Elon Musk has reinvigorated the American public company
Summary
- But his plan to take Tesla private may well flop
WHEN Elon Musk started Tesla in 2003 the world was a different place. The carnage of the dotcom crash was still visible—although Mr Musk had made $200m after PayPal, which he co-founded, was bought by eBay in 2002. The car industry was belching out fumes and complacency. General Motors had double the number of staff it does now. Chrysler was being run into the ground by Daimler, its then owner. Sergio Marchionne, who later saved Fiat and Chrysler, was a nobody toiling at a Swiss industrial-testing company. In 2010 Tesla floated its shares. Going public was the obvious thing to do. No one had heard of “unicorns"—multi-billion-dollar tech firms that are financed privately.
A stifling orthodoxy then held sway in corporate America. Inspired by Warren Buffett and Jack Welch, a former boss of General Electric, this doctrine held that the only attractive businesses were well-established ones, with a high market share, a “moat" to protect them against competition and lavish cashflows. Even the new tech darling of those years, Google, which floated in 2004, conformed to this conservative ideal. It made a profit in its first quarter as a listed firm, invested peanuts and, by 2010, controlled the search market. Meanwhile, passive investing was taking off. Its premise was that it was pointless to back individual companies—better just to own the entire market and go to sleep.
At first, Mr Musk’s approach to running a public company was exhilaratingly different. He persuaded institutional investors such as Fidelity and Baillie Gifford to make huge bets on his loss-making firm. Its mission was outlined in a 2006 “Masterplan": to make the internal-combustion engine extinct by mass-producing electric vehicles (EVs). When sales of Tesla’s Model-S sedan took off in 2013, its shares soared. Tesla’s public listing complemented its brand-building efforts. Fanatical customers lined up to give Tesla deposits in order to reserve cars that it had not yet built.
But somewhere along the line this liberated spirit has morphed into a crusade or a tragedy or a farce, depending on your view. Mr Musk, who thrives by stoking expectations to excess, is partly to blame. So is the tech boom, which Tesla has got caught up in, prompting comparisons with Apple or Amazon. But Tesla has little in common with these firms. It is capital-intensive, enjoys no network effects and has no breakthrough technology (Panasonic supplies its batteries). It also has higher unit costs than rivals, despite trying to automate production. The firm is trying to compete in an industry that has abysmal returns on capital, as the late Mr Marchionne loved to point out.
Cloaked in the glitter of Silicon Valley but facing a grimy fight with Detroit, Tesla’s position is stretched on every dimension. Its valuation of $70bn, including net debt, implies that sales will be six times bigger in a decade and is acutely sensitive to changes in assumptions. To justify it, Tesla says it can lift production fast. In the long run it would need to have about a 3% share of the global car industry by revenues to support its value. Today it is at 0.6%. Losses mean the firm has $11bn of debt, $3bn of which matures before 2020, leaving it vulnerable to dips in confidence.
This high-wire act has led over 20 executives to leave in the past 24 months. Meanwhile, the tech boom has made life difficult for Wall Street’s short-sellers, leading them to escalate their attacks on Tesla, an easy target. And the price signal sent by Tesla’s valuation has stimulated a response. Conventional car firms are piling into EVs—by 2020 there will be dozens of new models.
Somehow, Mr Musk must keep the plates spinning. There has been nutty conduct, from a wild interview with Rolling Stone to his slandering of a diver in the Thai cave rescue. But more revealing is his hyperactive rummaging for a plan that reinvents Tesla or changes how it is perceived. In 2016 it bought Solar City, an energy firm. In July it said it would build a huge factory in China. Mr Musk is giving detailed short-term guidance (he expects a profit next quarter). On August 7th he tweeted that he might take Tesla private at $420 per share (the price was $342 the day before) and that funding was secured. Later, he clarified that he expected half of outside shareholders to stay invested, and that Saudi Arabia’s sovereign-wealth fund might help him out. That may have been insufficiently solid to back up the tweet; the Securities & Exchange Commission has reportedly sent subpoenas to Tesla.
Going private sounds rather like a sabbatical from reality. It is far from clear what it would solve. The circus around Tesla is mainly due to Mr Musk, not to how public securities are regulated. For loyal shareholders a deal might mean part-financing a buy-out of a minority of investors at a premium, and after that, less liquidity and transparency. Any new investor would be paying 50% more than they would have spent buying shares in May, which should make even the indisciplined Saudis think twice. If the private plan flops, Tesla’s likely destiny is a soggy share price and a long struggle to ramp up production. At a lower valuation a big car firm might eventually buy it or take a stake.
Look at those cavemen go
Entrepreneurs often have it tough—Charles Goodyear went to a debtor’s prison before patenting a process to vulcanise rubber in 1844. But Mr Musk may not have the stomach for more years of slog. In a 2006 memo he named SpaceX, his private rocket firm, as his day job. What he might view as a disappointment would be a success by any other standard. Even if Tesla’s shares halve, it will have created $20bn of shareholder wealth, including $4bn for Mr Musk. Its soaring ambition has kindled investment across the car industry, in a process of disruption first described by Joseph Schumpeter, after whom this column is named. Thanks in part to Mr Musk’s example, it is fashionable again for an elite of public firms to invest heavily, including Netflix, and Amazon in recent years. Most boardrooms now are less obsessed with defensive hoarding. Mr Musk has tested the limits of the public firm, but he has reminded America of its possibilities, too.
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