- Tesla has recovered from the coronavirus pandemic better than any other automaker.
- Tesla just reported a record Q3 for vehicle deliveries, while most other automakers are managing sales downturns.
- The auto market in the US has been mounting a stronger-than-expected recovery, but Big Auto is so big that a total production shutdown has exposed the core weakness of its massive manufacturing capacity.
- Tesla, by contrast, is now operating at an ideal scale to reap the benefits of a demand rebound.
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The big question about Tesla has always been, “How would the company handle a major crisis?” The 17-year-old startup dodged bankruptcy during the financial crisis, but from about 2012 on, it grew rapidly. In 2020, its stock went on a tear, making it the most valuable automaker in the world by a wide margin, despite modest sales relative to giants such as Toyota, General Motors, and Volkswagen.
The backdrop for that growth was a historic boom, with record car sales in the US market and surging demand for electric vehicles. But with a skinny bank account and the need to fund more growth, Tesla and CEO Elon Musk looked as though they might struggle during a sales downturn, whenever one inevitably arrived.
Well, the cyclical downturn didn’t arrive, but a major crisis did. When the coronavirus pandemic hit earlier this year, the entire auto industry shut down production in China, the US, Europe, and South America. This was unprecedented: Even during World War II, Detroit kept its factories running, building tanks and planes rather than cars.
Big Auto is very big, and that’s a problem
Tesla idled its plants in California and China, but after about a month, it brought them back online. In the third quarter, the company reported record sales, with almost 140,000 vehicles delivered. That was a fraction of Ford’s sales during the same period — the Blue Oval sold almost 222,000 F-Series pickups alone — but Big Auto is currently struggling mightily with the intractable issues of its scale. Idling dozens of plants and then firing them back up is no easy task, and carmakers are struggling to make up for lost production as demand has recovered.
Before COVID-19, Tesla’s smallness and relative inexperience had been construed as negatives. The company wasn’t good at making cars, the argument went, and the more demand for EVs that appeared, the more Tesla would be tested with the blocking-and-tackling of manufacturing fundamentals. It was also assumed that Tesla’s cost of operations, which had undermined profits for most of its existence, would continue to dash investors’ hopes.
But the opposite has happened. Tesla has posted four consecutive profitable quarters, and when it reports its third-quarter earnings later this month, that streak could stretch to five, setting Tesla up for a fourth-quarter in the red and its first-ever full-year profits. (It isn’t clear that Tesla could post much of Q3 profit, and under the circumstances, analysts expect it to break even.)
Tesla has retired its execution risk
That doesn’t mean Tesla isn’t wildly overvalued. A market cap of almost $390 million makes it worth 14 Fords. In order for Tesla to vindicated investors’ confidence, it’s going to have to go from selling fewer than half a million vehicles a year to, if you go by just the Ford comparison and cheat the math a bit, as many vehicles as rolled off dealer lots in the entire USA in 2019: some 17 million cars and trucks.
OK, Tesla’s valuation isn’t strictly correlated with a potential sales volume, but with the expectation of outsized profits in a burgeoning market that it can dominate (and already does, at its currently modest scale). But even in that context, Tesla looks like as risky an investment as ever.
What it doesn’t look like is a risk on execution. This is a huge shift in Tesla’s story. For a decade, Tesla has serially failed to execute, often falling short of the benchmarks that Musk has set and disappointed the markets by missing delivery targets.
But in 2020, that story has decisively reversed. Now Tesla is bouncing back from the pandemic shutdown better than any other automaker. Big Auto is doing better than it thought it would. At Ford, for example, the CFO was just a few months trying to figure out if the carmaker’s multi-billion cash hoard would last through 2020, if its plants remained idled — but it’s managing sales drops on a year-over-year basis. Tesla, though, has resumed sales growth.
It’s the revenue, stupid
What this means, in the larger picture, is that although Tesla’s profits could come under some short-term stress, revenue should hold up and continue to grow. It is, after all, the topline that supports the bottom line, and more vehicles sold equals more revenue. Then the challenge is to maintain execution at a level that doesn’t waste capital.
Here’s where we get to the real secret sauce for Tesla’s successful comeback — and the most compelling argument against the negative thesis around the company. As the late Fiat Chrysler Automobiles CEO Sergio Marchionne infamously pointed out several years ago in a much-discussed presentation titled “Confessions of a Capital Junky,” the global auto industry is addicted to waste and having a hard time eliminating redundant research and development and returning underused manufacturing capacity.
Tesla has factories in California and China, a battery facility in Nevada, and plants under construction or planned in Germany and Texas. But the moment, with just the first two plants building cars, capacity appears perfectly aligned with demand, suggesting that unlike the rest of the industry, Tesla is operating with ideal efficiency.
Tesla could still be wasting resources. An attempt to automate an assembly line in California for its Model 3 sedan in 2017 was a disaster, leading to a hastily constructed replacement line in a tent in the parking lot. But if the company tracks toward the production of 500,000 to 750,000 vehicles a year in 2020-21, then that means it’s running its two main plants in a way that should support ongoing profitability.
A dumb luck situation
The bottom line is that, sort of by dumb luck, Tesla was perfectly designed to ride out the coronavirus crisis. It wasn’t so small, and its balance sheet wasn’t so shaky, that it was under serious threat from the lost production. And it was so large that it had to crank and crank to revive the machine, not did it have to burn billions to allow the assembly lines to sit idle. It also benefitted from China’s strategy to crush the virus, enabling it to quickly resume carmaking in Shanghai and making up for losses in the US.
Tesla is now reaping the spoils of that dumb luck, which, it ought to be noted, manifested at a time of staggering tragedy in America and around the world.
From a purely objective standpoint, however, if you were to concoct a crisis that would hurt the very large traditional auto industry but favor Tesla’s exceptional medium-size-ness, the coronavirus pandemic would fit the bill.