Paul English is the kind of serious Tesla fan who helped make Elon Musk, for a brief period, the richest person in the world.
The Boston-based tech entrepreneur, co-founder of travel website Kayak, bought his first Tesla in 2013, went on to invest in the company three years later and now drives a more recent Model 3.
But after witnessing the Tesla’s chief executive’s behaviour since his acquisition of Twitter late last year — including Musk’s brutal treatment of staff as he set about cutting about half the social media company’s workforce — English says he is not certain he will buy another Tesla.
Musk “made a massive misjudgment”, he says. “Teslas were largely bought by people who like change and new things. That’s typically people who are educated, and people who are liberal. Guess what educated, liberal people don’t like? Bullies.”
Musk’s Twitter takeover did not go down well on Wall Street, which feared the chaos and political polarisation it unleashed would tarnish the automaker’s brand and distract him at a critical time. A Tesla stock price slide that began in the autumn turned into an avalanche; shares are now 73 per cent below their peak of a little more than a year ago. Musk himself is $200bn poorer.
But while the drama at Twitter dominates the headlines, a profound change in Tesla’s outlook is also under way. A resoundingly successful period in which the company’s value peaked at nearly $1.3tn and after-tax profits were projected to hit almost $13bn in 2022 has rapidly given way to a darker economic picture. The main worry of Tesla’s investors has swung from how the company can produce enough cars to meet demand, to where it will find enough customers to justify its sharply rising production.
Growth in new vehicle deliveries slowed to 40 per cent last year from 87 per cent the year before — still a breakneck pace for a large carmaker, but below the 50 per cent annual rate Musk himself has set as the benchmark for the foreseeable future.
With Tesla ramping up production quickly at giant new plants in Texas and Germany, it now has the added problem of finding many more customers, says Philippe Houchois, a global automotive analyst at Jefferies in London. That has left it facing a “perfect storm”, he adds, with supply increasing, demand slipping and competition intensifying, all on the brink of what could be a severe downturn for the global auto industry.
That has left Wall Street grasping for clues about the company’s prospects at what could be an important turning point. Is this the end of Tesla’s golden age of growth — not to mention Musk’s charmed life as a revered innovator and champion of a sustainable energy future?
Or, as Tesla’s fans claim, will the economic downturn actually boost the company’s lead over the rest of the electric vehicle world, bringing Musk a step closer to his goal of dominating a new auto industry founded on EVs?
Survival of the fittest
Although Musk’s Twitter diversion has catalysed Wall Street’s rethink on Tesla, there is little evidence it has had a direct impact on vehicle sales.
Out of “well over 1,000” people who bought Teslas last year from Octopus EV, a specialist electric lease company that operates in the UK and US, only two customers switched to another brand over the Twitter issue, according to chief executive Fiona Howarth.
She adds, though, that it is still notable, given the outsized brand loyalty the company has always enjoyed. A survey by Morning Consult found that between October and November, the share of US adults with a favourable view of Tesla fell by six percentage points. Among Democrats, who are likelier to be EV customers, it fell by 20 points.
Musk could hardly have tarnished his own company’s brand at a worse time. Higher inflation and rising interest rates have combined to leave many potential customers worse off, while also increasing the cost of financing a new vehicle. That follows a series of price increases Tesla pushed through during the pandemic, as the cost of materials rose and ample demand presented an opportunity to pad margins.
Higher prices and financing costs have lifted the average monthly car payment in the US by about a quarter over the past two years, to nearly $700, according to Adam Jonas, an analyst at Morgan Stanley. In a note to investors last month, Jonas warned this would dent demand for the entire EV sector, while also leaving Tesla facing a “worsening macro backdrop, record high unaffordability, and increasing competition”.
The effects are already evident. In the US and China, waiting lists for Tesla’s most popular cars, which were running at six months or more early in 2022, have all but disappeared. This week brought news that the company delivered only 405,278 new vehicles to customers in the final three months of last year, well down from the 500,000 that some were hoping for as recently as last September.
