There is only one way to save Tesla: fire Elon Musk

Business Insider's article by Linette Lopez on April 24, 2024

Tesla is once again on the brink of extinction. Even after the company cut prices, sales are still slowing. The company is laying off 10 percent of its workforce, with a total of 14,000 workers from Shanghai to San Jose, from factory floors to administrative offices. The company had to recall all Cybertrucks that left the factory. And Tesla's position in China, a country vital to its future, is becoming increasingly shaky.

The company's chaotic state can only be blamed on one person, and only one person's exit can save Tesla: Elon Musk. Tesla has looked unstoppable over the past few years, but during that period of euphoria, Musk failed to implement any strategy to insulate the company from the global EV price war. The company is burning cash, losing market share, and, holding more aging inventory than ever before.

Tesla reported its first-quarter earnings on Tuesday, and despite Wall Street's worst-case expectations, Tesla's results fell short across the board. Earnings per share came in at $0.45, missing analysts' expectations of $0.52. As a result of Tesla's focus on AI research and capital improvements, free cash flow fell by a staggering 674%. Gross profit decreased 18% from the same period last year, while gross margin decreased from 19.3% to 17.4% over the same period. If Tesla is a car, you'll hear it crunch.

Tesla's problem is not the "production hell" or "delivery hell" of new models, Tesla has always survived. Hell is at least one location. Tesla's problem is that there is no clear direction. If a company spends all its money on a product that's not ready to scale, like a robo-taxi, it doesn't matter how much cash it has. Or cars that no one cares about – like outdated models. Investors want to see a concrete plan to build a new Tesla fleet for a leaner, more ferocious electric vehicle market.

Musk seems to understand at least that: Earlier this month, he denied a Reuters report that the company had canceled plans for the Model 2, a regular $25,000 Tesla model. It's the car the market needs, but in the company's post-earnings call, Musk only vaguely mentioned plans to speed up the production process. If you're new to smashing, maybe that's enough, but if you've been following Tesla for the past decade, you know that these timelines need to be approached with caution. Even Musk's most loyal shareholders, such as Ross Gerber of investment firm Gerber Kawasaki, are skeptical. In an interview with Bloomberg on Tuesday following Tesla's report, Gerber said he "can't rely on" the company's stated timeline anymore. On the call, Musk spent more time talking about his distant vision of an Uber-like robo-taxi fleet than the next car he could sell with existing technology.

Tu Le, founder of China Auto Insider, an electric vehicle consultancy, told me in a recent interview: "I think it will take at least eight to nine years for them to implement a robo-taxi." I think they'll say they've done it. But I'm thinking of the best-case scenario."

Musk doesn't have eight or nine years to save Tesla. On the one hand, Chinese competitors can produce cars at a much lower cost. On the other hand, traditional automakers are relying on the sales of internal combustion engine vehicles and hybrid vehicles to weather the slowdown in demand for electric vehicles. If the Chinese market is a rock, then the Western market is a hard stone. Tesla is somewhere in between. The company needs a serious leader with a practical idea, no self-driving gimmicks, no blowtorches, no worn-out Sebot trucks, no shit stickers, no video game marathons, and no haphazard use of ketamine. Basically, there is no Elon. It required a dedicated, relentless, and efficient leader who could deliver Model 2 without significant delays.

On Tuesday, Musk said of the recent layoffs that Tesla needs to restructure in order to enter a "new phase of development." He's right, the automaker really needs a big tweak, starting with him.

For Tesla, the future doesn't have to be so ugly. In 2020, the company stood on top of the world. Its Shanghai plant began producing lower-cost, higher-margin cars. It built one plant each in Germany and Texas. It sold more cars than ever before. The sustained annual profits led to a surge in the stock market and Wall Street rejoiced.

How did Musk get through this glory days? He sold a lot of Tesla shares to buy Twitter, tried to get out of the deal, but was forced to continue. He blew up some rockets. He implanted brain chips in a group of monkeys. He took the kitchen sink to work and added a few more jobs as a CEO. He openly screwed up Gov. Ron DeSantis' attempt to launch a presidential campaign. At Tesla, Musk delivered about 4,000 Cybertrucks, only to have each of them recalled due to acceleration failures, while also squandering any goodwill between the company and its core customers.

Tesla has failed to develop a strategy for dealing with chaotic times, and the EV industry is clearly still in its infancy.

