Electric automaker Tesla reported Q3-2023 financial performance this week and to state the obvious, the results were not well received by investors.
After reporting disappointing total production and vehicle delivery performance earlier this month, the formal reporting of Q3 quarterly financial performance disappointed on revenues, earnings, and on production and supply chain related challenges. Once more, related statements by CEO Elon Musk to analysts and financial media contributed to added concerns relative to the automaker’s ongoing results.
The Tesla financial performance reportedly sparked a selloff of other EV automaker stocks including Fisker, Lucid, and Rivian. They further added to growing concerns that consumers have moderated on their desires to purchase an all-electric vehicle. The industry’s news cycle has pointed to increasing inventories of unsold EV’s at dealer lots.
Q3 Quarterly Financial Highlights
The key Q3 financial headlines included:
Disappointing on total quarterly revenue expectations, the most in more than three years. In the recent quarter, the average Tesla vehicle sold for a reported $44,000 compared with $54,000 in the year ago quarter. While that may be attractive to prospective Tesla customers, it does not resonate with Wall Street when price cutting does not result in added volume and profitability. In the slide deck supporting the report of Q3 results, the automaker indicated that average vehicle cost was around $37,500, and the company continues to work to reduce that cost further.
There was a stated warning from Musk that existing high interest rates could curtail industry demand for EV vehicles. Both Bloomberg and The Wall Street Journal indicated in their reporting that such comments marked a distinct change in tone for Musk, who indicated last year that Tesla was a company that was “recession resilient.”
Reportedly, Tesla is expected to cut vehicle pricing again in the current quarter to meet its committed annual vehicle delivery goal.
The Q3 results included the reporting of a 44 percent decline in quarterly net income and a resulting 7.7 percent operating margin in the latest quarter. Continuing vehicle price cuts across the board have taken a toll without corresponding manufacturing cost decreases. As a comparison, the EV automaker’s automotive gross margin, excluding regulatory credits reached a peak of 25.1 percent in the year earlier quarter, and have declined since. In its reporting of Tesla’s quarterly earnings, The Wall Street Journal indicated that the latest operating margin places Tesla: “on par with many traditional automakers,” with the implication being that the automaker has eroded manufacturing cost advantages.
The immediate news of the Q3 quarterly financial performance caused the company’s stock to decline 9.3 percent, eroding $70 billion in market value.
Production and Supply Chain Challenges
Volume Production Levels
Financial and industry media reporting further keyed-in on the latest indicators relative to ongoing Tesla vehicle, production and supply chain related challenges.
In the near term, with the Q3 production and delivery performance, the automaker is facing the challenge of meeting or exceeding the delivery of more than 475,000 vehicles worldwide in the final quarter, compared to the 430,488 produced in Q3.
Musk indicated for the first time that it was impossible to sustain a 50 percent annual delivery growth rate.
By far the most reported statement from Musk was that the automaker’s Cybertruck, introduced to the market two years ago, and planned for initial customer deliveries by the end of November, would face “enormous challenges” in the scaling up of production. He further used the term “production hell”, a term he previously associated with the start-up of Model 3 production so many years ago, when the CEO took up residence on the production floor.
Musk bluntly added that it would take another year to 18 months for this vehicle to be a significant contributor to cash flows noting: “We dug our own grave with Cybertruck”
As our Supply Chain Matters reading audience can attest, such a statement implies that product design with supply chain considerations for volume production was not necessarily the underlying principle of this rather sophisticated vehicle. For the Tesla Cybertruck, with reportedly more than a million reservations for this vehicle, how long will prospective customer be willing to wait with car loan interest rates higher, and with added EV pick-up models in the market?
Neither is Tesla the sole company to have struggled with this principle.
Start-up Rivan Automotive has since learned that having the most sophisticated and “cool” features on the market for a premium EV pick-up or SUV, does not have relevance, when lacking the ability to both produce the vehicle at desired volume to be able to both satisfy customer order demand and achieve product margin targets.
Future Production Capacity
Bloomberg noted in its reporting that Tesla is now slow walking the automaker’s plans for a previously announced investment in a new factory complex in Mexico. Instead, Musk indicated that Tesla is not ready to go “full tilt” on construction because of the state of the global economy.
