Tesla’s decision to raise $2 billion by selling new stock this Wednesday caught a lot of fans and investors by surprise. Until recently, it was hard not to fall in love with Tesla and its goal of making new electric cars affordable and fun. The stock price has gone up by nearly 700% in five years and Consumer Reports called the Tesla Model S the best car it ever tested back in the summer of 2013.
The bad news is, since that time, Tesla has been forced to confront a reality that many of us deal with in our own lives: money and popularity can't solve our biggest problems. And Tesla, it just so happens, has a lot of problems.
If you invested $1 in Tesla back in September 2014, you now have around 70 to 80 cents. The company’s stock has been quietly stagnant for three years now, and Tesla’s announcement that it's selling $2 billion in shares to raise much-needed cash is setting off warning bells.
Look, I love the idea of Tesla, but there's a major disconnect between its reputation and its actual ability to get shit done. The company continues to be unrealistic about its future plans -- and its ability to achieve them. If you were considering investing, here's why you should run.
Tesla might need to raise five times the cash it's hoping to -- just to keep its lights on
Forget about Tesla making a profit, or even breaking even: the Tesla Gigafactory, currently under construction in Nevada, is going to cost the company well over $3 billion to complete. The new Model 3 will likely add at least $1.5 billion to that total if production reaches Musk's lofty goal of 500,000 vehicles a year (and that's a big if... we call bullshit). Last year alone, Tesla's cash flow was well over $2 billion... in the red. The company currently has no automotive partners to help the 10 million-square-foot Gigafactory reach its capacity. In fact, Toyota and Daimler (which owns Mercedes-Benz, etc...) sold their stakes in Tesla way back in the fall of 2014 and have ceased all joint ventures with the company.
In the car business, where joint ventures and cooperation are essential towards keeping costs down, Tesla’s position of going it alone could become fatal.
Even worse, Tesla's entire business model has an expiration date
Chances are good that you're familiar with the $7,500 federal tax credit currently in place for electric vehicles. What you may not know is that this government subsidy -- which is good for 200,000 vehicles for each manufacturer -- is scheduled to run out for Tesla by late 2017 to early 2018. This means that the vast majority of buyers who placed a deposit for a Model 3 won't be receiving that $7,500 subsidy -- making the car that much more expensive than its advertised price.
Worse still for Tesla, competing cars from other manufacturers will have an inherent $7,500 cost advantage over that model -- at least for a while. In other words, even if this stock sale results in faster production times and Tesla somehow hits what appears to be a mythical production goal, the subsidy issue looms large.
Even with $2B in cash, Musk's "500,000 cars per year" just isn't happening
Raising funds alone won't magically make Tesla's production goals feasible, at least not in Elon Musk's aggressive 2018 timeframe. Musk has already said that Tesla won’t hit its production targets for the summer of 2017 due to the need to “solve the supply chain and internal production issues.”
As Forbes recently pointed out, these issues aren't small -- they're monstrous. Why? Today’s vehicles require over 30,000 parts, and failure rates of those parts can't even reach a few percent if the company is to survive. But Tesla suffers from chronic quality-control issues; as a result, the Model X launch failed spectacularly. The company planned a weekly run at 750 vehicles, but only managed to squeeze out 2,420 vehicles in the first quarter -- that averages out to less than 200 cars a week. Then there were the Falcon Wing doors that don't open, and the extraordinarily high drivetrain failure rates. The overall quality control is so bad that Consumer Reports recently pulled the Model S off its recommended list.
Tesla is a young manufacturer with a huge learning curve to overcome if it plans to master long-term quality. As far as the Model S is concerned, the attempt to mass produce 500,000 vehicles will only harm Tesla's attention to quality control.
Even the biggest and best manufacturers can't pull off such ambitious goals
Toyota has manufactured more assembly plants and earned more quality awards than any other automaker over the last 30 years. In fact, Toyota's quality feats have been so far beyond the industry standards that General Motors, the world's largest auto manufacturer, developed a joint venture with Toyota just so that it can better learn and understand the Toyota production system.
Toyota's talents took decades of continuous improvement and learning. Yet Toyota will still need four years to develop a new assembly plant in Mexico -- with only a 300,000-vehicle capacity. It's not the physical construction of this plant that is the obstacle. It's developing the talents and capabilities of suppliers, many of whom already supply Toyota with millions of parts worldwide.
Even if Tesla had all the money in the world, it simply doesn't have the level of experience to accomplish its 500,000-unit goal in half that time, and it certainly doesn't have the relationships. Sure, Tesla's the "it" brand of the moment, but it has a history of promising great success, only to fall short of expectation time and again. If that's the kind of company you want to invest in, I've got some excellent oceanfront property to sell you.
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