Meanwhile, a decade after the launch of the Tesla Model S, competition in the electric car market has finally turned serious. As regulators in Europe and elsewhere prepare to squeeze out petrol car sales completely, global carmakers are increasingly releasing cars designed to have widespread appeal, rather than the early models they merely needed to sell in limited numbers to hit emissions targets.
Volkswagen has poured billions into its own system that underpins models across the VW, Audi and Škoda range, while Hyundai-Kia have launched a series of widely praised models. Ford and General Motors have vowed separately to spend between $30bn and $35bn to develop new EVs. Each has unveiled a suite of new models.
Tesla’s share of electric vehicle sales in the US slipped to 65 per cent in the first nine months of last year, down from 79 per cent in 2020, according to S&P Global Mobility. By 2025, that figure will be below 20 per cent, S&P predicts. “It’s natural they won’t maintain this huge market share they have in EVs” as rivals produce more competitive models, says Howarth at Octopus EV.
The scramble for a foothold among so many new entrants is likely to bring a period of competitive turmoil. “It’s not going to be easy,” says Carlos Tavares, chief executive of Stellantis, which added to the increasingly crowded field of electric pick-up trucks this week with the unveiling of an electric version of its Ram 1500. “The industry is in a Darwinian period.”
Bringing down the price of EVs will be key, Tavares says. “Without affordability, the middle classes will not be able to join the club, and then we will not have enough volume impact to protect the planet.”
Tesla faces a similar pressure to bring down its costs — and prices — to meet its heady growth targets. After seeing the average selling price of its vehicles drift up to reach $52,500 in the latest quarter — nearly $5,000 higher than a year before — finding a way to bring prices down to a true mass-market level could become the key to reaching Musk’s ambitious sales target of 20mn vehicles a year by 2030.
“Musk is constantly repeating that only a narrow section of society can afford the Model 3,” one big Tesla investor says. “We are going to need an electric vehicle that people can afford and Tesla is in a very good position to do that.”
The Tesla chief executive said on a call with Wall Street analysts last year that the company had started to think about how to build a new, lower-priced vehicle, though he did not say how long it might take to become a reality.
Just another carmaker
What Tesla does next will help determine where its share price ultimately ends up. Despite the tumble, it still trades at about 28 times this year’s expected earnings — a huge premium to other carmakers.
A more severe re-rating of its shares is likely, says veteran auto executive Bob Lutz, as investors come to realise that it does not enjoy any particular technological advantages to justify valuing it as a high-growth tech company.
Lutz, who once held senior roles at Ford, Chrysler and GM, credits Musk with “single-handedly returning a reputation for excellence in technical innovation to the American car industry”.
But with the technology behind electric motors, lithium-ion batteries and control electronics widely available to other carmakers, he argues that Tesla is destined to be seen as just one carmaker among many — with a far more modest stock market valuation to match.
Yet Musk’s supporters say this underestimates the more durable advantages that the company has built up in the decade since it launched the Model S.
The many technical advances it has come up with, from the design of its battery cells and packaging to manufacturing techniques, to casting large sections of it newest models in a single piece to reduce the number of parts, have given it a clear cost advantage, says Pierre Ferragu, an analyst at New Street Research.
Tesla also has an industry-leading gross profit margin, he adds, that gives it a cushion to cut prices to maintain growth. Other automakers with thinner margins on EVs will have to cut back capital investment, he argues, reducing the competition.
If correct, that suggests Tesla could emerge from a downturn in a stronger position relative to its competitors, setting it up for the next phase of growth. But for now, the worry that it is facing slower growth and will be forced into cutting into its profits to support sales has spooked Wall Street.
For the believers, there could be no better time to double down. Galileo Russell, a member of Tesla’s army of loyal personal investors, says that although he found the Twitter controversy “frustrating”, he is planning to add to his Tesla position for the first time in more than three years.
Musk has been underestimated before, he says, and the current souring on Wall Street is no different. “The media like to think Elon’s cancelled and this will ruin Tesla,” he says. “But the silent majority still supports him.”
Additional reporting by Harriet Agnew