Is Tesla Close to Bankruptcy?
Elon Musk cracked an April 1st joke on his investors. He first claimed that Tesla had gone completely bankrupt. Later, he revealed that the company was still healthy and this was only an April fools joke. There are many investors and critics in the world who believe that this April fools joke may soon become a reality. There is no doubt about the fact that Tesla is definitely on the back foot. It is struggling financially. This is the reason why stocks of Tesla have seen a massive 15% drop in the two months following February of 2018. The firm is still a behemoth. Even after a 16% drop, its market capitalization is close to $50 billion.
In this article, we will have a closer look at the events that are causing financial distress at Tesla.
Auto-Pilot Accident: Tesla is famous for producing electric vehicles. These vehicles have a semi-autonomous driving system. This system is a crude form of self-driving car system that is being tested by Google and Uber. However, the problem happened when a Tesla driving on this semi-autonomous system was involved in a fatal crash. The crash has raised question marks on the safety of Teslas technology. Most of Teslas cars being sold in the market at present are premium products. They are priced at over $75000 which is way beyond the reach of the common man. These vehicles sell because they are believed to have superior technology. This incident is likely to cause a dent in the sales of Tesla at least in the short term. This is why there has been a drastic change in the stock price.
Also, Tesla had to call back over 123,000 cars. It is believed that these cars had a faulty bolt. This bolt was susceptible to corrosion and would impact the ability of the driver to steer and park the vehicles correctly. This failure was once again highlighted by the media and the competition. The opinion amongst the people is slowly changing. People believe that Tesla is a technology company and should therefore be involved in creating back end technology that powers cars. The manufacturing of cars should be left to experts like General Motors and Ford Co.
Failure to Scale up Production: Much of Teslas $49 billion valuations can be attributed to the possibility that it started mass producing cheaper cars that will appeal to the mass market. Tesla has also announced its plans to undertake such manufacturing. They announced a car model that would be priced at close to $30000. Customers were very excited and close to 500000 cars have been booked by taking an initial deposit of $1000.
Tesla does not face a marketing problem. Eager customers are queuing up to give their money to the firm. Rather Tesla is facing a production problem. Elon Musk had personally committed that the company will rampantly scale up its production and will have a manufacturing capacity of close to 20,000 vehicles from the financial year 2017. However, the company has not been able to keep up its promise. Even in 2018, the company can barely manufacture 5000 vehicles. Elon Musk is said to be personally working on this issue. Insiders have reported that he is so committed to the work that he is even sleeping at the factory!
Push to Automate: These delays in production can be attributed to Elon Musks push to completely automate the manufacturing of automobiles. At the present moment, big firms like General Motors and Ford are using semi-automatic production lines. This means that a combination of men and machines is used to manufacture cars. Given the present technological situation, this is the most cost-effective and viable model. However, Elon Musk is adamant that he wants to create a factory where machines create other machines. Since robotic process automation is not developing at the pace that Musk expected, Tesla is facing multiple challenges in production.
Cash Burn Rate: It is a known fact that Tesla is not a profitable company as of now. Every year, the company burns cash and is supported by investor money. Tesla is likely to face a cash crunch in 2019. This is because its production is slow and hence sales will not generate enough cash to meet obligations. To top it up, one bond issue worth $1.2 billion is maturing in 2019. Hence, the company will need to raise cash somehow. Given the negative news surrounding Teslas operations, it is likely that the company may have to take a down round i.e. obtain funding at a lower valuation.
Competition and External Environment
The external environment does not appear too favorable for Tesla. Behemoths like General Motors and Ford are rapidly making inroads into the production of electric cars. They have invested huge sums of money into the production of electric vehicles. Hence, soon their cars will be in direct competition with Tesla. As a result, the sales of Tesla, as well as its ability to command premium prices, will take a hit.
Also, the interest rates seem to be on the rise. This will cut the consumers disposable income reducing the market for cars. Also, the high-interest rates will make it impossible for the company to obtain financing at lucrative rates.
If we add all these factors up, the picture becomes clear. Tesla is indeed in some financial trouble. Until the company can get its act together quickly, it is going to face a financial crisis that may threaten its very existence.
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