Best Move for Musk: Sell Tesla

The entrepreneur has achieved his vision but is not suitable for the nitty-gritty of corporate management
By Christopher Whalen
Christopher Whalen
Christopher Whalen
Christopher Whalen is the chairman of Whalen Global Advisors and the author of "Ford Men." This article was first published by the Institutional Risk Analyst.
June 18, 2018Updated: June 18, 2018

Great entrepreneurs polarize, and taking the degree of polarization as a yardstick, Tesla’s Elon Musk must be a great entrepreneur. Splitting the investor space and the public into two ironclad camps, he usually comes out on top of any detractors.

In  May, Tesla’s stock dropped 30 percent from high to low  after the old stories of delivery delays and tussle with analysts, but it has since rallied a whopping 50 percent. But the problems, especially the lack of profitability, remain.

In an interview with CNBC’s Carl Quintanilla, former General Motors Vice Chairman Bob Lutz made two interesting points: Tesla spends too much for its larger batteries, and the company’s labor costs are six times the industry average.

“[Musk] doesn’t want to talk about the numbers, which are a disaster,”  Lutz told CNBC. “Elon’s costs are way higher than his revenues. He says let’s talk about the future. He wants to talk about anything but the disastrous business.”

Given the polarizing nature of Tesla, Lutz generates a lot of controversy. But it is true that Musk does not cut a very impressive figure as a corporate CEO. He is behaving like a cranky child, a la Facebook’s Mark Zuckerberg. He either needs to play the role as CEO of a public company or stand down.

In fact, Musk is reminiscent of Henry Ford, a difficult man who had a vision and largely kept his own counsel. Ford was not known for his patience with mere mortals, preferring the company of other visionaries like Thomas Edison, Harvey Firestone, and Charles Lindbergh.

In fact, Henry Ford was an appalling manager who was not even an officer when Ford Motor Co. was started. He would have failed for the third time in business but for his partners like James Couzens, Horace Dodge and Charles Sorenson.

The story of Ford—and autos in general—should serve as a warning to Musk. Manufacturing passenger vehicles in the 21st century is a very tough, oftentimes irrational business with modest and frequently negative equity returns.

The Key Is the SUV

Ford’s recent decision to stop making “cars” is a reflection of this economic reality. Ford and all the global automakers must follow the evolving preferences of consumers when it comes to product design and discard products that don’t fit that target. Green is good, but consumer preferences for SUVs are really about utility, a trend Ford itself helped shape by introducing truck-based passenger vehicles like the Bronco and Explorer several decades ago.

The fact that Tesla has embraced traditional sedans rather than some sleek kind of vision for the hybrid SUV is notable. Bloomberg Intelligence auto analyst Kevin Tynan, for example, thinks that the global industry is headed towards a mix of SUVs and true trucks with traditional passenger cars getting a rapidly declining share of the production pie. Makers like Tesla and Audi, for example, are atypical in their continued focus on passenger cars vs. SUVs of varying shades. Tynan said in February:

“A decade ago, most SUVs were being built on a truck platform, but that is not the case at all today. These were full frame vehicles. Today there are very few SUVs built on the same platform as the pickups. Or to put it another way, Ford still makes ‘cars’ that look like SUVs on the outside.

Price Point

Tynan also noted that SUVs and trucks tend to be more profitable than cars, but here is where the problem comes for Tesla. According to Lutz, the delivered price for the Tesla Model 3 is in the $50,000 range as opposed to the original price tag of $30,ooo. That big difference in terms of the delivered price for a Tesla Model 3 is what will take out a lot of demand for the vehicle, Lutz concludes.

Musk has achieved two huge goals: First, he validated the concept of electric cars in the public mind and with the auto industry. The entire global auto industry is desperately chasing Tesla’s vision of the electric future of personal transportation. Second, Musk has created a premium brand in Tesla, but this brand needs to be managed to be competitive. As Tynan noted:

“Tesla is valued as a tech company, but as a car maker they are in precisely the wrong place in terms of consumers who want a higher ride and other attributes of a truck or crossover… Tesla could at least build a car that consumers want.”

To us, Musk needs to declare victory and move on to his real passion, namely selling the future—space travel, shuttles to Neptune, whatever. Making cars of whichever propulsion type is about today and those few global brands that can compete for market share. Like Henry Ford, Musk’s considerable talent as a visionary and salesman may not be matched by his operating skills. He should just admit as much and put Tesla up for sale.

Tesla ought to hold an auction among the top global automakers and pick a partner to build Tesla autos, especially small and mid-size hybrid Tesla SUVs. The continuing glut of global capital may still enable Musk to extract himself whole from the Tesla project and avoid the fate as some previous automotive entrepreneurs. We’re thinking not so much about the habitually conservative Henry Ford as much as William Durant of GM fame.

Musk Like Durant

One of the greatest speculators of a century ago, Durant built GM into the largest corporation in history during the first decade of the auto industry. Ford, GM, and the Dodge Brothers were all fabulously successful and profitable businesses in the 1900s, with returns to shareholders measured in the thousands of percent annually.

Durant brought Buick, Oldsmobile, Pontiac, Cadillac, Champion ignition, AC spark plug and other companies into GM, sales soared, but earnings lagged. By 1910, however, Durant became over-extended and lost control of GM to the creditor banks led by JPMorgan. Durant was ousted by the bankers as his company sank into bankruptcy.

By 1915, aided by the du Pont family and other investors, Durant regained control of GM and began “an enormous program of expansion,” to quote Earl Sparling’s 1930 classic, “Mystery Men of Wall Street.” The E.I du Pont Nemours Powder Company put $50 million of war profits into GM to support Durant.

In the spring of 1920, Durant tried to float $64 million in new stock to finance the excess of expenses over revenue at GM. The stock was trading at $38.50, but new investors were coming in at half that valuation—just $20 per share. The situation went from bad to disaster quickly, when several large stockholders, concerned about the misalignment of costs and revenue, threatened to sell, forcing Durant to personally support the stock.

By June 1920, Durant had been buying GM stock through intermediaries for more than a month, but to no avail. The stock broke to $20 in public trading when a 100,000 share block was offered, Sparling reports. GM reached $12 per share by the end of the month. The value of GM continued to fall along with his fortune. Durant spent his entire cash reserve—$90 million—to allow some of his personal friends and associates to exit the stock.

By the end of 1920, JPMorgan stepped in once again and, along with the du Ponts, took charge of GM for the second time in two decades. They paid Durant $40 million for his stake, of note. More important, du Pont controlled GM until the administration of President Dwight D. Eisenhower forced the divestiture.

It seems to us that Elon Musk has a choice. He can either magically cut the cash burn rate of Tesla down to nothing and start delivering cars on time, or he can look for an exit strategy. Musk has created an awful lot of value in Tesla, but the better part of valor may be for this American icon to partner with a global automaker and move on to personal aircraft, for example.

But will Musk be able to let go?

One might apply the judgment of Sparling or the persistent Durant to the personality of Musk: “[I]t isn’t money nor even power that this man has striven for all his years, but achievement, a role in the play of life that might turn that comedy and farce into the kind of drama it would be had a surer playwright written it.”

Christopher Whalen is the chairman of Whalen Global Advisors and the author of “Ford Men.” This article was first published by the Institutional Risk Analyst.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

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