Elon Musk is a Silicon Valley prophet. The tech entrepreneur regularly makes outrageous pronouncements about a near future of electric, driverless vehicles, abundant renewable energy, reusable rockets, hyperloop commuting, even colonies on Mars. He says he’s going to make these things happen, and a good many people believe him.
Among these disciples are many of the biggest and smartest investors in the world. They’ve stumped up huge sums of cash for Musk’s principal venture, the electric car company Tesla, largely in equities but most recently through a $1.8bn bond issuance. Despite the huge growth in the share price, some analysts still say the stock is undervalued.
But is their faith justified? As yet, prophecies abound but profits are nowhere to be seen. Critics regularly accuse Musk of the cardinal CEO sin of overpromising and underdelivering. The Wall Street Journal last year found that Musk had missed his own targets no fewer than 20 times since 2011.
Most of these ‘failures’ have, however, been modest, while the ambition of his targets was anything but. A typical example would be Musk announcing in May last year that Tesla would produce 20,000 vehicles in its second quarter. In fact, it produced 18,345, but when you consider that was around 50% more than the previous year, it doesn’t seem so bad.
By far the most substantial missed target was the launch of the Model X sports utility vehicle, which began deliveries in 2015, two full years after plan. Otherwise, it’s still hard to ignore the successes, especially since the launch of the Model S in 2012. Take a look at Tesla’s annual production since then, bearing in mind that demand has always exceeded supply.
Tesla grew deliveries at an impressive pace after it started production of the Model S mid way through 2012... (Source: financial filings from Tesla Motors)
Part of that impressive growth has come because the Model S and Model X were always intended to be cheaper, higher-volume products than the Roadster, Tesla’s original car (or not so original – it was actually an adapted Lotus Elise). But you’ve also got to give credit where it’s due: there are very few bosses or growth investors who’d be disappointed with better than 50% annual delivery increases.
Musk may just have set himself a target too far, however. After launching his company’s mass market product, the Model 3, he said he was bringing forward the target of 500,000 vehicles produced per annum from 2020 to 2018. To put that in perspective, that’s likely to be five times what the company will produce this year. Ambitious doesn’t do it justice.
...but if you put that next to its 500,000 production target for 2018, it’s not nearly impressive enough. The full 2017 figure is a beermat estimate, assuming similar production/deliveries of Model S and Model X for the second half of this year (it was 47,000 in the first half), with modest deliveries of the Model 3 at the end of the year.
Is it possible? Perhaps. One key factor, demand, is already sorted – there have already been well over 400,000 reservations for a Model 3.
The main barriers to supply at this stage are battery production (Tesla and Panasonic’s vast ‘Gigafactory’ in Nevada started operating last year, albeit on a limited scale) and supply chain*. Any rapid scaling of a manufacturing operation is likely to run into some practical problems, but presumably Musk believes that they are close enough.
Ultimately, it comes back to faith then. Believers may take comfort in the knowledge that while Musk’s predictions often sound like something out of sci-fi, his targets have actually turned out to be realistic (with the exception of the Model X), even if they haven’t been met. The fate of his company – and his investors’ money – largely depends on whether that pattern continues.
After all, Tesla only has a short window of opportunity to disrupt the vastly better-funded car giants, before they commit fully to electric themselves.
*Slightly longer term, there’s the promise of Tesla’s revolution in manufacturing. The plan is to build machines that build better machines, which will then build the cars with almost no human involvement, achieving unheard of levels of efficiency. For now, the company’s manufacturing plant in Fremont, California is estimated to have just about the necessary capacity to produce 500,000 vehicles at current technology.
Image credit: Tesla Motors