In March, the EV automaker unveiled “Master Plan Part 3” whose aim was sated as becoming the largest automaker by volume by 2030. That equated to the ability to produce and sell 20 million vehicles globally.
The initial step announced in this roadmap was the planned investment in a new production complex to be located in Monterrey, Mexico. This facility was reportedly destined to produce the termed “next-generation EV vehicle,” which was presumed to imply a successor to the Model 3 line-up of more attractively priced Tesla EV models for broader market appeal. At the time, Bloomberg reported that this facility would have the potential to produce upwards of one million electric vehicles annually destined for the Mexican market as well as for export, and generate upwards of 6,000 jobs.
The slide deck addressing the company’s latest performance included a breakout of existing global production facilities. The narrative relative to production growth indicated that Gigafactory Texas, and the Berlin-Brandenburg plants are expected “to grow very gradually from its current level as we ramp additional supply chain needs in a cost-efficient manner.” From our lens, that is the reality facing Tesla in the company’s ambitious growth plans to dominate the EV sector. The company’s strategy for dominating the market via price cuts has obvious implications for being the most efficient producer.
Added Perceptions and Thoughts
In our Supply Chain Matters previous commentary reflecting on what we titled Tesla’s Audacious Master Plan, we cited two areas of concern.
One was this manufacturer’s track record to date.
As Bloomberg astutely noted in its reporting at the time, Tesla took 12 years to produce and deliver its first million vehicle milestone. Each incremental one million vehicle milestone increase occurred in 18 months, 11 months and seven month intervals. Each added plant investment seemed to include significant executive and employee turnover and with a lot of pain and learning along the way. Musk himself had previously stated that the newest Austin and Berlin facilities were money pits for cash burn and for day to day challenges. The Shanghai complex initially struggled but an operationally experienced production volume culture and bottoms-up leadership has led to consistent growth, being a global export hub, and now multi-plant leadership direction.
Thus, seasoned operations management, scale and efficiency of product development and production are absolutely essential for this next phase of transformation. It was a wise move to appoint a global head of operations, but more leadership talent is needed across multiple business areas. Business media itself has increasingly opined that Musk’s energies being more occupied with his acquisition of Twitter (now X) may have been the detriment to ongoing leadership at Tesla and other ventures.
Since we penned that viewpoint, Tesla announced the departure of two rather key senior executives. One was Zach Kirkhorn, the automaker’s CFO and de facto chief operating officer, who is recognized as helping to transform the company into a profitable entity after years of various challenges. The other was Powertrain Engineering Vice President Colin Campbell, a 17 year veteran, who departed to join battery-recycling startup Redwood Materials to serve as that company’s Chief Technology Officer.
The second factor is that true to the company’s core Silicon Valley high tech culture of striving to shatter existing industry norms and practices, the company produced its first vehicle in 2008, nearly 15 years ago. Having benefited from the first-mover advantage, the opportunity to test, explore and learn different product management, supply network, production and vehicle delivery logistics practices at its various stages of growth was available. However, Musk’s micro-management style and manner have reportedly added to the challenges. That first mover advantage window is now narrowing.
An aging model line-up with the rest of the global automotive industry initiating their own transformations toward across the board EV or hybrid model offerings are collectively targeting multiple buyer segments from entry to luxury levels. While some traditional auto global brands do not necessarily have high-tech innovation and software culture roots, the top five have years of experience in implementing highly efficient and scalable production and supply networks, and all have Tesla as their competitive target. While market growth may be challenged by economic headwinds at this point, consumers are highly concerned about the need to reduce dependence on fossil fuels given the increased realization that the planet is alarmingly warming.
Our premise is that Tesla will be well served by broader investment in across the board talent at all levels. Especially since the industry’s supply and production networks are still a work in progress in their ability to meet the aggressive goals established for the iconic company.
For all of the above outlined, it seems evident that for at least Wall Street, and perhaps some in the supply chain management community, the bloom is off the rose in regard to Tesla.
It is time to address consistent operational execution, disciplined time-to-market and a broadened investment in leadership talent globally.
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