This is an audio transcript of the Behind the Money podcast episode: ‘A turning point for Tesla?’
Michela Tindera
Hey, everyone. Before we start today’s episode, we at the FT wanna hear from you. And we wanna know what you’d like to hear more of. So to help us understand that, we’re running a survey that you can find online at FT.com/btmsurvey. That’s FT.com/btmsurvey. There’s also a link in our show notes. The survey takes around 10 minutes to complete, and if you fill it out, you’ll have the chance to win a pair of Bose QuietComfort Earbuds. Thanks everybody. Now let’s get on with the show.
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When Paul English bought his first Tesla about 10 years ago, it was, in his words, amazing.
Paul English
The power, the efficiency, the software, the control, the car, the app on the phone. It really was unlike any car I’d ever driven before. There were not a lot of them on the road in 2013, so it would turn heads. People say, “what car is that?”
Michela Tindera
Paul’s an entrepreneur himself. He co-founded the travel site Kayak.com, and he was so excited about his experience with Tesla that he decided to invest in the company, too.
Paul English
I bought stock in Tesla in 2016 because at that point it was turned into my daily car. I was driving it every day and the software was updating at night. So you get the car in the morning and new features have been added. I was just incredibly impressed with that and I thought that it clearly was a company of inventors and I believe it’d be the dominant car company, but also the company could invent other products.
Michela Tindera
But more recently, his opinion changed. And that shift began for him in 2022, when a certain CEO bought a certain social media platform.
News clips
Breaking news: the deal is done . . . Twitter has been sold to Elon Musk . . . A $44bn deal makes Twitter a private company with no shareholders to answer to . . . Slashing the social media giant’s workforce . . . Investors in Tesla this morning expressing some frustration . . .
Paul English
The final straw for me was the day he marched into headquarters and had people escorted out of the building and was really proud of firing like half the staff. And it just seemed like incredible cruelty that was unnecessary. People looked up to him as this almost, like, godlike creature that he could do no wrong. And at that point, I think the halo came off and people no longer saw him as this, like, godlike creature. They saw him as sort of a cruel business person.
Michela Tindera
Since Elon Musk acquired Twitter, shares in Tesla have sunk by more than half. Paul’s thinking about selling his own shares, too, and he says he doesn’t think he’s alone.
Paul English
When you have something that’s just radically different, as a Tesla, that appeals to a certain segment of the population — people who tend to be highly educated and often liberal. And people who are highly educated and liberal don’t like people that are bullies. And when Elon turned into this big bully at Twitter, those people who bought all of Tesla’s willing before now questioning it, do they they want to support this man, and then now questioning the stock price.
Michela Tindera
Elon Musk and Twitter have dominated headlines for months, but in reality, his online antics aren’t the only reason why Tesla’s stock has been falling. Other obstacles are getting in the way, and those could put the carmaker on a bumpy road.
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I’m Michela Tindera from the Financial Times.
Tesla is facing a new test. The economy is slowing down and competition from other carmakers is finally heating up. Today on Behind the Money, we’re looking into how Tesla and Elon Musk are gonna navigate tough challenges ahead and whether it will be able to stay on top of the EV market in the coming years.
To get a better picture of what’s happening with Tesla at this pivotal moment, I wanted to talk to Richard Waters. He covers Silicon Valley for the FT.
Richard, welcome to the show.
Richard Waters
Well, it’s great to talk to you, Michela.
Michela Tindera
So I think to tell the story of Tesla and what’s happening now, we need to go back a few years to just before the pandemic hit.
Richard Waters
This was a company that was chronically unprofitable. It was struggling to ramp up its production. So along came the pandemic. Just at that moment, Tesla’s new plant in China started to kick in. Production went through the roof. Demand for the rest of the car industry really started to suffer. You know, people weren’t buying cars, but electric cars, interest just took off. And so Tesla hit this wave and prices also started going up because other companies couldn’t get enough parts to produce cars. Tesla had a supply chain that was really working. And so as their production took off, their prices started going up.
