Tesla will not survive for long as a standalone company

Right at the beginning, let me make it clear that this article is about Tesla, and not about electric cars. While Tesla is a leader in developing electric cars, the two are not synonymous. In particular, the future of electric cars is not the same as the future of Tesla as a standalone company that makes electric cars.

My basic point is that Tesla will be bought out by some larger company — probably an established car company, and possibly even some non-car company.

Why?

There are three main reasons.

First, Tesla has no experience or expertise as a manufacturing car company. It’s not enough to design a new, exciting car. You have to produce large quantities without manufacturing defects. Musk himself has warned that Tesla would face “manufacturing hell” as it ramps up production of its new mass-market Model 3 sedan. And, it’s not enough to make and sell cars. You need to honor the warranties, and deal with recalls. (There’s no company that has not undertaken recalls of its cars.) When these issues arise, Tesla is likely to face problems.

Second, a car company needs to be large-scale to be able to compete against other low-cost car producers. Tesla’s main competition is not from other electric car makers. The competition is from large-scale producers such as Toyota, who have well-honed cost-minimized production processes. Current plans are for Tesla to produce half a million cars even in 2025. That’s just too small. Without a large enough scale, the average cost of the cars is too high.

Yes, Tesla is a disruptive company. That’s its advantage. But, their disruption is in the concept and design, not in reducing costs.

Third, Tesla still needs to spend large amounts of money on R & D. Their product is still in very early stages, and will need continuous improvements. Even the conventional car companies are spending large amounts of money to upgrade their cars. However, they can spread their R&D over a large number of cars. Not Tesla. It’s scale is still small.

One symptom of Tesla’s cash needs is that it has just borrowed $ 1.8 billion with a yield of 5.30 percent. That’s good for a company that has a poor bond rating. But, it will not be easy to even pay the interest, let along repay the loan. “Tesla would surrender the entire profit on the first 48,000 Model 3 sales each year just to pay annual interest on the new bonds.”

To conclude: Within a few years, Tesla is likely to be able to design an acceptable electric car that an experienced manufacturer could, unlike Tesla, sell for around $ 30,000 with perhaps a small profit. In the same period, Tesla will be hungry for additional funds, which will be hard to come by. Then, Tesla will be an attractive company to buy, and become part of a larger group.

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