Tesla: Additional Things We Now Know About Elon Musk
- Elon Musk ended the sideshow by grandly announcing that his loyal shareholder base would prefer that the company remain public.
- Without providing any facts, Musk continued to claim that funding was available to take the company private.
- We can only speculate about why Musk made the original announcement, but the series of events displays more examples of Musk’s irresponsible behavior.
- Although Musk is revered as a “visionary leader” among Tesla supporters, the latest episode shows how little Musk is concerned about reality.
After a tumultuous period of hugely volatile swings in Tesla's stock (NASDAQ:TSLA) set in motion by Elon Musk's August 7 announcement of "Taking Tesla Private," there was a "Staying Public" blog post on August 24 that announced that Tesla will remain a public company. I found all of this absurdly comical given that a company with over $11 billion of debt (and negative working capital!) definitely needs an ongoing lifeline to possibly available capital in public securities market, but somehow the idea seemed to be believable to many people.
The fact that there was absolutely no possibility that the current shareholder base could have supported such a transaction or that capital was actually available to "buy out" shareholders not wishing to participate in such a transaction now offers an additional perspective on Musk's previously irresponsible claims and projections about Tesla's operating activities throughout its history.
As for Tesla's continually missed targets, forecasts, and projections concerning its operating activities and financial projections (Bill Maurer has an excellent summary of such unfulfilled statements), a more benign perspective could have been that "the world is a complicated place and not everything will go according to plan." Tesla supporters have seemed to continually have such a benevolent view of Musk's unfulfilled timelines and statements even though the financial reality of such unfilled statements had totaled over $5.7 billion in operating losses over its history.
Now that Musk has made similarly outlandish and now unfulfilled "projections" about the possible future capital and corporate structure of Tesla, I believe all of the earlier unfulfilled statements and projections about operating activities should be viewed from a much more critical perspective. Essentially, in my opinion, Elon Musk is willing to say and do anything to manipulative the narrative about Tesla into having people believe what he would like them to believe. The latest episode is just another example of exactly what I have just described.
Did the "Taking Tesla Private" proposal have any chance of succeeding?
Just from a capital markets perspective, I do not believe that at least $50 billion of capital would have been available for such a transaction even in what is still a relatively "easy money" and "frothy" capital markets environment.
The rumored significant support from Saudi Arabia's Public Investment Fund (PIF) was also comical given that its current assets are around $230 billion (they would not allocate between 10 and 20 percent of their assets into one investment!). The Saudi PIF also recently displayed its own need for funding by having just raised $11 billion by issuing debt during August.
Another announced supposed collaborator, Silver Lake Partners, currently has total committed capital of around $40 billion and so based on typical risk management guidelines, probably only $2 billion would have been available from such a source. Essentially Musk's statements and implications about "Funding Secured" was not a lot different from some loquacious fool blathering on at a cocktail party about all of their "connections" and supposed accomplishments. As I mentioned in one of my comments about the ongoing events in the "going private" farce, the entire sequence of events reminded me of a bad episode of Gossip Girl where characters bantered back and forth about imaginary business deals and trading properties back and forth.
The comedy and absurdity in all of this gets better, however, given the subsequent involvement of both Goldman Sachs and Morgan Stanley. As mentioned in the "Staying Public" blog post, such consultations with such an astute choice of advisors (to imply another data point about Musk's brilliance!) seemed to result in clarifying the difficulty of such a transaction. I have over 30 years of extensive capital markets experience, however, and Elon could have just called me on August 6 and in no more than ten seconds I would have offered a succinct "NFW" opinion and saved everyone a lot of time, trouble, and money.
The reason for such a quick and decisive NFW opinion is exactly what Musk now belatedly claims to have learned during the three week drama during August. All of those supposedly loyal institutional investors also have dry and boring constraints and risk management guidelines that would prohibit such an investment. All of that should have been obvious up front but not knowing or caring about such things also displays a lot about Musk's dangerous flaws.
As Musk and Tesla have previously "pushed the envelope" with opaque financial disclosures and notable omissions of details, the latest episode also shows that Musk really doesn't care about normal obligations and constraints that don't suit his purposes. Such behavior itself should be considered a significant risk for investors but when combined as well with continually missed operating targets and forecasts, the risk of investing in Tesla should probably now be considered as being significantly higher.
From having had 20 years of experience managing mutual funds, I can also venture another opinion as to why Tesla's "loyal" institutional investors had no interest in even considering a private investment in Tesla. Even before the recent episodes of Musk's erratic behavior from the:
- "Pedo guy" comments - which, amazingly enough, had a replay this week!
- The heavy handed, gangsterish, and almost "Secret Police" type intimidation of a critic
- Crazy tweets from an officer of a public company about an upcoming "short burn of the century"
Tesla's institutional investors, although enjoying "the story" in a market with a very limited number of true growth stocks, were probably also very aware of the risks of investing in Tesla. But, with a publicly traded security, there is always an exit path. With Musk's "going private" scheme there would have been no exit path. That is why there was probably actually no support at all from the institutional investors even beyond what should have been obvious from the compliance and regulatory constraints.