Michela Tindera
Right. So they fixed that and demand was surging. And then in tandem, there was this wild runup of the stock price, too.
Richard Waters
By late 2021, it was worth $1.3tn. And it was partly just because, you know, it started to produce cars and make a lot of money. But I think obviously behind that, there was something else which was, you know, this fervour there’s always been for Tesla just caught fire at the moment that there was a lot of cash around and everyone was chasing, you know, the hottest growth stocks and there was nothing hotter than Tesla. So there was some reality behind it, but an awful lot of hype and it just went completely through the roof.
Michela Tindera
Yeah. So from that peak, as you said, that market cap peak of $1.3tn. Now, looking at Tesla’s stock, it’s fallen quite a bit. Why is that?
Richard Waters
Yeah, I think, you know, Musk being out on Twitter, being so politically polarising and controversial, has influenced his personal reputation. You know, it’s created a lot of enmity for him personally. And that’s rubbed off on to Tesla.
Michela Tindera
OK, got it. But it goes beyond just Musk’s politics, right?
Richard Waters
So there’s a real concern that he’s sold a lot of his Tesla stock to finance the Twitter acquisition. And he kept selling throughout the year right through December, even though he’d said he wouldn’t sell anymore. And that’s left people thinking, you know, if Twitter’s finances are in trouble, is Musk gonna keep selling Tesla shares? And does that put more pressure on the price? So for all these reasons, I think there’s a, there is definitely a Twitter overhang over Tesla. But I think there’s a much more important factor at work, and that is that for the first time really, people are starting to ask whether demand for Tesla cars is there, whether there’s enough demand to support the production that’s coming on stream. And that’s really a turning point. Tesla is remarkable in that it doesn’t spend any money on advertising, which is unique in the car world. And so for a company like that, it just had this incredible demand and fervour. Well, things have changed. This year is gonna be different. And so that switch from a focus on supply and whether they can make enough to demand and whether they can sell enough really is now a big cloud hanging over this company.
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Michela Tindera
I want to zoom out a bit and, you know, maybe some people listening to this might say, “oh, Elon Musk. Haven’t we heard enough about this guy? Why does what’s happening with Tesla even matter?” What would you say to that? Why does the story about what Tesla is going to do in the future and where it fits in the electric vehicle market, why does this matter?
Richard Waters
Well, I would agree with you and all those people who would say we’ve had way too much about Elon Musk. I think I could subscribe to that. What he’s done in the EV industry and the space industry, has been, you know, really remarkable. Unfortunately, so much of what we’re reading is the chaos he’s saying at Twitter. Maybe he’ll do some great things at Twitter and I look forward to hearing more about that in future. But, you know, right now, it’s been chaos. And so all of that has created this kind of, you know, has fed this Musk mania in the media and I think that’s a shame because I do think Tesla is a very important story that deserves a lot more attention and not because of Musk. You know, I think we need to, if possible, strip the Musk out of the Tesla story for a moment and just look at this, you know, really quite remarkable car company that has had so much impact on the automotive world. And going into recession, its first real test, now we have a chance to see how great is this company he built? How strong is this brand he created? And, you know, we’re gonna find out. And I think that’s a remarkable story. And I hope we’re not too obsessed with Musk while we tell it.
Michela Tindera
Mm-hmm. Yeah. So looking beyond Elon Musk and Tesla, other car companies have started to seriously enter the EV space recently. To name a few, there’s Volkswagen, Ford, General Motors. Could you talk a bit about what those companies are doing and what they’re offering?
Richard Waters
So what we’ve seen so far is some very expensive development programs with companies like VW putting tens of billions of dollars and indeed, you know, in many ways betting the future of the company on electric. And the first real products that are only just starting to come out and they are in the higher end, you know, Audi, Jaguar and so on, are starting to produce, you know, some decent cars. But I think it’s the mass market level that we’re starting to look to. You know, I think the car market is not like the phone market. There aren’t just one or two super brands like the iPhone. Everybody has a different view about what they like to drive. Everybody likes a different price point, different brand characteristics. And I think, you know, the auto industry understands this and is starting to fill as many gaps that Tesla with its very simple product lineup hasn’t filled.
