Former GM executive Bob Lutz returned to Tesla-sceptic mode last week and said that the company is doomed. This isn’t the first time Lutz — who retired from General Motors after also working for Ford, Chrysler, and BMW — has foretold Tesla’s demise. Unfortunately for Musk, he presents some compelling points
For the record (and I’ve asked him about this), he doesn’t think Tesla CEO Elon Musk is a poor leader; quite the contrary, he admires what Musk and Tesla have done. It’s just that he doesn’t think Tesla has any meaningful technological advantages over the rest of the auto industry.
And he’s right: GM brought a long-range, affordable EV, the Chevy Bolt, to market a year ahead of the Tesla’s own Model 3. Tesla had thus far struggled to deliver it’s cars, while GM could finish the year selling 5,000 Bolts a month.
Tesla brand is formidable, but relative to the major companies in the traditional auto industry, Tesla is cash-compromised. GM and Ford, for example, are sitting on strong balance sheets. Tesla, meanwhile, has enough cash on had to operate for about a year.
Tesla is also spending about $US1 billion per quarter, in-line with what GM spends — but GM is selling dozens of vehicles and raking in profits. Tesla is selling, effectively, two cars and haemorrhaging funds.
Prepare for the sales downturn
Plus, Tesla is subject to the same market dynamics as everybody else. At the moment, the US market is riding an extended sales boom. By the time the numbers are added up, 2017 should see around 17 million in new-vehicle sales. Tesla’s little slice of that translates into a near-monopoly on luxury electric cars.
When the downturn in sales arrives, it’s not outlandish to predict that Tesla’s sales will fall alongside the rest of the industry’s. The revenue drop-off wouldn’t be arriving at a good time, as the company has to:
- build the Model 3 in mass quantities
- develop its just unveiled Semi Truck and new Roadster
- expand it manufacturing footprint beyond a single factory
That’s all going to cost billions, and lacking profits, Tesla can ill-afford to backpedal on revenue, which has been climbing year-over-year.
The problem with companies that don’t make money in the car business is that eventually the lack of profits always catches up with them. GM hadn’t made money for a few years prior to its 2009 bankruptcy. The financial crisis pushed the company over the edge, but even a prolonged downturn in sales would have punished the carmaker’s overleveraged balance sheet.
Lutz had a front-row seat for this, by the way. That doesn’t mean Tesla will go bankrupt. But the risk that it might is significant and its financial condition points in that direction, so investors have to take it into account.