Tesla: Zap or fizzle?

Elon Musk is one of the 21st century’s defining figures. His ventures have redefined the scope of technology, from SpaceX, his private space exploration firm, to Tesla, his electric car manufacturer. This most recent endeavor, though, has struggled to turn a profit.[/dropcap]

Tesla’s operating loss per vehicle last year was just under $15,000 in Q2 of 2016. When a company loses money on each vehicle it sells, the difference can’t be made up in bulk. Yet, Tesla plans to begin production of a mass-market vehicle, despite the failure to turn a profit per unit in the lucrative luxury car market. Because of these figures, investors are reluctant to put their money behind the company. Analysts also point to the serious problems with cash flow the company is having. Currently, Tesla owes about twice what it has in cash on hand. It’s difficult to finance large-scale production without a ready supply of capital.

Those figures, though, don’t paint a complete picture of what Tesla is doing. Most of those “losses” reflect investments the company is making in R&D and manufacturing. Traditional automotive manufacturers have established production processes, and the internal combustion engine has been proven technology for just over a century. These companies don’t have the same startup costs, and so their investments in EV and battery research don’t show up as significantly on the balance sheet.

Further, Tesla’s timing in the market could be better. Shortly after the luxury model hit the market, fracking technology dropped the bottom out of the oil market. This freefall made serious changes to the automotive landscape. Trucks and SUVs, difficult sells since the recession in 2008, were viable purchases again. OPEC overproduction has since compounded the price drop, putting efficiency far from the mind of car buyers.

The inverse of the law of gravity, that what goes down must come up, will likely hold true for oil as well. Fossil fuels are still the cheapest and most portable form of energy production around, and America in particular lacks the electrical infrastructure to replace every car on the road with an electric vehicle. The supply of oil will eventually return to a normal, higher state, and demand is likely to continue to grow.

When the price of oil rises again, Tesla will be looking at a fundamentally different marketplace. They have the advantage of technology; right now, no one else can do what they do in terms of battery capacity or longevity. If that advantage remains, Tesla will start making money.

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