Tesla seeks to convince it has turned the corner
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For months Tesla has been stuck in “production hell”, with delays to manufacturing of its mass-market Model 3 testing the patience of customers and causing the company to haemorrhage cash.
That is changing. The amount of cash burnt by the electric carmaker fell last quarter to $739m, against estimates of $901m. And it has staved off the need for yet another injection of new funds — trimming future spending plans and forecasting both positive cash and an accounting profit over the next two quarters.
Elon Musk, the Tesla chief executive, also expects his group to make 50,000-55,000 Model 3s next quarter, and says it can scale up production for a “tiny fraction” of the cost of getting the car’s assembly up and running.
Analysts have come to take Mr Musk’s often wildly optimistic forecasts with a pinch of salt but there is a sense of broader renewed faith in a company often caught between strongly-held views of bulls and short-selling bears.
“After three quarters where investors have been in the dark with respect to estimating Model 3 volumes and margins, this quarter felt like there might finally be some light at the end of the tunnel,” said George Galliers, an analyst at Evercore ISI.
Tesla’s better financial fortunes coincide with an improvement in Mr Musk’s standing with Wall Street. During the company’s earnings call on Wednesday evening, the irascible chief executive avoided a repeat of his bad-tempered outbursts of three months ago, apologising to analysts he previously criticised as “boring” and “boneheaded”.
“I think there’s really no excuse for bad manners, and I was violating my own rule in that regard,” he said.
The measured performance, and a less precarious financial outlook, spurred a 10 per cent rise in Tesla’s shares. “Management adopting a less confrontational style should help investors revisit the investment case,” said Philippe Houchois, an auto analyst at Jefferies.
But the company has a long way to go before Mr Musk’s assertion that it is a “ real car company” — made at the end of June when the business turned out 5,000 Model 3s in a single week for the first time — is widely accepted.
Production of the Model 3, its attempt to break into the mass-market car industry, is still six months behind schedule and the company has yet to make a single entry-level $35,000 model that will, it believes, propel it out of its high-end niche.
Currently the company is only taking orders for models with added features, which range in price from $49,000-$80,000, a decision that helps boost Tesla’s cash position because many of the options on the cars, such as four-wheel drive or better performance, are higher margin.
There are signs it is making tentative inroads into the segments it needs to dominate to survive.
Tesla named the five cars that buyers of the Model 3 were most likely to trade in, besides earlier Tesla vehicles. As well the best-selling hybrid Toyota Prius and the all-electric Nissan Leaf, the list included the Honda Accord, the Honda Civic and the BMW 3-series.
Tesla also gained bragging rights over its premium rivals after the Model 3 outsold all other mid-sized upmarket saloon cars in the US — such as the Audi A4, the Mercedes C-class and the BMW 3-series — combined.
For the first time, the company booked a small profit on the Model 3 cars it delivers.
Hamish Chamberlayne, a fund manager at Janus Henderson Investors who has owned Tesla stock for several years, said gross margins on the Model 3 — the selling price minus the cost of building vehicles — had turned positive “earlier than many expected”.
“Tesla should be able to achieve 20 per cent gross margins with the base price Model 3,” he told the FT. “This is the reason for management’s confidence around future cash flow generation.”
The figure is still considered optimistic by most analysts.
Mr Musk said the group may hit 25 per cent margins on the car by the second quarter of next year — compared with the “slightly positive” margins reported last quarter.
The ability to derive meaningful profits from the Model 3 is crucial for Tesla as it seeks to build a self-funding business that does not need to tap the markets for fresh money.
Profits from the Model 3 will also be instrumental in funding Tesla’s future model line-up, which includes a smaller sports utility vehicle, a sports car and a truck.
When Mr Musk unveiled the car in 2016, he said it was culmination of a grand plan to enter the ferociously competitive automobile industry — first by making low-volume, high-margin products, such as Tesla’s Roadster and Model S, then breaking into the volume segment with lower priced offerings.
This is why the company has thrown everything at the model — including erecting a tent in the car park of its Fremont plant to manufacture extra vehicles in order to meet its production targets.
Tesla has raised more than $19bn since 2010 through various means, including debt and equity as well as customer deposits on future cars — though Mr Musk insists the business will never need to raise equity again.