Musk needs new Teslas to pay for his autonomous dreams

Tesla is trading radicalism for speed of delivery and capital efficiency, at least in the medium term.. REUTERS/Florence Lo/File Photo (REUTERS)
Tesla is trading radicalism for speed of delivery and capital efficiency, at least in the medium term.. REUTERS/Florence Lo/File Photo (REUTERS)

Summary

Tesla’s plan for a more affordable model that might revive growth and cash flows has been accelerated at the expense of ambition.

Tesla on Tuesday announced something totally unexpected from a company run by Elon Musk: a compromise.

The surprise passage of its highly anticipated first-quarter results came in the outlook statement.

“We have updated our future vehicle line-up to accelerate the launch of new models ahead of our previously communicated start of production in the second half of 2025."

This is exactly what investors wanted to hear after a wave of doubt about the company’s commitment to producing a new mass-market car. The shares rose 10% after hours.

But there was a twist: The company went on to explain that these new models will combine elements of both its current production platform and its “next generation" one under development. That means cost savings will be lower than previously expected, but so will capital spending as existing production capacity can be adapted to the new products. Tesla won’t be opening new factories dedicated to a cut-price vehicle any time soon.

In other words, Tesla is trading radicalism for speed of delivery and capital efficiency, at least in the medium term. It is a sensible decision from a company that has historically preferred to take the heroic road. Institutional investors will likely love it; the Tesla fan base perhaps less so.

Terrible first-quarter results explain why Tesla is reaching for a new approach. With electric-vehicle sales under pressure, the company burned through $2.5 billion of cash—far more than analysts had expected—by combining the lowest quarterly operating cash flow since early 2020 with record capital spending. Carmakers unravel very quickly and expensively when sales fall, and Tesla is no different.

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The company is expecting a better second quarter as production and logistics problems that previously held back deliveries, such as an arson attack on its Berlin factory, unwind. But flagging demand for electric vehicles is also part of the mix, and the reported numbers don’t distinguish between temporary and more lasting effects. As revenues fell 13% year over year in the first quarter, inventories rose 10% to around $16 billion. These may be parts and unsold Teslas stuck in transit—the scenario emphasized by management on a call with investors—or they may be cars sitting on lots waiting for buyers.

The new plan has a shot at reviving sales growth next year: Musk said that the new models would come “early 2025 if not late this year." Beyond that, though, he gave few details, pointedly declining to answer analysts’ questions during the call. That leaves the door open for speculation on all sides, with bulls claiming that the affordable Tesla project is being brought forward and bears emphasizing the compromises.

The other wrinkle in the new plan is that Musk still seems much more interested in cracking the code to self-driving vehicles than in making a cheaper electric car. “If somebody doesn’t believe Tesla is going to solve autonomy, I think they should not be an investor in the company," Musk said when asked by Morgan Stanley analyst Adam Jonas about Chinese competition to produce a low-cost EV.

Musk is right that Tesla’s valuation doesn’t add up without driverless cars, regardless of its growth in deliveries. So it was disappointing that the company gave investors no new ways to track its progress or gain confidence in its technology beyond well-worn assertions that it has the right approach. Tesla is taking a riskier road to autonomy than the likes of Mercedes-Benz and Alphabet, rejecting expensive lidar sensors and leaning into artificial intelligence. The approach should win on unit cost, but only if it actually delivers technologically. Meanwhile, Tesla’s spending on Nvidia’s AI-training chips and data centers is exacerbating its financial strain.

The company is holding an event to unveil a “robotaxi" on Aug. 8, but its self-driving technology requires constant supervision, suggesting delivery of truly driverless Teslas is still years away. Concrete details of its approach and performance benchmarks could help build investor confidence in what is usually seen as a moonshot, though.

Musk only has eyes for robots and AI, but selling cars is the cash machine capable of funding higher-tech dreams. His first priority must be to fix it.

Write to Stephen Wilmot at stephen.wilmot@wsj.com

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