I would say that despite Tesla's tremendous achievements over the past few years, Musk should obviously spend more time with it. Tesla failed to strategize during a chaotic period when the EV industry was just getting started. Of course, the company has been on a lean and cost-cutting campaign for years, but this strategy has not been enough to balance price cuts, weak demand, and the need for significant capital expenditures to survive fleet stagnation.

A truly visionary CEO who should have continued Tesla's dominance in the EV market. They'll do research to try to understand what the demand for EVs will be like after early adopters buy a car. They will know what types of buyers will enter the market at that stage and what type of car those buyers want. A truly visionary CEO will meet the needs of these customers. Back in November, I interviewed Nafdeep Sodi, a pricing analyst at Sodhi Valuation Associates. Advertising can also help alleviate concerns about issues such as range anxiety. This month, Tesla laid off its entire marketing team.

For years, analysts have warned Musk that competition is coming, not only from traditional automakers, but also from the Chinese market that has fueled Tesla's success. The Chinese government's long-standing practice is to support Western companies in the Chinese market in order to promote competition, and once Chinese competitors can catch up, the Chinese government will tip the scales in favor of local companies. In addition, the Chinese government controls almost every part of the battery supply chain, from metal mining and refining to battery manufacturing, which has helped Chinese EV makers produce models with prices as low as four figures. The new option puts Tesla at a disadvantage in one of its most important markets: in the fourth quarter of 2023, Tesla's share of the Chinese car market fell to 6.7% from 10.3% at the beginning of the year.

In order to stay ahead of the curve, Tesla should have dedicated itself to building the Model 2 and lowering its pricing to a place where it had more customers. However, Tesla stopped innovating, the Model 2 did not come out, and Musk realized that the company needed to launch a Tesla that "serves the people", which may come too late. Instead of spurring sales with impressive or approachable new options, Tesla is trying to boost sales by irregularly lowering the prices of existing models, thereby stimulating demand. The results backfired: Revenue from the automotive business fell 13 percent from a year earlier, and the gross profit margin of the auto division fell to 14.8 percent from 18 percent a year earlier, according to Tuesday's financial report.

Tesla has always been a "growth" company, a rising star that competes with traditional automakers. But now, the company has entered a new stage of development. Because, it is a large, mature company, and it will require more money, discipline, and focus to continue to grow. Musk never had a time when he was content with the status quo, but after 2020, Tesla began to become less of a place where Musk pushed cars to keep innovating, and more like a place where Musk got cash and did whatever else he wanted. Maybe he's tired of it, maybe he's distracted. In conclusion, in any case, Musk prematurely stopped pushing Tesla.

On the call, Musk made countless excuses for the poor performance of the quarter - the Houthi riots in the Red Sea, the arson case in Berlin, the renewal of the Fremont factory. He asserted that Tesla is not a car company, but an artificial intelligence robotics company. He went out of his way to talk about turning Tesla into a self-driving Uber service, but refused to answer any questions about the Model 2. Look here. Look over there. Look everywhere, except for the next few unplanned quarters.

Now, the company, which was supposed to be an American electric car giant, needs to solve the problem of survival.

The removal of Musk could cause the stock price to fall in the short term, as there are still many Elon fans who hold the stock out of obsession. But the rest of Wall Street is beginning to wake-up to Tesla's grim outlook: As of Tuesday, Tesla's stock price was down more than 40% for the year and more than 60% from its all-time high in November 2021. Of course, the gesture of actually producing the Model 2 helped drive the stock price up after the earnings report, but at this moment, shareholders should be more concerned that Musk may be wasting Tesla's resources on side hustles – whether it's turning X into a liberal dating app or rebuilding a vanity clown car. If the Model 2 doesn't come out soon, then Tesla will be waving the white flag in the global electric car war for the foreseeable future. Forget about growth – now the company that was supposed to be the American EV giant needs to solve the problem of survival.

When Musk entered the "minefield" of electric cars, Tesla was the only game in town, the interest rate was 0%, and most people in the United States believed him to be Iron Man. Since then, China has become an electric car powerhouse, traditional automakers have been trying to get a piece of the pie, debt has become more expensive, and half the country has come to think of Musk as Lex Luthor. The situation has changed, and Tesla's leadership needs to change with it, or it will be left behind.