Tesla receives biased coverage

This blog is somewhat out of step with my usual blend of self-indulgent travel “writing” and self-indulgent nerdiness flaunting, but I am keen to address a years-long trend of consistent misinformation about Tesla in the press. There are many reasons for this, including the dissemination of deliberate misinformation by competitors, the oil industry, and short sellers.

Frankly much of it consists of nothing more than glorified tweets on SeekingAlpha, but surprisingly often an apparently well-researched article by an apparently knowledgeable author is published in the mainstream press, and I am concerned that readers who are not fortunate to share my background in hardware tech development may be left in a state of confusion. So having long resisted the urge to add yet more noise to the signal, I am wading into the fray.

Screenshot from 2019-02-25 22:15:18.png
For the purposes of this blog, I will focus on one specific article though I don’t mean to imply that it is unique or particularly terrible. There are whole lists of incorrect predictions of Tesla’s doom. If anything this article comes across as one of the more reasonable articles, which is why it forms a particularly pernicious part of the overall deluge of misinformed fear, uncertainty, and doubt.

In particular, Forbes is one of the more respected online outlets, though it publishes anti-Tesla articles nearly every day, with the exception of this one. The author, Betsy Atkins, is an experienced investor who writes a weekly column for Forbes. Though it is not disclosed in the article, she sits on the board of Volvo, so she does have relevant industry experience. My commentary will focus on the article, not the author.
In contrast, I’m a recovering theoretical physicist. I’ve worked in the big hardware tech sphere at Hyperloop and at NASA, so I feel that I can add a technical perspective often missing among business commentators. I have no special inside information, but I am a very happy co-owner of a Tesla Model 3.

I met Elon Musk in 2011 and immediately went as long TSLA as my meager grad student salary would permit, a decision I do not regret. I know and have worked with many people who have worked with Elon and it is no secret that not everyone enjoys his style, but nearly everyone agrees that he is a brilliant and effective leader. In my interactions, I have found him to be polite, engaging, and extremely reasonable. Again, my focus here is on the article, not the personalities of the protagonists.
Below, I have copied the text of the article in block quotes, and added my comments in between.

Screenshot from 2019-02-25 22:16:02

You’ve seen the antics on Twitter and late night radio and you wrote it off as an eccentric genius CEO. But unfortunately, it isn’t getting any better and Tesla isn’t Elon Musk’s personal hobby, it’s a public company.

I think Ms Atkins is referring here to Tesla’s legal structure, but it’s important to note that Elon is not a rented suit. He is one of a minority of founders, who has continued to earn the right to lead his own company, in which he retains a controlling stake. Elon is wealthy enough to retire; he’s not doing it for the money.

Tesla has stakeholders; shareholders, investors, employees, business partners, suppliers and customers and none of them are being served by the continued problems at Tesla.

Nearly every year, motions to reduce Elon’s power at Tesla are rejected, overwhelmingly, by shareholders. This reflects his perceived value to the company and is unlikely to change. Likewise, every other business associate is free to leave, and yet shareholders, investors, employees, business partners, suppliers, and customers continue to line up with almost cultish devotion.

It’s time for the board to take firm action and build a stronger leadership bench and have opportunity should they need a succession plan. I’m not saying they remove Musk completely from Tesla, that would be disastrous, but they need to bring in a world class operator who can lead Tesla through their next 5 years.

Elon has publicly stated that Tesla would benefit from a great COO who understands the business, but also the board can’t remove Elon, even if they wanted to. This is not mysterious, though I can understand that a career investor might be more accustomed to calling the shots.

Someone with a tech background coupled with manufacturing experience, who has been proven to be able to scale up from $12B where they are now.

This is the problem. Elon Musk is probably the most successful entrepreneur of all time. His current record stands at, I think, 5 billion dollar companies. Sure, there are other CEOs who have built large companies, but very few in the US in the hardware space, basically none in this generation in automotive, and certainly no-one with a proven track record. People can get lucky once, but five times? So when Ms Atkins proposes to insert adult supervision in the COO or CEO role, she should be more specific about who she has in mind, or else concede that finding such a person is probably more difficult than enduring Elon’s occasional blunders – the consensus position of the current board and majority of shareholders.

Musk could remain as Executive Chairman and Chief Innovation Officer or something similar where his inspired, brilliant, mind can flourish.

Safety

The issues plaguing Tesla are varied and will require several changes. In January 2019, California’s Division of Occupational Safety and Health fined Tesla $29,000 after finding several safety hazards in their Model 3 production Tent in Fremont. While the fine is immaterial, the reasons for the fines highlight a startling lack of planning and care by the operating team at Tesla.

The fine is immaterial because the safety violation was trivial. Tesla has one of the best safety records in the country. As usual, a routine minor issue was given a hundred breathless articles, while constant major violations by competitors and other industries are almost entirely ignored. 100,000 people die prematurely every year due to unregulated dumping of fossil fuel combustion products into the atmosphere.

