Tesla’s Quarter 2 2024 financial results were, to put it politely, ‘weaker than expected’. Tesla, as a manufacturer solely of electric vehicles, has a sideline in selling ‘regulatory credits’ to other vehicle manufacturers – essentially allowing other car companies to meet government carbon emissions targets by purchasing Tesla’s unused credits in this area.
Cars are Tesla’s core business – and that business is dying
To what extent Tesla is permitted to be allowed to account for these credits each quarter seems to be a rather elastic concept but in Q2 2024 it booked $890mn in regulatory credits. However in the same quarter margins on its automotive business dropped to 15% as compared to 16.8% in Q1 2024 and 18.6% in Q2 2023. This was despite the aforementioned regulatory credits increasing by over 100% since Q1 2024. In Q3 2024, Tesla delivered 462,890 vehicles versus 443,956 in Q2 2024 – despite heavy discounting and cheap finance deals.
In the 2023 financial year, Tesla’s automotive segment accounted for 94% of its revenue and gross profit (this includes related revenue sources such as leasing and carbon credit sales). The other 6% was energy generation and storage which Tesla stressed had grown in profitability by 84% between Q1 and Q2 2024.
The ‘energy sector’ consists of solar panel installations and ‘PowerWall’ home battery energy storage systems. Energy storage deployments dropped to 6.9 GWh in Q3 2024 versus the vaunted growth to 9.4 GWh in the previous quarter. Tesla’s Q1 2024 financial report was very quiet about how many solar installations were deployed, suggesting it is not big business.
Why is Tesla’s automotive business dying?
Consumer demand for electric vehicles seems to be weakening and government subsidies to encourage EV rollout are drying up. The Model Y launched at the height of the Covid pandemic when government lockdowns and furlough schemes were in place and consumers had disposable income.
Both the EU and US have imposed import tariffs on Chinese-assembled cars. European supply of Model 3 comes from Tesla’s Shanghai plant with Model Y being sourced from the German plant. US Model 3 vehicles come from the Fremont, California plant and Model Y from Tesla’s Texas plant. Tesla has been forced to increase its prices thanks to EU tariffs on Chinese-assembled Model 3 vehicles.
Rival car makers have since moved in on the electric vehicle market with superior products to Tesla’s. Brands such as Kia/Hyundai and BYD are offering strong competition in the segment. Tesla has fielded complaints about poor build quality, austere and poor quality interiors (Tesla is the only car maker that makes its own seats) and more seriously suspension failures.
Tesla ranked last (of 32 brands) in the 2020 JD Power survey. In 2017 this might not have mattered as Tesla’s products were still new and competition in the battery electric vehicle market was minimal. Seven years later, Tesla is left with a stale product line and declining sales even in the light of several rounds of price cuts and generous finance packages – all of which eat into Tesla’s profit margin.
The effect of Musk’s pay award on Tesla
The 2018 award to Musk incentivised Musk to increase Tesla’s market capitalisation, which he did by deploying tactics likely to drive up the share price in the short term. These included regular hype-filled predictions of imminent Tesla breakthroughs.
Of these, the most notable were regular claims that ‘full self-driving’ (completely autonomous operation of a Tesla vehicle with no human involvement) was imminent and that owners of Tesla cars could earn vast sums by hiring out their vehicles as autonomous ‘robotaxis’ when they weren’t using their cars themselves. A side tactic was to cut capital expenditure into research and development to make Tesla’s financial reports look better. Yet the much-vaunted breakthroughs failed to appear.
Musk has an interest in keeping Tesla’s share price high – borrowing against the millions of Tesla shares he holds is how he funds his lifestyle. If the share price drops too much, his creditors might call his loans in. After Reuters published that Tesla’s prospective entry level ‘Model 2’ had been scrapped, Musk took to Twitter to hype the Tesla ‘robotaxi’ with an alleged announcement date of 8/8 (note the Nazi symbolism). But as we have discussed earlier in this article series, Tesla is nowhere near solving the problem of autonomous vehicles and the eventual announcement in October 2024 was yet more vapourware.
