Can Elon Musk reinvent the wheel with Tesla’s Model 3?

On May 4, CEO Elon Musk stunned the auto world by vowing to ramp up Tesla’s vehicle production to 500,000 units per year by 2018, just two years from now--10 times the number of cars and SUVs Tesla delivered in 2015.  (REUTERS FILE PHOTO)

 

For weeks now, lineups several metres long have formed at the Tesla Motors Inc. kiosk at Yorkdale Shopping Centre. These are Tesla enthusiasts putting down a $1,000 (U.S.) deposit on an advance order for Tesla’s latest electric vehicle (EV), the Model 3.

The excitement over the Model 3, which holds the potential of making EVs a mass-market product for the first time, has no equivalent since the anticipation of Lee Iacocca’s Mustang more than half a century ago.

 

And the upfront cash from the faithful at Yorkdale and Tesla’s other sales outlets worldwide meant that when Tesla co-founder and CEO Elon Musk took the wraps off three Model 3 prototypes at a convention centre last month, he already had $115 million in advance-order cash in his back pocket. By now, that figure is about $400 million.

 

On May 4, Musk stunned the auto world by vowing to ramp up Tesla’s vehicle production to 500,000 units per year by 2018, just two years from now. To date, the 13-year-old Tesla Motors has made a grand total of just under 125,000 vehicles. The new goal is 10 times the number of cars and SUVs Tesla delivered in 2015.

 

If the Model 3 has the potential to revolutionize an auto industry that has not changed in its essentials since the advent of the internal combustion engine in the 1880s, it will take revolutionary means to bring about that transformation.

 

This is where the Tesla story begins to look like magical thinking.

 

To succeed in this game-changing gambit of global import, Tesla has to do a few things it’s never done. These include ramping up production at a faster pace to a higher volume level than has been achieved since Henry Ford’s experience with the Model T.

 

It will require Musk, Tesla’s chief product designer, to build the company’s first affordable mass-market car. Tesla’s three previous models have all been up-market vehicles – a roadster, a luxury sedan (the Model S), and an SUV (the Model X) derived from the Model S. It will also require Tesla to get its “Gigaplex” in Nevada, world’s largest electric-auto-battery plant, operational by year’s end.

 

This first Tesla entry-level car has a base price of just $35,000 ($27,500 after the U.S. federal rebate for EV purchases). With a price tag that undercuts most of the current EV competition, Musk will have to rapidly learn how to mass produce one of the world’s most technologically sophisticated products at the lowest unit cost possible. Otherwise, Tesla will lose money on every vehicle sold.

 

Tesla will effectively be reinventing the assembly line, in speed, efficiency and quality control. The Tesla faithful will tolerate glitches and recalls, but not mass-market buyers. To them, Tesla is an unknown quantity, in contrast with the many other EV makers, including Toyota Motor Corp., Ford Motor Co., Nissan Motor Co., BMW AG and Daimler AG. Recall that it was IBM Corp., among the most trusted names in business, and not Radio Shack, Apple Inc. and other start-up pioneers in personal-computing that created the mass market for PCs, in the 1980s.

 

Tesla will have to overcome its history of falling behind schedule on every one of its products to date, including a Model X SUV delayed more than 18 months.

 

It’s also not a safe bet that Tesla can finance its Model 3 ambitions. The company has lost money for 12 consecutive quarters, and a total of $1.7 billion over the past four years. Because of escalating costs, Tesla managed to post a 2015 loss, of $889 million, that is twice its paltry revenues of $413 million.

 

More worrisome is the insider activity that colours the financing of Musk’s three companies. Musk, 44, is the largest shareholder in Tesla; in the rocket maker Space Exploration Technologies Inc. (SpaceX), and in SolarCity Corp., which makes and installs solar-energy systems.

 

Any CEO would have her hands full with the challenges at Tesla. But Musk is also CEO of SpaceX and chairman of SolarCity. The latter has been chronically troubled by cash shortages. And when flagship Tesla was struggling just three years ago with a glitch-plagued Model S, Musk had to step in personally to inject $100 million into Tesla by purchasing newly issued Tesla shares.

 

Tesla shares trade at a stunning, and unsustainable, multiple of 75 times projected 2017 earnings, emphasis on projected. Is Tesla overvalued, with its current shareholder value of $27.1 billion?

 

Put it this way, the 117-year-old Renault S.A., which produced 2.8 million vehicles last year and turned a $3.3 billion profit that was more than six times’ Tesla’s total 2015 revenues, has a market cap almost identical to Tesla’s, at $27.7 billion.

 

Add that all up – Tesla’s non-existent profit, the unorthodox financing, the repeated product delays and quality issues, and the shoot-the-moon ambitions to reinvent the auto sector, and where the Tesla faithful see a vision of a better world, prudent investors see a “concept company” – a mere idea, compelling though it might be.

 

Yet Musk might well turn the table on his skeptics.

 

Musk grubstaked his three main businesses with the $165 million in proceeds from his stake in PayPal Holdings Inc., the online-payments processor. The Pretoria native, who also claims Canadian and U.S. nationality, then created, with Tesla, the world’s lone luxury-market EV maker. In 2015, Tesla’s Model S, its glitch problems solved, was the best selling plug-in electric vehicle in the world, despite its luxury price tag.

 

And the Model 3’s rave reviews appear to be merited. True, the car has yet to go into production, which Tesla has scheduled for next year. That’s an important caveat, to be sure. But it’s matched by a Tesla track record of eventually delivering on seemingly impossible performance claims for each of Tesla’s earlier models.

 

The Model 3 or something close to it is the vehicle with which you’d want to attempt an auto revolution.

 

The few EVs priced lower than the Model 3 are Spartan vehicles without Tesla’s trademark styling elegance or interior creature comforts. At a $35,000 base price, the Model 3 also underprices non-EVs in the small-luxury range, including the BMW 3 Series, the Audi A4, Mercedes-Benz C-Class and the Lexus IS. At 344 km between recharges, the Model 3 has the cheapest range on the market, as a ratio of purchase price to distance. It also ranks high in acceleration, at 0-96 km/h in six seconds or less.

 

Musk concluded the Model 3 unveiling last month with an evangelical touch. “This is really important for the future of the world,” he said.

 

So, OK, buy the car. But sell the stock.