mileage.
The fact that TSLA has embraced traditional sedans rather than some sleek kind of vision for the hybrid SUV is notable. As we discussed with Bloomberg Intelligence auto analyst Kevin Tynan in February in The IRA ("The Interview: Kevin Tynan on Autos and Mobility"), the global industry is headed towards a mix of SUVs and true trucks with traditional passenger cars getting a rapidly declining share of the production pie. Makers like Tesla and Audi, for example, are atypical in their continued focus on passenger cars vs SUVs of varying shades. Tynan said in February:
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“A decade ago most SUVs were being built on a truck platform, but that is not the case at all today. These were full frame vehicles. Today there are very few SUVs that are built on the same platform as the pickups.” |
Or to put it another way, Ford still makes “cars” that look like SUVs on the outside. And please don’t take your Audi Q-7 off-road in Maine or even off pavement during the June Camp Kotok fishing trip (there are a couple of spots left, BTW). Take the Ford F-250 Super Duty with the double cab and short bed to tow the grand lake canoe.
Tynan also noted that SUVs and trucks tend to be more profitable than cars, but here is where the problem comes for TSLA. According to Lutz, the delivered price for the Tesla Model 3s is in the $50k range as opposed to original price tag of $30k. That big delta in terms of the delivered price for a Tesla Model 3 will take out a lot of demand for the vehicle, Lutz concludes.
More important, at that $50k price point, Tesla is up against Toyota, Audi, BMW and Daimler Benz, all of whom have full electric and hybrid offerings that can be reasonably profitable today. And the rest of the auto industry is right behind the premium marques in terms of features at lower price points.
Elon Musk has achieved two huge goals: First, he validated the concept of electric cars in the public mind and with the auto industry. The entire global auto industry is desperately chasing Tesla’s vision of the electric future of personal transportation. Second, Musk has created a premium brand in Tesla, but this brand needs to be managed to be competitive. As Tynan noted:
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“Tesla is valued as a tech company, but as a car maker they are in precisely the wrong place in terms of consumer who want a higher ride and other attributes of a truck or crossover… Tesla could at least build a car that consumers want.” |
To us, Musk needs to declare victory and move on to his real passion, namely selling the future, space travel, shuttle to Neptune, whatever. Making cars of whichever propulsion type is about today and those few global designer/assembler/marketers that can compete for market share. Like Henry Ford, Musk’s considerable talent as a visionary and salesman may not be matched by his operating skills. He should just admit as much and put Tesla up for sale.
Tesla ought to hold an auction among the top global automakers and pick a partner to build TSLA autos and especially small and mid-size hybrid Tesla SUVs. The continuing surfeit of global capital may still enable Musk to extract himself whole from the Tesla project and avoid facing the fate of some previous automotive entrepreneurs. We’re thinking not so much about the habitually conservative Henry Ford as much as William Durant of General Motors (GM) fame.
One of the greatest speculators of a century ago, Durant built GM into the largest corporation in history during the first decade of the auto industry. Ford, GM and the Dodge Brothers were all fabulously successful and profitable businesses in the 1900s with returns to shareholders measured in the thousands of percent annually.
Durant brought the Buick, Olds, Pontiac, Cadillac, Champion ignition, AC spark plug and other companies into GM, sales soared, but earnings lagged. By 1910, however, Durant became over-extended and lost control of GM to the creditor banks led by JPMorgan (JPM). Durant was ousted by the bankers as his company sank into debt.
By 1915, aided by the du Pont family and other investors, Durant regained control of GM and began “an enormous program of expansion,” to quote Earl Sparling’s 1930 classic, “Mystery Men of Wall Street.” The E.I du Pont Nemours Powder Company put $50 million of war profits into GM to support Durant.
In the Spring of 1920, Durant tried to float $64 million in new stock to finance the excess of expenses over revenue at GM. The stock was trading at $38.50, but new investors were coming in at half that valuation – just $20 per share. The situation went from bad to disaster quickly, when several large stockholders, concerned about the misalignment of costs and revenue, threatened to sell, forcing Durant to personally support the stock.
By June 1920, Durant had been buying GM stock through intermediaries for more than a month, but to no avail. The stock broke to $20 in public trading when a 100,000 share block was offered, Sparling reports. GM reached $12 per share by the end of the month. The value of GM continued to fall along with his fortune. Durant spent his entire cash reserve -- $90 million – to allow some of his personal friends and associates to exit the stock.
By the end of 1920, JPMorgan stepped in once again and along with the du Ponts took charge. They paid Durant $40 million for his stake, of note. More important, Du Pont controlled GM until the Administration of President Dwight D. Eisenhower.
It seems to us that Elon Musk has a choice. He can either magically cut the cash burn rate of TSLA down to nothing and start delivering cars on time or he can look for an exit strategy. Musk has created an awful lot of value in TSLA, but the better part of valor may be for this American icon to partner with a global automaker and move on to personal aircraft, for example.
Otherwise TSLA will continue to burn cash and, eventually, must go back to the markets for more. And if TSLA is unsuccessful in raising new cash, then like GM in 1920 the great endeavor will be finished – unless Musk is prepared to fund the venture out of his own pocket. The bond holders and other creditors are, of course, ultimately the true owners of TSLA. Thus a sale may be the best outcome for this valuable brand, but how to get Musk to accept such an outcome?
Trouble is, Musk may not be able to fund his project until it becomes at least as competitive as the rest of the industry. And between today and that operational goal, TSLA will be valued more and more as a car company as opposed to a technology play. Ponder Audi AG valued at $34 billion vs TSLA at $49 billion. The markets will resolve the question soon enough.
One might apply the judgment of Sparling on the persistent Durant to the personality of Musk: “[I]t isn’t money nor even power that this man has striven for all his years, but achievement, a role in the play of life that might turn that comedy and farce into the kind of drama it would be had a surer playwright written it.”
EDITOR'S NOTE
This Hedgeye Guest Contributor piece was written by Christopher Whalen, author of the book Ford Men and chairman of Whalen Global Advisors. Over the past three decades, he has worked for financial firms including Bear, Stearns & Co., Prudential Securities, Tangent Capital Partners and Carrington. This piece does not necessarily reflect the opinion of Hedgeye.