As for individual investors being willing to play along with "In Musk We Trust" by also participating in Musk's delusion about a "Special Purpose Vehicle" for them to still support Musk's visions, that was also absurd. Any basic securities lawyer could have told Musk in about ten seconds that such an idea was also not possible for the same dry and boring compliance issues. Individual investors would probably have also been unwilling to participate given the same lack of an "exit path" issue as has already been described for the institutional investors.
What do the recent events say about Elon Musk?
As mentioned a bit earlier, the missed operating targets and financial forecasts have apparently been viewed in a reasonably benevolent light by most Tesla investors in that there was always an ongoing "growth story" also along with the missed forecasts. But, now we have another real world example of something else proposed by Musk that was completely unfeasible and unachievable. Does such an event mark a turning point in how investors may view and believe Musk in the future? In my opinion, yes.
There is even more in the recent background of the "going private" scheme that should draw further questions about Musk's behavior and actions. As linked above about the projected "short burn of the century" we initially had no idea about what may have been up Musk's sleeve. Since very few people thought that Tesla could reach a production rate of 5,000 Model 3s a week in the second quarter, Musk's "all hands on deck" final week of the quarter push to slightly exceed that rate in just one week was probably Musk's attempt to prove all the naysayers wrong and cause the shorts to cover.
That didn't work, however, as although the stock opened higher the day following the announcement, it then quickly declined when the absurdity of the supposed achievement was more widely appreciated. The absurdity of such a supposed Stakhanov like achievement is also highlighted even more when the production "guidance" for Q3 was only 50,000 to 55,000 Models 3s a week. Maybe I have no imagination given that I went to school before the "new math" was introduced but that guidance for total Q3 production of the Model 3 is only around 4,000 a week.
Since the "all hands on deck" effort to produce the "short burn of the century" didn't work, I think that the "going private" announcement was then another attempt to engineer a short squeeze. What is comical about such an attempt, however, is that aside from that there was no chance of such a transaction taking place, the stock stayed roughly 20 percent below the supposed $420 "buyout" price which also showed that almost no one believed that it could happen.
Since there was very little credibility about the going private transaction, I also now think, as already suggested above, that there will be much less belief in Musk's statements and projections in the future. For a company with huge ongoing capital needs, that could be very risky for Tesla investors.
Meanwhile...what's going on with all those dusty cars?
Since Musk's and Tesla's statements in the future will likely be accepted with much less credibility if I am correct with my perspective, the company's current statements about what is actually going on with the Model 3 "production ramp" will probably also be accepted with much less belief.
Some enterprising sleuths have done drone flyovers of the various "staging lots" in Lathrop and Burbank to show thousands of Teslas sitting in the hot sun on an ongoing basis. There has been other coverage of the staging lots as well from Business Insider and a local newspaper near Lathrop. There has been much speculation as well as to whether the cars are waiting for "rework" after initial manufacturing or even whether such a "production constrained" company actually has no customers for the cars but, in my opinion, even a much more benign explanation shows both Tesla and Musk in a very poor light.
As I have essentially suggested earlier in this article, the actual reality of Tesla is that Musk feels free to just make stuff up. And so, given another previous vision from Musk of highly efficient and almost completely automated "Alien Dreadnaught" manufacturing where Tesla would be the most efficient manufacturer in the auto industry, the actual reality is that:
- Most of the robots either didn't work or weren't effective (humans are underrated!),
- an "advanced" materials delivery system, has been scrapped, and
- cars are now being worked on in a quickly constructed tent now taking up space in one of Fremont's parking lots.
And so I'm not sure why all of those cars are out there sitting in the sun because it doesn't seem very efficient to me.
In any case, the extreme limits of the Fremont facility are now definitely being displayed as there is no room for the vehicles there. The Tesla claim of vehicles being manufactured only to order also makes no sense as if the vehicles were fully inspected and finished vehicles then they would be on their way to their eager buyers instead of sitting in a storage lot. Also, if there is no room for the vehicles in Fremont and cars are also being manufactured in a tent, that also begs the question about where the next promised Musk story, the supposed Model Y, might be manufactured.
From the real world, an actual data point about the costs of a manufacturing plant
Another recent Tesla story was about their announced future China "Gigafactory." Elon Musk is never happy with just factories and to make things more exciting they all have to be Gigafactories! As usual, however, the China factory announcement had very few details. A new China auto assembly plant planned by a real car company (Nissan (OTCPK:NSANY)) does provide some dry and boring details about the actual costs of such a new facility.
