In the history of car companies, has there ever been one that took such a long and sustained thrashing as Tesla? Actually, one iconic company does come to mind that offers a number of striking parallels: Ford.
Learning through failing
Robert Greene’s recent book, Mastery, offers some interesting insights into Henry Ford’s initial experiences in trial and error. Manufacturing automobiles in the late 1890s was no less a daunting venture than it is some 120+ years later. It required a tremendous amount of capital and a complex business structure, considering all of the parts that went into production.
Through his personal ingenuity, however, Ford found what seemed like the perfect backer relatively quickly. William H. Murphy, one of the most prominent businessmen in Detroit. The new Detroit Automobile Company and all who were involved had high hopes. But problems soon arose. The car Ford had designed as a prototype needed to be reworked – the parts came from different places. Some were deficient and far too heavy for his liking. He kept trying to refine the design to come closer to his ideal. But it was taking far too long, and Murphy and the stockholders became restless. In 1901, a year and a half after it had started operation, the board of directors dissolved the company. They lost faith.
Ford assessed his failure and decided he’d been trying to make his machine serve too many consumer needs. He would try again, making it more lightweight and smaller. He convinced Murphy to give him another chance. Still believing in Ford’s genius, he agreed, and together they formed the Henry Ford Company. Right from the start, however, Ford felt the pressure from Murphy to get the automobile production-ready so as to avoid the same problems he had the first time. Ford resented the interference from people who knew nothing about design or the high standards he was trying to establish for the industry. When Murphy and his men brought in an outsider to supervise the process, Ford reached his breaking point.
Less than a year after its establishment, Ford left the company. The break with Murphy this time was final. In the car business, everyone wrote Henry Ford off. He had blown his two chances and nobody was ever given a third, not with the amount of money at stake. But to friends and family, Ford himself seemed unconcerned. He told everyone that these were all invaluable lessons to him – he had paid attention to every glitch along the way, and like a watch or an engine, he had taken apart these failures in his mind and had identified the root cause: no one was giving him enough time to work out the bugs.
Greene writes, “The people with money were meddling in mechanical and design affairs. They were injecting their mediocre ideas into the process and polluting it. He resented the idea that having money gave them certain rights, when all that mattered was a perfect design.”
He goes on to say, “It is a curse to have everything go right on your first attempt. You will fail to question the element of luck, making you think that you have the golden touch. When you do inevitably fail, it will confuse and demoralize you past the point of learning. In any case, to apprentice as an entrepreneur you must act on your ideas as early as possible, exposing them to the public, a part of you even hoping that you’ll fail. You have everything to gain.”
In spite of how vastly different Ford's world was from Musk's, you could almost create a connect-the-dots portrait of similarities between the two. Perhaps we just hear about the negatives of Musk and Tesla more now that everyone can megaphone their opinions as often as they please.
Comparisons aside, let’s take a peek at where things stand today as we edge toward the end of Q1 2018.
Has Tesla paid off its loan?
First, a necessary myth-busting. While this should probably come as old news, it is well-documented that Tesla paid off its loan some five years ago, and yet the same tired storyline of how Tesla is somehow “fleecing” America continues to dog the company. Although there were other companies who took out loans from the ATVM program established by President George W. Bush (signed into law in 2008 to support the development and production of fuel-efficient vehicles), few to none point fingers at them. Most don’t even know who they are, much less whether or not they paid back their loans.
To date, Tesla remains the only borrower to have paid back the loan in its entirety -- not to mention nine years ahead of schedule and with interest. Whatever the case, the Tesla bears took their positions early and even today continue to repeat the story some half a decade later.
Critics also harp on how consumers will get "federal dollars" if they purchase a Tesla. Here's the deal: There's a government program called the Clean Vehicle Rebate Program (CVRP), which offers rebates to any and all electric vehicles. That's right, hydrogren fuel cell, battery electric and plug-in electrics for all automakers, including Toyota, Chevy, BMW, Hyundai, Cadillac, Ford, Honda, and, yes, Tesla. Hate the program all you like, but it's strange how Tesla gets singled out.
What is the ATVM program, and is it any good?
Trump wants to cut it, but currently the program still has as much as $16 billion to lend, has "created or preserved" 35,800 jobs, many in manufacturing, and claims to have funded innovations that saved consumers more than 1.6 billion gallons of gasoline.
“It creates jobs, it promotes U.S. manufacturing and it helps build our lead in the global advanced-technology race,” said Genevieve Cullen, president of the Electric Drive Transportation Association.
