Howes: Tesla’s tailspin tells familiar tale in Detroit
Forgive ol’ Detroit auto types for thinking Tesla Inc. is showing signs of desperation. We should know — the Motor City pioneered the genre.
Financial execs are leaving Tesla. High-flying shares are tanking, down more than 13 percent just this week. Credit ratings agencies are issuing downgrades, raising the possibility that Chairman Elon Musk’s iconoclastic automaker could run out of cash later this year without a steady increase in production to reassure increasingly pessimistic investors.
Sound vaguely familiar? Reviews on the hotly anticipated Model 3 compact electric car are less than stellar — if build quality means anything, that is, to would-be buyers accustomed to the high standards of Toyota, BMW and even re-engineered Detroit brands.
And now Tesla’s senior vice president for engineering is issuing a call-to-arms to people on the Fremont, California, factory floor: building more than 300 Model 3s a day would be an “incredible victory,” Bloomberg News reported Doug Field saying. Make the skeptics “regret ever betting against us. You will prove a bunch of haters wrong.”
Maybe. But just about anyone who’s paid more than passing attention to the modern auto industry and its imperative for disciplined execution can see the signs of an industry rival under enormous stress. Detroit learned that lesson the hard way.
Consider: just a few days before the end of the quarter, Tesla is moving workers from the line building its pricier models to the Model 3 line — presumably to bulk up the first-quarter Model 3 production numbers investors will be examining closely next month.
Here’s a news flash: Tesla may be able to fool portions of its true-believing fan base, and it may be able to cajole Silicon Valley investors heavily invested in Musk’s electrified vision. But missing production targets directly proportional to cash generation won’t fool the big-money folks at Moody’s Investors Service, who are paid to ask hard questions.
They know too much and have heard too many excuses: “The negative outlook reflects the likelihood that Tesla will have to undertake a large, near-term capital raise in order to refund maturing obligations and avoid a liquidity short-fall,” Moody’s said in a statement this week.
“Prospects for addressing its liquidity (whether equity, convertible notes or debt) will be supported if the company can establish credibility for reaching Model 3 production levels — 2,500 per week by the end of March and 5,000 per week by the end of June.”
But if it can’t, a failure of Tesla could become more than a theoretical possibility. That’s why ramping Model 3 production to meet hundreds of thousands of orders is critical to a brand that has revolutionized portions of the industry but failed to master its manufacturing prowess.
A tracker developed by Bloomberg uses Vehicle Identification Numbers to estimate production of the long-time-coming Model 3. The tracker pegs weekly Model 3 production at 1,076 cars, less than half the rate Moody’s and others hope to see by the end of this month.
That’s a whole lot of not good, growing evidence that Musk’s Tesla can defy traditional auto industry norms only for so long. Production that feeds sales demand can generate huge amounts of cash; production that doesn’t meet its ramp-up schedule eats cash, especially if limited sales of other car lines can’t adequately compensate for the losses.
Tesla “faces liquidity pressures to its large negative free cash flow and pending maturities of convertible bonds,” Moody’s said. In November, $230 million will come due, followed by another $920 million a year from this month.
And the ratings agency says Tesla’s $3.4 billion in cash and securities as of the end of last year is “not adequate” to finance its needs — not without seeking more money from investors. Seen that movie, too, here in Detroit, and it culminated in ignominious bankruptcy.
Recalling 123,000 flagship Model S sedans and vehicle fires linked to lithium-ion batteries don’t help, either. Not when the fires draw the scrutiny of federal investigators, rattling investors who worry Tesla’s underlying electric powertrain technology may not be as safe as assumed.
Musk deserves credit for pressuring the traditional industry to innovate in the electric vehicle space; for proving that “over-the-air” updates of software are both doable and popular with customers; for showing there is a market for electrics, however small in a world of pickups and SUVs, that could grow over time.
But the time for Tesla to prove it can deliver the volume electric car it said it would is arriving, quickly. The credibility of the brand, and its founder, to claim they beat the auto industry at its own game depends on it.
Daniel Howes’ column runs Tuesdays, Thursdays and Fridays. Follow him on Twitter @DanielHowes_TDN, listen to his Saturday podcasts, or catch him 3 and 10 p.m. Thursdays on Michigan Radio’s “Stateside,” 91.7 FM.