Tesla CEO Elon Musk has said repeatedly in 2018 that Tesla won’t need to raise money, despite the automaker burning through a staggering amount of cash.
At Tesla contentious annual shareholder meeting last week, he fought off an attempt to split his combined CEO/chairman of the board roles and an effort to kick his brother out as a director. Then he declared, again, that Tesla would be profitable in the third or fourth quarter — and that no debt or equity raise was forthcoming.
Tesla has around $3 billion in cash on hand, as well as lines of credit it can tap, but the cost of ramping up production of its troubled Model 3 continues to be expensive. Despite that, you can dice and slice the numbers, throw in zero-emissions-credit sales, tweak the actual pace of production — and come up with some scenarios on which Tesla is slightly profitable and winds up with about a billion in cash by the end of 2018.
Surprise profits have materialized for a quarter in the past, so it’s not unprecedented. And I’ve long maintained that Tesla could fall back on its relatively successful business of selling high-priced, all-electric luxury vehicles and become steadily profitable, given that its holds a monopoly on this market.
Following the shareholder meeting, however, I’ve started to think that there’s a method to Musk’s apparently mad insistence of making Tesla ride out 2018 on the edge of insolvency.
Tesla’s cash options
The issue now is that Tesla is really in nickle-and-dime territory.
Its stock price is much too high for a carmaker that’s incinerating capital at the rate Tesla does, without any profits to show for it, but because it’s so elevated and evidently in demand, Musk ought to be able to tap capital markets any time he wants, for a billion here and a billion there. In fact, his refusal to raise at current elevated stock price seems like a baffling missed opportunity.
The problem is that Tesla’s cost structure means that the company is spending a billion a quarter to operate, so these periodic raises and debt issuances aren’t enough to pad the balance sheet. These funding methods are also not going to be sufficient to fund future projects, such as the new factory in China that Musk said would get started later this year or sometime next, now that China has eased its joint-venture requirements for foreign electric-vehicle manufacturers.
A lot of analysts think Tesla will need $10 billion or more to keep the train moving over the next few years, so what Tesla really needs is to quickly swing to substantial profits, on the back of the Model 3’s fitful birth (unlikely); or run out of money and secure a massive infusion of capital from elsewhere.
Could that be Musk’s game plan? Before you say that it sounds crazy, remember that he’s done it several times in the past. At one point, both Daimler and Toyota held stakes, which Musk negotiated during the gnarly days of 2010, when Tesla was struggling to develop its Model S sedan. Both automakers later sold their holdings for a nice return.
In 2017, China’s Tencent acquired a 5% stake.
My sense is that Tesla now views China as its biggest future market, with a government that’s pushing EV development and annual sales that in some optimistic estimates could hit 40 million, more than double the US market. The US market is also extremely competitive and topped-out in terms of current sales volumes, at an historic yearly high that’s been at 17 million since 2015.
Tesla has growth limits in the US market
The only way Tesla grows into its market cap in the US is to vanquish a major player or two, but unless it figures out a way to sell electric cars for less than $25,000 apiece and do that profitably, it’s not going to happen. Tesla is also moving toward a production system that is far different from what traditional car companies use, so the company can’t simply take over competitors’ factories. Instead, it has to build them from scratch.
If this doesn’t look like a roadmap to a major China investor, I don’t know what does. It would also explain why Musk has been so chill about not needing more cash, even as Tesla sets it on fire at an unprecedented pace. If you really want to overthink matters, you could simply recall the confidence with which Musk and his executives spoke of the China expansion last week. It sounds like a done deal.
And I think it sounds like a done deal precisely because Tesla is lining up the financing as part of a substantial investment round from a Chinese player. That would go a long way toward funding not just two new very expensive Gigafactories (making both batteries and cars) in Europe and China, but a dozen worldwide— what Musk’s master plan calls for.
So the Master Plan, Part Trois (Musk’s last one was amusingly called “Master Plan, Part Deux”) would, believe it or not, entail Tesla going “bankrupt” right up until it suddenly doesn’t.
In other words, the Tesla bears, shorts, and Chapter 11 prophets are all totally right — except that they haven’t factored in Tesla’s bailout strategy. In 2009, Chrysler and General Motors turned to a government to save them, and in Chrysler’s case to Fiat to take over management. Musk might have studied his history in this and come up with his own version of it, maintaining managerial control and getting a Chinese company to play the role of the US Treasury.
We could debate whether I’m correct about this, and Tesla could easily do another “Sorry, we did the math wrong” old-school equity raise of a few billion in 2018 and get away with it. The markets are certainly already pricing in the possibility, and worst case they’re discounting Tesla to $200-$250 per share, below the current $325 (shares popped last week on reaffirmed weekly production targets for Model 3).
But something much bigger could be in works. And it would be big in China.