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The commentary below was written by Christopher Whalen. It was originally posted on The Institutional Risk Analyst

Tesla's Single Point of Failure - z tez

Watching the meltdown of Tesla Motors (TSLA) founder and CEO Elon Musk last week unfold in the pages of The New York Times, we are reminded that enterprises need both vision and operating smarts to be successful. It was obvious years ago that Elon Musk needed help to build a new car company.  Yet somehow the members of the board of directors of TSLA did nothing as Elon Musk led this extraordinary endeavor. 

We noted in Ford Men: From Inspiration to Enterprise that Henry Ford had the vision thing, but his partner James Couzens turned the idea into a successful business.  So bad was his reputation for tinkering and racing that Ford was not even an officer of Ford Motor Co (F) when it was founded, but he had an idea.  

Thanks to Jim Couzens, in less than a decade that idea Henry Ford nurtured exploded into one of the great American fortunes, a transformational fortune built on manufacturing. The business was wildly successful and repaid its investors and more in the first year.  And thanks to another Ford Man, engineer Charles Sorensen, Ford Motor Co invented the assembly line that enabled the company to meet the astronomical demand for cars a century ago. 

Musk is no Henry Ford, but TSLA is the latest case in point to the lesson that solitary leaders often fail. No matter how brilliant or inspired, most of us need the moderation and help of business partners, directors and investors to make an enterprise succeed and endure. Having Horace Dodge on the board of directors of Ford Motor Co, for example, certainly did not hurt the company’s prospects. The Dodge Brothers actually built the early Ford cars as kits until the Ford Motor Co had its own factory. 

When Couzens resigned as General Manager of Ford in 1915, the company was by then controlled solely by Henry Ford and would suffer for three decades from his distracted, idiosyncratic mismanagement.  The fact that Ford Motor Co did not fail prior to WWII is a miracle. How difficult was Henry Ford?  Think Steve Jobs squared.  

Of course, personalities and vision are essential to any enterprise, but the enterprise cannot be dependent upon just one person if it is to be enduring. Over the years there were many managers and bankers who kept Ford Motor Co afloat. But for the singular efforts of James Couzens, though, Ford Motor Co almost surely would have been Henry Ford’s third business failure. 

Personalities and vision are important in business, no doubt.  Henry Ford II saved Ford Motor Co from bankruptcy after WWII, but he had a deep bench of managers and financial minds behind him and the Ford family.  Yet fate plays a strange role in business.  Ponder how different the auto industry would be today had Horace and his brother John Dodge not both died of the Spanish Flu in 1920. Dodge might be the number one US automaker followed by GM.  Ford Motor Co might have already disappeared from view under the erratic leadership of Henry Ford. 

The Fords are celebrities but not magicians. You need a dose of techno buzz to achieve that.  Had Bill Ford announced in 2003 a project to build all-electric Ford cars, he might have caused a bit of a stir.  But Bill Ford never would have escaped the financial straight jacket of the existing auto business.  

Technology demigod Musk, on the other hand, was able to launch a “new” car company at a technology market multiple based upon the dubious promise of future profits from battery power. But Musk also is TSLA's single point of failure.  The dependence upon Musk to maintain the nose-bleed valuation of TSLA seems a key reason why TSLA's timid board has not tolerated any competition in the CSUITE. 

Despite the tech sector pretensions, the impact of TSLA and Musk on the auto industry is enormous. Consider the fact that Geely expects to IPO Volvo Cars at a $30 billion valuation – more than 16x the $1.8 billion Ford received from the sale of the business in 2010.  The  Volvo IPO owes as much to the hype surrounding TSLA as it does to the credit market machinations of global central banks.   

Does a business that made half a million cars last year with a single digit profit margin really deserve a $30 billion valuation?  Only if you really, really believe that TSLA is worth $52 billion or more with a fraction of that output. But if TSLA crashes, then the Volvo IPO very likely is toast as well. 

Just as Tesla had thrived due to the vision and passion of Musk, the company’s prospects and equity market valuation would suffer greatly in his absence.  Tesla without Elon Musk is just another unprofitable car maker, albeit one that promises to “accelerate the world’s transition to sustainable energy.”  Really?  