Ford was granted a loan worth $5.9 billion in 2009 to upgrade 13 manufacturing facilities in six states. Those facilities have since produced more fuel-efficient versions of the Escape, Focus, Fusion and F-150, among other vehicle models, according to the ATVM website.
“It was an important program at that time,” said Ford spokeswoman Christin Baker. “We had a plan in place already to transform and retool our facilities and this loan helped us to accelerate those plans.”
Nissan received $1.45 billion in 2010 to build or update facilities in Tennessee where the company makes batteries, paints cars, and assembles the all-electric Nissan Leaf. That project created 1,300 jobs, according to ATVM.
Both of those loans are still in good standing, an Energy Department spokesman said. Others have busted, but among these examples, Tesla is an exemplar.
Tesla paid off the entire loan ($451.8M) to the Department of Energy by 2013 with interest. Before that, for the first seven years since its founding in 2003, Tesla was funded entirely with private funds, led by Elon Musk. Tesla brought its Roadster sports car to market with a 30% gross margin, designed electric powertrains for Daimler (Mercedes) and had done preliminary design of the Model S all before receiving a government loan.
The program is often confused with the financial bailouts provided to the then bankrupt GM and Chrysler, who were ineligible for the ATVM program, because a requirement of that program was good financial health.
What are more legitimate critiques?
Is it all sweetness and light and sipping rosehip tea? You’d have to be living in a Congolese cobalt mine not to have heard the criticism.
The Model 3 rollout has hit setback after setback. Profitability remains elusive. Bears detail it nearly every day. Tesla is expecting negative automotive operating margins through Q1. Interest rates are starting to head north, and some economists are predicting a slowdown, which would clip consumer spending and, therefore, demand for Tesla vehicles and green energy solutions.
There are infrastructure challenges (Ford faced a world without paved roads), issues with environmental sourcing related to carbon emissions in the creation of their batteries, and questions about whether or not Musk is over-reaching with so many irons in the fire. There are plenty of storylines to keep fanning the flames of castigation.
Where does Tesla stand today?
Even for bulls and long-termers, Tesla’s stock is often seen to be overvalued. On the other hand, there are few better representations of supply versus demand dynamics than a company’s share price. There’s only an limited number of outstanding shares in a company’s float after all.
A company’s share price, therefore, is a reflection of the total participants in the market demand for equity ownership of the stock. When that share price is elevated like with Tesla, there is massive pent-up demand. When a company’s share price languishes, then demand is low, since buyers are missing to buoy the stock.
According to CFRA analyst Efraim Levy, Tesla will likely finally meet its latest Model 3 production target of 5,000 vehicles per week by the end of Q2. You heard it here. Bears might want to check their short hedges.
CFRA also expects an impressive 50 percent increase in Tesla's revenue in 2018. Levy says manufacturing efficiencies will also likely improve Tesla's margins. Also, Tesla appears to be in no immediate need for additional funding for the Model 3 ramp, but the company could require additional financing for its international Gigafactory expansion plans.
But that doesn’t tell the whole story. Individuals can short a company’s stock by borrowing shares they don’t own, thereby artificially suppressing the perceived demand of the shares. In a case like Tesla, approximately 30 million shares are sold short.
Tesla has specific and credible plans to resolve the primary Model 3 production bottleneck in Q2 2018. The company has an unexpectedly large cash balance, enough to carry it into Q3 2018 with no need for additional capital as long as no further production delays occur. The company seems to be on trajectory toward sustained quarterly operating profits by the end of 2018.
Tinkering behind the scenes continues with Tesla's autonomy R&D. Deep learning is often non-linear: non-existent, then slow, then remarkably fast, much like Ford's creative progress must have been.
On its recent quarterly earnings call Tesla reiterated their goal to produce 2,500 cars per week by the end of next month. There is yet another promising update on the primary production bottleneck, the machines that package battery cells into modules (which are then packaged into battery packs). Apparently, Tesla Grohmann has designed a production line at its headquarters in Germany that has been tested and is working spectacularly -- it’s expected to be three times as productive as the battery module lines currently in place. Now the new lines just have to be shipped from Germany to Tesla’s Gigafactory in Nevada, and installed. That too is looking to hit in Q2 2018.
Grohmann Engineering is the real deal. It’s been working on advanced manufacturing for 55 years, and car manufacturers like BMW and Volkswagen have been clients. Tesla Grohmann is Tesla’s manufacturing A team, so Tesla’s claim that the new battery module production lines are awesome is completely credible. And for those of you literally keeping track, here's a live production tracker for the Model 3.
Maybe the bears are the fuel to the innovator's fire, or maybe they just ignore them as best they can, but one thing for sure, nothing great was ever made without great struggle.
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