Can Tesla switch horses?
It seems Musk is now either getting bored of the Tesla vehicle business or he has realised the potential for stock price-boosting announcements is exhausted. His claims that Tesla is now an artificial intelligence (AI) and robotics company ring very hollow. It is incredibly rare (although not unheard of) for a company to completely switch its core business model and one might be justified in thinking that to do so would require a managerial talent far greater than Musk.
The ‘must have’ AI processing chip is the Nvidia H100: estimates are that Microsoft and Meta (Facebook’s parent company) had over 150,000 units each at the end of 2023. Tesla by contrast was estimated to have 15,000. Musk’s response has to talk up Tesla’s “in house” Dojo chips – but silicon chip design is not the sort of specialist area that Tesla has any experience with. Nor is even remotely connected to Tesla’s core competencies.
Musk’s other key claim for Tesla’s future is robotics, and his belief that there is a huge market for humanoid robots. Yet at the 2024 World Robot Conference in Beijing, Tesla’s supposedly impressive Optimus robot spent the entire exhibition static in a glass case. Tesla’s October ‘Cybercab’ event also featured Optimus robots walking among the crowd and seemingly operating autonomously – only for Bloomberg to report a few days later that the ‘autonomous’ robots were being remotely operated by concealed humans. Tesla is far from being the industry leader in autonomous humanoid robots.
Could Tesla go bankrupt?
If Tesla did fail, it would be far from the first car maker to do so. Nissan was all but insolvent when Renault stepped in to save the carmaker in 1999. General Motors and Chrysler Corp were driven into bankruptcy by the 2008 financial crisis but had been in trouble for some years before. Nissan was struggling under the burden $35bn in debt, largely caused by an outdated product line and poor management practices.
Chrysler and GM failed to offer the fuel-efficient vehicles that the market was demanding by the start of the 2000s and all three resorted to substantial price cuts to try and sell their products. The comparisons with Tesla’s situation are interesting. Musk seems to regard Telsa’s automotive lineup as legacy products to keep the company ticking over until the immensely profitable artificial intelligence and robotics products are ready.
Tesla’s Cybertruck and Semi models don’t and won’t sell in sufficient numbers to save the company. The former can’t be sold outside of North America as its design and weight fall foul of European road traffic regulations. The latter is also nowhere near ready to go on sale in European markets seven years after its unveiling, with charging infrastructure (and charging times) remaining an issue.
Tesla’s plans to introduce this infrastructure to Europe are, as so often with Tesla, vapourware. The only significant user of the Semi is PepsiCo; leaked information is that the vehicles have numerous serious drawbacks and that the Semi was just another Musk stock price-pumping attempt.
Long term prospects for Tesla and Musk
Car making by its very nature is a capital-intensive business and also a very competitive one. It’s no coincidence that most manufacturers facelift their cars on a 3-4 year cycle and replace them outright every 7-8 years if not sooner. The only ‘new’ model in Telsa’s pipeline is a Model Y refresh similar to the Model 3 – but the margins on these especially in Europe and China won’t be enough to save Tesla.
Tesla’s board seem determined to keep hold of Musk even though his demonstrable mismanagement is driving the company towards failure. His increasingly alt-right political moves cause one to speculate on his motives: possibly he is ‘all in’ on Trump winning the US Presidency and hopes for significant favours if this happens. Perhaps years of drug use are taking their toll. Musk deserves credit for having the vision to make purely electric vehicles acceptable to consumers on a large scale. However this legacy now looks like being overshadowed by his abuse of wealth and power. Let him enjoy his day in the sun – it won’t last.
For those interested in thorough takedowns of Musk and others who like to make outrageous claims needing a dose of reality, YouTubers The Commonsense Skeptic come highly recommended.
