One of my biggest questions about Tesla has always been why the company wants to grow quite quickly. In abstract,…
One of my biggest questions about Tesla has always been why the company wants to grow quite quickly.
In abstract, I understand why: CEO Elon Musk believes that humanity lives on borrowed time when it comes to global warming. If we do not change gas-powered vehicles with electric cars – Quickly! we are sentenced
However, as a practical matter, it seems that Tesla has long lived on the edge. And despite the fact that the company has only booked a big third quarter, raising nearly $ 7 billion in revenue and earning a profit of over $ 300 million, Tesla still has only $ 3 billion in cash. In the automotive industry, it is enough to stay on business for a year, optimistic if the economy goes south.
Tesla has been run in black quarter before (although it never managed a completely profitable year). There have been times when I’ve wondered, “Why not consolidate the result, rather than pushing aggressively against the next big deal?”
The company has not made it of course. So its uneven results have been out-of-step with the rest of the automotive industry, which has been routinely profitable for almost a decade. On the one hand, Tesla’s strategy has given it a strong market cap, greater than (profitable) Ford and (profitable) Fiat Chrysler Automobiles. On the other hand, Ford has eight times as much money in the bank as Tesla; It can drive out a dozen moderate recessions and a complete economic collapse.
Tesla has shown quite a good capital discipline, but to some extent its ability to push into a kind of lean start-up way comes to an end. For example, the Fremont, CA factory does not operate very efficiently, requiring more than twice as many workers to build around 200,000 vehicles such as General Motors and Toyota needed to build 400,000 when they jointly operated the facility. Tesla also assembles many of its model 3 sedans on an ad hoc line that was quickly built under a tent in a parking lot. It was a good solution to a problematic problem, but it will probably not last longer.
Fixing Fremont will obviously cost serious money. But that’s only the beginning. In the next few years, as Tesla goes from a 200,000-300,000,000 automaker to one that can produce possibly millions of vehicles annually, it will have to spend staggering amounts of cash.
Currently, I focus on investment expenses instead of debt management (Tesla has about $ 10 billion in the balance sheet). Tesla currently manufactures three vehicles: Model S-sedan, Model X-SUV and Model 3-sedan. In the next year you want to start building model Y, a compact SUV. It also has a pickup truck, a new Roadster sports car and a semi-trailer on the drawing board. The recovery can cost one billion to develop. Roadster can be cheaper, so call it half a billion. Semi can be one billion or more.
It’s Teslas’s full cash box there. Meanwhile, model 3 and model X may be due to updates in the next few years. Tesla also spends to expand its Supercharger network and, as it sells more vehicles, will need to increase the scope of its retail and service locations.
The really big is a new factory, slated for China. It is likely that it costs several billion. Tesla will surely finance it with debt, so it will be even more important for that investment to pay (it does not have to pay directly – if it’s decades, inflation will erode some of the long-term responsibility). And unlike Tesla’s traditional competition, Musk will expand its business at 2018 prices. Just to go back to Ford for comparison, this car manufacturer is still active factories built in the 1920s. Much of the manufacturing capacity was purchased and paid for 50 or 60 or more years ago.
This is actually one of the critical points where Tesla’s economy fails to compare with other Silicon Valley technology companies. Apple does not have to invest in factories. Facebook does not need to hire hundreds of thousands of workers. Musique’s ambitious ideas about automated manufacturing are not cheap: the robots in their factories can go for a million dollars a pop. Program companies can be worth billions on the back of some laptops, a cloud account, 20 people and a WeWork space.
Do not be depressed about this! If Tesla can continue to increase its billions of revenue every quarter, it will have the cash flow to spend what it needs to spend. And if it can maintain its huge market share in electric cars, because sales are improving globally, the investment should pay off (automaker both makes and loses money long after they have matured, so Tesla has no leave and the company has never met a contractual market – or until and really known a time when interest rates were particularly high).
In fact, Tesla should be completely happy to spend staggering sums of money. Sure, I would like to see them slowly back and forth a few billion. But right now they can play crimes. Becoming premature defensive can mean that they are investing now and pay the price later. In any case, if the fourth quarter is profitable, they expect to accelerate the pace of their cash incineration.
The question will be, “Why do not you sell anything more to collect money while the times are good?” But it’s a matter we need to deal with once enthusiasm over Tesla’s amazing latest performance dies down.