As described in a recent Reuters article, Nissan plans to spend $900 million for a plant that will have a capacity of 200,000 to 300,000 vehicles per year. The Tesla announcement, although vague as usual, implied that their new "Gigafactory" would have capacity of at least 500,000 cars per year, which also corresponds to the company's narrative that there is huge demand for their vehicles.
Not only cars would be manufactured in Tesla's new China Gigafactory, however, but there was also more of the same "highly automated and integrated" story about having battery manufacturing there as well. So, for double the vehicle capacity of the now announced Nissan plant, that would cost at least $2 billion. For additional battery production and battery pack assembly capacity, that would probably add another $1 billion for a total of $3 billion in costs.
Although another one of Elon Musk's recent claims is that the company will now be "cash flow positive" in Q3 and going forward and would never again need any external financing (the sixth iteration of that claim I believe), $3 billion is a lot of money - in addition to probably $2 billion for additional capacity for the Model Y, Semi, Roadster, etc. and so I don't see how the Tesla China plant will ever be built.
As with everything involving Tesla, there are always rumors, speculation, and stories about how something might actually be able to happen. Concerning the China plant, there seems to be an assumption that "local financing" will be available. Concerning that notion, however, China is already in the middle of huge scandals about defaults in "Special Purpose Financing Vehicles" and so I don't think much, if any money, would be available from China for Tesla's plans.
Y is there now more competition?
Another part of the Tesla "story" is that there will be unlimited demand for a "Model Y" SUV. Well, guess what, given Tesla's other challenges - including never meeting plans and deadlines - there is now a significant new competitor which will have an all-electric SUV at least two years before the Model Y may have its chance to sit in a dusty parking lot.
That SUV is the new Mercedes EQC but even that model is not alone in beating Tesla into the electric SUV segment given the already introduced Jaguar I-Pace and the Audi E-Tron that began being manufactured this week. Tesla fans, who probably still believe in fairy tales such as "$35,000 mass market vehicles" being produced by Tesla, will claim the EQC will not be a competitor given its likely price of around $80,000. That price, in my opinion, is actually a very telling real world data point about the actual costs of producing electric vehicles. Daimler, as a disciplined organization, is not willing to lose money on its vehicles - a concern that does not seem to be shared by most Tesla investors.
There was another interesting detail about the EQC announcement, however, which also invalidates another Tesla fairy tale which is the dreamed about cost advantages of its "Gigafactory." Even forgetting about the fact that Panasonic is probably charging Tesla a fixed unit cost for each cell, which effectively invalidates Musk's "economies of scale" suggestions, Musk likes to imply that such "integration" will always give Tesla a cost advantage in batteries.
The interesting detail in the EQC announcement, however, is that Mercedes will be manufacturing the batteries themselves:
"The centrepiece of the Mercedes‑Benz EQC is the lithium-ion battery from in-house production housed in the vehicle floor."
But, how can that be? How is it possible to manufacture batteries without a Gigafactory? Well, an organization as disciplined as Daimler seems to have figured out a way - and they certainly wouldn't be doing that if they thought they were going to lose money.
This is so different from Tesla that has racked up almost $6 in operating losses although Musk now claims that the company will be profitable going forward. From my perspective, with the long list of Tesla's unfulfilled promises financially, I put a very low probability on Tesla ever generating consistent operating profits. In any case, even with the additional promise of being "cash flow positive" there is a huge difference between being able to possibly generate a small level of positive cash flow (which Musk will then crow about) and generating enough cash to ever repay $11 billion of debt and also support ongoing capital spending requirements of probably at least $3 billion annually.
As I have described earlier in this article, I believe the recent "Tesla going private" episode provides a real world example of that Elon Musk is willing to say and do anything to attempt to control "the narrative" concerning Tesla. Aside from what will probably be ongoing and costly regulatory and litigation issues involving Musk and the company, I believe that Musk's irresponsible and manipulative behavior will now come under much greater scrutiny and that his statements will have much less credibility. For a heavily indebted company in a very capital intensive industry where there is a continual need for sources of capital, that is a huge risk that is not being appreciated by Tesla investors.
None of what I am describing should be a surprise, however, as many Musk statements and promises are overstated and unfulfilled:
- A $35,000 "mass market" vehicle,
- a July 2017 introduction of such a "mass market" vehicle,
- "Full Self Driving" which has been being sold for almost two years now but with no announced delivery date,
- "Alien Dreadnaught" manufacturing to be the most efficient manufacturer in the world,
- "Solar Roof Tiles" which are effectively still not available, and
- "No Brainer" synergies between Tesla and SolarCity but where the previous SolarCity business activities have effectively now all been terminated.
I could go on for quite a while about many other examples of unfilled statements but the Bill Maurer blog post linked above already provides a very comprehensive list.
The overall point of this article, however, is what has already been mentioned throughout - that Elon Musk's future credibility will be much more in doubt. For a heavily indebted company in a very capital intensive industry, that will be a huge risk for Tesla investors.
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