To us, Musk and his investors are stuck on the horns of a very nasty dilemma.  In order to make TSLA a functioning car manufacturer, CEO Musk must bring in some operators before he burns out or worse.  But to do so means destroying the techno hype that has fuled TSLA's forwad equity valuation, enabling Musk to burn through billions in debt and equity capital based upon a promise of “green” transportation. Anybody familiar with making lithium batteries knows that this technology is anything but green or sustainable.  

The most recent outburst by Musk about a fictional going private transaction illustrates that the reputation of a successful inventor may not necessarily translate into business acumen.  Visionaries such as Musk and GM founder William Durant, on the other hand, are showmen.  They are great at building new businesses so long as they are spending someone else’s money. 

Ultimately, the iron law of profit and loss destroyed the lofty dreams of Durant, forcing GM into the arms of JPMorgan and the DuPont zaibatsu twice prior to WWII. We suspect that the same fate awaits TSLA and its credulous shareholders.  And as we've said before, the bond holders are the true owners of TSLA.

Investors rightly love Elon Musk because he is more than a mere speculator like Durant.  Musk imagines big ideas and turned many of them into reality, a proud achievement that he shares with another great American inventor, Thomas Edison.  It was Edison, never forget, who loved the idea of electric vehicles.  Yet ultimately when Henry Ford left Edison’s employ in 1900 to build cars, he chose to use gasoline instead of electricity.  

After creating and selling what would become the General Electric Co, Edison’s business fortunes declined.  Merely being brilliant and having a vision of the future was not enough. Ford’s immensely powerful mind generated its own inspirations based on observing the industrial activity that was welling-up from the ground in and around the Detroit region in 1900.  He took counsel with peers like Edison, Dodge and Harvey Firestone.  

Musk belongs to this same exclusive category of visionary inventors inspired by change.  But Ford, Edison and Musk all stand as examples of why being a visionary is not sufficient to be successful in building and operating a business.  As we noted in an earlier comment ("Should Elon Musk Sell Tesla?"), Musk has defined a market for electric cars and created a brand, but the better part of valor may be to declare success and sell his creation to a larger global manufacturer.   

Henry Ford called Edison “The world’s greatest inventor and the world’s worst businessman,” a telling assessment that was confirmed by the series of failed commercial ventures.  Edison himself said that having an idea is not enough.  But Ford’s criticism of his longtime friend and mentor was more than a bit ironic.  Henry Ford’s fortune  also required the efforts of many, many other people, as described in Ford Men.  

John Kenneth Galbraith summarized the basic truth when he wrote in Atlantic Monthly more than a half a century ago: “Although Ford conceived of the Model T, Couzens made the Ford Motor Company.”  Elon Musk now faces this very same challenge of how to turn inspiration into an enduring and profitable commercial enterprise. 

Leaving aside the particular operational concerns of building an electric car, Elon Musk and Tesla face a more basic problem.  In the century and more since Henry Ford, James Couzens and Horace Dodge began to build cars, the automobile has become a very relevant but entirely undifferentiated commodity good. There are basically three types of cars: small, mid-sized and full sized.  Most of these are now styled outwardly as SUVs, but are designed to maximize efficiency and minimize price.  And the companies that manufacturer these vehicles all barely make money.  

The fact that TSLA vehicles are driven by batteries is interesting, but there is nothing transformational about TSLA despite all of the hype about green transportation and "sustainability." Yes, electric motors and batteries are far more efficient today than a century ago, but strides made in internal combustion engines are impressive as well.  Compared with the explosive event of the first Ford Model T, when Americans learned 110 years ago that they could get a gasoline powered car instead of a horse, today’s innovations in transportation are incremental.  

Electricity, gasoline engines, radios and semiconductors, are all the inventions of the past century, while the innovations of today are largely derivative. Seen is this harsh light, is TSLA really worth $50 billion as Friday’s close suggests? Is Volvo Cars worth $30 billion?  Really?  We shall see.

EDITOR'S NOTE

Christopher Whalen is Chairman of Whalen Global Advisors LLC, a Wall Street insider who understands the intersection of politics and finance, and says what he means. He has worked in politics, at the Federal Reserve Bank of New York and as an investment banker for more than 30 years. He is the author of three books Inflated (2010)Financial Stability (2014) and Ford Men (2017).

In 2017 he resumed publication of The Institutional Risk Analyst and contributes to many other publications and media outlets. He just launched the first volume of The IRA Bank Book, a review of the operating and credit performance of the US banking industry written for institutional investors. 

Tesla's Single Point of Failure - market brief