Creating a tent production line that is the size of two and a half football field is going to require a permit – no? It’s alleged that Tesla didn’t obtain a permit, nor did they inspect for safety violations or train workers about heat illness which should be a consideration as the tent is open air and the manual work is difficult. While the fine is minute, the cost of an injured worker could be significantly greater. It’s understood that the tent was in response to Tesla being on the brink of failure, reportedly weeks away from running out of cash, but that is also the problem – waiting until it takes desperate measures to “pull-up” out of the nosedive.

Here Ms Atkins insinuates that building a production line in a tent was a last-ditch response to a persistent problem, as though management was asleep at the wheel. I think it’s widely conceded that Tesla made many mistakes, and a few big ones, during the Model 3 design and production ramp. But a rapid response to emerging problems is a sign of connected, responsive leadership. And a car that can be assembled in a tent in just 40 steps, while competitors typically require 120-150 steps, underscores how transformational the design is. Tesla is doing something new, and that requires experimentation.

Finance
Running out of cash is a CFO problem, and he’s leaving too… again. Deepak Ahuja is resigning as CFO for the second time. He started with Tesla back in 2008, quit in 2015 and returned to the company in 2017 when his successor left. Ahuja will transition out later this year, but his successor has already been named and he’s a first-time public CFO who’s only six years out of his MBA program. Considering that Tesla has been a revolving door of Chief Accounting Officers who would report to the new CFO Zach Kirkhorn, he won’t have a seasoned team with strong institutional knowledge backing him up. Granted, I do feel that bringing in millennials at all levels of a company is a requirement for future success, at this point for Tesla, some experience, pattern recognition and scar tissue earned in previous roles is what is needed in the CFO position. Wall Street agreed with me, as Tesla shares fell more than 2% coinciding with earning results and the CFO announcement.

I don’t know the full reasons why Mr Ahuja retired twice, but nor does Ms Atkins. In my opinion, pattern recognition is not necessarily useful if it is trained in the wrong industries. The new CFO, Kirkhorn, has been at the company for many years and understands its business intimately. More importantly, Tesla is a company that is exploding into new markets, requiring a continued focus on growth rather than consolidation and market defense. Finally, Tesla shares fell 2% coinciding not with Mr Ahuja’s announced retirement, but with the earnings call that occurred at the same time. In a rather common pattern, several institutional investors allegedly submitted inflated expectations on total delivery and revenues so that market sentiment would turn briefly negative, enabling the sale of short options. This sort of market manipulation is a not uncommon way to make money in the finance industry, which sometimes seems to forget that its role is to efficiently allocate capital between market participants, not merely to itself.

Production
While nearly half a million people have put down a thousand-dollar deposit for a Tesla Model 3 (that they may not get for years due to production issues),

This is simply not true. Customers in open markets are receiving cars within weeks of ordering, and have been for many months. Additionally, how is rampant demand a problem?

Tesla in mid-January laid off another 7% of their workforce after already cutting 9%, less than a year before.

Ms Atkins is well aware than nearly all competitive companies “rank and yank” on a yearly basis. Tesla has done so since its foundation. Since hiring is an imperfect process and companies evolve, the alternative is to fill the company with mismatched team members who dilute team effectiveness. Furthermore, laying off swaths of the company is standard practice for the sorts of board-hired guns that Ms Atkins advocates for Tesla, though Tesla’s existing practice is more in tune with optimizing for long term, rather than short term, value.

Tesla has said the layoffs are needed to save money as it shifts away from selling the more expensive models S and X and tries to reach the long-awaited goal of a $35,000 Model 3 that they promised three years ago.

Tesla wants to sell the Model 3 for $35,000 not to induce demand, since demand is out of control. Tesla wants to sell the Model 3 for $35,000 as a continuing demonstration that electric cars are overwhelmingly better than gas-powered cars. Tesla will continue to offer high-margin options to bring in the revenue they need to build yet another enormous factory. How many other manufacturers are building record-breaking factories?

Manufacturing and operating issues are still plaguing Tesla and they need to bring in an experienced manufacturing executive to make a long-term plan to meet production requirements.

Sandy Munro, a seasoned car manufacturing veteran, gave several interviews to promote his consultancy’s tear down of the Model 3. While initially he found evidence for well-known production hurdles, he pointed out that in the final analysis, the car had incredibly advanced technology. Tesla has invested heavily in improving its technology, to the point that it is easily six years ahead of other luxury car manufacturers, and gaining. The Tesla Model 3’s power train is 30% cheaper and 30% more efficient than the nearest non-Tesla competitor, which is one of the reasons that various offerings from Jaguar, BMW, Porsche, and all the rest are proving to be so lackluster. Elon said this in last October’s earnings call, which I tweeted and quote here:

“There are one or perhaps two points that are worth keeping in mind, as our quarterly letter indicates. The Model 3 is the most efficient energy per mile electric vehicle out there. It has the best efficiency. We are the best in terms of miles or kilometers per kilowatt hour. And we also have the lowest cost battery per kilowatt hour. This makes it very difficult for other companies to compete with Tesla because we have the most efficient car and the lowest cost batteries.

