Would a privately-owned Tesla be better off?
Tesla CEO Elon Musk’s tweet last week that he was considering taking the company private raises the question: Do public markets, with the huge amount of capital they provide to new mobility companies, hurt or help those operations?
The stock markets detract from the day-to-day work at Tesla, Musk admitted. “This is all about creating the environment for Tesla to operate best,” he wrote in an email to employees that was later posted on the company’s blog. “As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla.”
At first glance, Musk’s dissatisfaction with public markets that have been extremely kind to Tesla seems surprising. With a market valuation that has grown to rival and sometimes surpass much bigger automakers whose production volume and profits eclipse its own, Tesla has benefited enormously from Musk’s ability to inspire public market investors.
Musk: Master of market hype Photo credit: REUTERS
But Bloomberg reported last week that a Securities and Exchange Commission inquiry into Tesla is not just about whether Musk should have used Twitter to announce the going-private proposition. It also seeks “general information about Tesla’s public pronouncements on manufacturing goals and sales targets,” signaling that Musk’s mastery of stock market hype may have gone too far.
Once a vision of the future has been sold to markets, it can take on a life of its own. The stock market doesn’t have the patience to weather the inevitable ups and downs that come with disruptive technologies, particularly from companies such as Tesla that are trying to upend the highly cyclical auto industry while relying on regular capital infusions to stay afloat. The dual risks of markets losing confidence in Musk’s ability to deliver on his daring goals and a broader macroeconomic downturn — the “force majeure” that Musk may have been alluding to in Tesla’s second-quarter earnings call — could be inspiring Tesla’s flight to the relative safety of private ownership.
To established automakers, Musk’s predicament likely comes across as overdue karmic retribution. The industry has struggled to inspire the optimism that Musk has built around Tesla. But they are steeped in the art of surviving the lean years of regular economic downturns. If investors are indeed re-evaluating the potential of companies such as Tesla to significantly impact the car business, execs at established companies may be finding their frustration turning to relief.
They may not have maximized their share prices during one of the strongest bull markets in recent memory, but they face less of a fall from grace.
Success in the auto industry requires a long memory, and for some automakers the apocalyptic days of the 2008-09 downturn are still fresh. Though Tesla has shown how shifting tastes and new technological possibilities can shape the future of the business and inspire consumers and investors alike, it has not been forged in the fires of adversity that make traditional automakers so resilient.
The conservative, risk-averse industry culture that has made Tesla’s limitless confidence seem so inspiring to investors makes little sense in the summer of a sustained bull market, but it comes into its own when investor disillusionment and economic winter beckon.
With Ford taking an unpopular $11 billion restructuring charge, it’s impossible not to think back to its remarkable anticipation of the last economic downturn. If Tesla has now become “a real automaker,” as Musk has claimed, it might take a lesson from Ford, the only other American automaker to have avoided bankruptcy.
Going private to avoid scrutiny and short sellers won’t be enough. To survive lean years, Tesla will have to deliver on Musk’s forecast of ongoing profitability and positive cash flow. If Musk can lead Tesla to financial sustainability and end its dependence on the markets for capital infusions it will survive any correction and prove that it has the key attribute of a “real automaker”: the ability to endure.