Tesla boss Elon Musk has tied his future earnings to the success of his electric car business. Musk will be paid in excess of $55 billion if he hits a dozen targets, including growing Tesla’s market cap to $650 billion by 2028. He’ll become the world’s richest man if the gamble pays off.
But can it?
The likelihood that will happen depends largely on a global shift in the motor industry from internal combustion engines to electric motors. That, in turn, hangs on a variety of factors even the great showman can’t control.
“We are on an irreversible trend toward a time when all cars will be electric,” said Dr. Paul Nieuwenhuis, senior lecturer and co-director of the Centre for Automotive Industry Research & Electric Vehicle Centre of Excellence at Cardiff University. “But it will not happen in the very near future. There are a lot of things that have to happen first. And none of those are certain to happen yet.”
Right now, Tesla’s sleek limmos and sports cars are the highest profile electric vehicles (EVs) on the road. (And after Musk’s personal sports car was shot into martian orbit onboard one of his SpaceX rockets last week, the brand is now also the best known in the universe).
Pre-orders for the next generation model have exceeded half a million. But it will take more than one car to pay Musk’s billions.
“There are a couple of key accelerators that need to be in place first,” said Charlie Simpson, lead at KPMG’s Mobility 2030 project that’s assessing the viability of EVs. “You wouldn’t necessarily bet against Tesla, but there’s a major set of hurdles it is going to have to overcome.”
Chief among them is whether or not Tesla can scale up production to the volume and quality standards necessary to meet its targets.
Musk has proven himself a master marketer and innovator, steering PayPal, SpaceX, his own infrastructure firm, the Boring Company, and Solar City, the renewable energy complex, to success.
But he’s having problems building cars on a large scale. Production of the Model 3, Tesla’s first mass market vehicle, has been pushed back. Workers on its California production line have complained of overwork in dangerous conditions. The company faces claims of poor quality car construction — nine in every 10 of its S and X Models have required a fix before shipping, according to some reports. And production has been slow on the jewel in its crown — its battery manufacturing operations. Some reports suggest they’re still being assembled by hand.
Musk has reportedly described the hitches as “production hell” and is said to have set up home at one of the production lines to oversee remedial work.
“Is Tesla going to be the organisation that can take advantage of this at scale?” asked Simpson. “They are now coming up against the realities of mass production, which is a very different skill set to those that have got them to where they are now.”
Musk the showman
Despite these setbacks, Musk can do no wrong. Tesla’s valuation is somewhere around $60 billion, helped no doubt by the successful launch of the Falcon Heavy rocket, the biggest to takeoff from the US since the 1970s. But it has never made a cent. On Wednesday it reported it burned through yet more cash in the fourth quarter, $277 million to be precise. And still its share price rose.
Simpson describes the valuation as “outrageous” and based on “ridiculous” multiples of the current business.
But reality may bite hard when the Model 3s begin rolling off the production line in sufficient quantities, which at current expectations will be sometime in June. That’s when the $35,000 cars will come under wider consumer scrutiny. If the verdict is damning, it could lead to a tie-up with one of the big US petrol and diesel engine manufacturers, like GM or Ford, or a reverse takeover of one of their contractor manufacturers.
“Musk is making Tesla too big to fail, it has to work,” said Nieuwenhuis.
Two other big considerations will help decide if it will.
The EV industry is built on tax credits and other incentives from governments keen to reduce air pollution and reduce dependence on dwindling supplies of fossil fuels. If that rug is pulled from beneath it, the industry could collapse.
“It can’t continue on its own, not yet,” Nieuwenhuis added.
Secondly, electricity generation capacity and supply must be in place to handle the surge in power demands for EVs. Some estimates put the required generational capacity increase at threefold. Further, smart distribution strategies will be needed to ensure grids don’t collapse under the weight of so many cars charging.
California, considered the region ripest for EV adoption, scores well on incentives and demand but poorly on energy. The reverse is true in Europe, with its smaller markets but better coordinated regulatory setup. China is most likely to achieve both soonest because it has the resources, the unified regulatory backdrop and demand to build an EV ecosystem from scratch.
The picture is optimistic for the UK, said Simpson, who points to an encouraging investor environment as well as advances in research into next-generation batteries technology, such as solid state technology.
“There are some major structural issues around the fragmentation between government departments and the investment levels required to get the energy infrastructure in the right shape,” he said. “But we’re beginning to see levels of investor interest that suggest this is going to move fairly positively.”