“I do encourage our competitors to really make a huge investment and we’ve been saying that for a long time. They’re only in this competitive disadvantage because they didn’t invest. We tried to help them as much as we could and they didn’t want to take our help. They can use all our patents for free and we’re happy for them to use our Supercharger network if they can just have an adapter for our connector or something. We want to be as helpful as possible to the rest of the industry.

“The fact of the matter is that we made the investment in Gigafactory and other companies didn’t. We put a lot of effort into having extremely efficient cars and having the most efficient powertrains and the other companies didn’t. I’m sure they will over time, but that is what has put us in quite a strong competitive position right now.”

Perhaps Ms Atkins has leveraged her position on the board of Volvo to suggest they invest heavily in electric technology, as Volvo announced that they would produce exclusively electric or hybrid vehicles from 2019. Since worldwide sales of gas-powered cars peaked in 2017, all manufacturers who don’t want to fight over the scraps of a shrinking market should rapidly get into the electric game. There was a time when Volvo was unafraid to lead, often by decades, in car safety technology. It no longer leads. Ms Atkin is well placed to find out why.

Leadership
As the company is running out of money, slashing jobs, pivoting production away from the more expensive models that have kept it’s head above water, Elon Musk is flying around in the corporate jet, logging more than 150,000 miles last year alone.

Elon Musk’s jet is not a corporate jet, it is owned outright by Elon Musk. In my opinion, it’s disingenuous for Ms Atkins to suggest that Elon is grifting on his company’s dime, as though using a private jet is somehow illegal. I got my pilot’s license on a grad school salary. Private aircraft are actually very common amongst the middle and upper classes, particularly since someone of Elon’s prominence cannot enjoy the privilege of anonymity and safety in public.

Musk who is often heard preaching about the dangers of global warming and carbon emissions used the jet to fly to Texas to tour the set of HBO’s Westworld, take his kids to Israel and Jordan for Spring Break, vacation in Chile and head to Ireland to tour the set of “Game of Thrones.” The trip to Ireland occurred just after Tesla cut 3,500 jobs to cut costs.

I feel that it’s unfair for Ms Atkins to complain about Elon’s use of a private jet on climate grounds given that Elon is probably ranked number one among billionaires by net reduction of global carbon usage, and is actually doing something about it. I see very few articles decrying, for example, the role played by the Kochs in perpetuating the literally poisonous status quo.

Certainly, many of the miles were business related as Musk flew to China to break ground on their new factory in Shanghai and meet with Premier Li Keqiang. It’s clear Musk is being stretched too thin between Tesla, SpaceX, his other side ventures as well as his movie hobby.

Which movie hobby? Did Ms Atkins confuse Elon with Jeff Bezos, who has gotten involved with several productions in Hollywood?

Tesla, the public company needs a full time CEO who can focus on getting the iconic US electric car maker back on stable footing.

The suggestion that Tesla needs a “peacetime CEO” who can prioritize stability ignores the underlying flux of the market. The world is in the midst of a tumultuous transition to renewable energy. After decades of policy dithering, efforts by many including Tesla have developed technology which can crush the incumbents even on their own unfair playing field.

Deployment is growing at roughly 30% year over year, while costs fall about 10% per year. Fighting for life between the giant existing companies is not a generic leadership problem. It’s a problem that has defeated all but leaders as visionary as Elon Musk. Elon’s physics background and deep knowledge of engineering across multiple fields make him uniquely qualified to see the future then build it. I know, because I drive it.

The board of directors at Tesla needs to make some serious strategic decisions about leadership. They may well potentially need a new CEO, a more experienced CFO and a head of manufacturing that can take the company to the next level.

As Larry Ellison remarked, which of the critics has landed an orbital rocket on a boat?

Dave Arnold, Tesla’s spokesperson made an interesting comment when he was asked about Elon Musk’s private jet use. He said “until we can teleport, there’s unfortunately no alternative that would allow him to do his job effectively.” That’s a great idea, let’s free up Elon Musk to work on teleportation, it would be a great use of his creative genius.

I did my PhD in General Relativity at Caltech partly to understand how to build teleportation, and after a few years of study, understand why it’s impossible. I don’t know if Dave Arnold has studied physics, but he clearly understands that teleportation is physically impossible, which is why his suggestion is a joke. Ms Atkins has the resources to hire a physics mentor, and I would be happy to recommend one.

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