The world’s most successful electric carmaker, Tesla’s journey has been full of obstacles, most of which resulted from its own mistakes. Musk clearly stated that even the recent $2.7 billion infusion of capital cannot save them if Tesla does not cut costs, reduce inefficiencies and deliver vehicles on time.
There are many issues that led Tesla to this stage including late deliveries, quality assurance, and regulatory hurdles due to Musk’s battles with the United States’ Securities and Exchange Commission (SEC) among others.
Musk has been trying his best even sleeping on the assembly line floor to assure the quality of the cars leaving the factory but his habit of blunt tweets had put him and Tesla in trouble at many instances. The Musk’s tweet to go private costed him $20 million and he couldn’t learn from it and breached the contract with SEC again later. We also cannot ignore Musk’s abrupt tweet about closing some of their stores to save cost.
Some people learn it the hard way and this is especially true for Musk who couldn’t streamline the manufacturing process and inefficiencies. Imagine, the $35,000 Model 3 is actually costing the company $38,000.
At Tesla’s quarterly meeting in April, Musk announced a $702 million loss in the first quarter of 2019, which is a huge amount. Although Musk was wise enough to gamble with public shares and convertible senior notes, which was successful, he is clear about one thing. If they do not reduce waste and cost, they will be extinct within a year.
Musk said in an email to employees, which is obtained by Reuters, “As mentioned at the company talk, it is extremely important that we examine every expenditure at Tesla no matter how small, and be sure that it is critical.” He went on to say, “When making hundreds of thousands of cars, battery packs and solar systems, even a ten cent savings could be worth over $50,000 a year. There are over 10,000 unique parts and processes at Tesla, so making small improvements across the board has a giant cumulative impact. At the same time, we must also continue to make our products subtly better in thousands of small ways.”
Musk’s words are very serious and he said directly, “It is important to bear in mind that we lost $700 million in the first quarter this year, which is over $200 million per month. Investors nonetheless were supportive of our efforts and agreed to give us $2.4 billion (our net proceeds) to show that we can be financially sustainable. That is a lot of money, but actually only gives us approximately ten months at the first-quarter burn rate to achieve breakeven.”
Musk also told that the new CFO is working hard to analyze and verify each transaction at the company comprising, “expenses of any kind anywhere in the world, including parts, salary, travel expenses, rent, literally every payment that leaves our bank account”.
“This is hardcore, but it is the only way for Tesla to become financially sustainable and succeed in our goal of helping make the world environmentally sustainable,” he added.
Will Tesla be able to weather the storm depend on a lot of things. They need to cut costs, minimize inefficiencies, and keep delivery promises. Musk too has to act more smartly and prudently to avert issues with the SEC and stay composed online. He should not over-promise and over-estimate in any way. Only time will tell how Tesla and Musk deal with this situation.