Michela Tindera
Right. Obviously more competition makes it better for the consumer. But now there’s also this new problem that’s cropping up as interest rates have been rising, it’s becoming more expensive to buy a car. I was wondering if you could talk a bit more about that and just how the current economic environment is impacting demand for cars right now.
Richard Waters
It’s a very expensive purchase for consumers and we’ve already seen with inflation that car buyers have less cash. They’re starting to get more cautious. But there’s a second effect, which is that the cost of financing a purchase is going up as interest rates go up. So in the US, for instance, the average cost, the average monthly payment now that people are making to buy a car is $700. That is, you know, 25 per cent more than it was two years ago. And that’s a big chunk out of people’s income at a time when income is coming under strain. So the real question here is how bad is this downturn gonna get? Because we haven’t really seen yet, you know, the, those interest rates haven’t bitten in a way that a lot of people think they’re going to in 2023. And if so, then how big a dent is that gonna put in car sales?
Michela Tindera
So with all these different factors coalescing right now, Tesla is facing what appears to be this fork in the road. And depending on who you ask, whether it’s Tesla’s fans or Tesla’s critics, there’s two different paths that the company could go down. So, what are those two paths?
Richard Waters
Well, one — and the one that we’ve heard a lot about is — is the end of a great period of growth at Tesla and a more difficult future. And you only have to look at how quickly, you know, that their growth numbers have slowed down to get a sense of why Wall Street is concerned here. So sales of new vehicles last year at Tesla went up 40 per cent, which is an extraordinary number for a big car company. But that was less than half what they managed the year before. And it’s just a sign of how quickly things are slowing down. And that’s before really we get into, you know, what many people think will be quite a severe slowdown in 2023.
Michela Tindera
OK. So that’s what the Tesla critics say. But Tesla fans would have something else to say about this, right?
Richard Waters
You know, the supporters of Tesla would say actually fine, it’s fine that going into this uncertain period, Wall Street would discount this stock more. That’s entirely understandable. But what Wall Street doesn’t realise is that as we get through this period, Tesla is in a much stronger position relative to its competition.
Michela Tindera
Mm-hmm. And how is that?
Richard Waters
So other car companies are going into this downturn with much lower profit margins and they also have electric vehicle programs that are at a much earlier stage. So as you get into a recession, the question for them is gonna become what do we wanna support? What can we afford to support here? Now, they’re not gonna cut their electric vehicle programs fully because these are long-range programs that they bet their companies on. But what will happen is that they will start to think, “how do we support our cash flow, particularly if there is a recession and it turns out to be a bad one? What do we do to underpin our cash flow?” Selling SUVs and pick-up trucks, these have nice margins and these companies make a lot of money out of that. So I think what they’re gonna do is they’re going to look at EVs, they’re gonna say, let’s just slow the ramp up. Let’s, rather than pump money into building more electric cars and building up our production this year, let’s put that off. Let’s, you know, let’s put that off two or three years. We can do that without undermining our longer-range plans.
Michela Tindera
Yeah. And that would theoretically give Tesla some extra breathing room, wouldn’t it?
Richard Waters
It’ll take some of the pressure off Tesla. It’ll have to see its profit margins come down, but the competition will be slower and take longer to develop. And when we hit the next growth phase and whether that’s a year or two or three years out, Tesla could be in a relatively stronger position and ready to really kind of, you know, ride that next market upcycle. So, you know, it’s the relative strength in a downturn that’s key here.
Michela Tindera
Now, last week, Tesla took a significant step to increase demand. It lowered prices on its cars by thousands of dollars across the US and Europe. Do you think that will be enough for Tesla to weather this economic downturn or do they need to do more?
Richard Waters
Well, it’s a first step. It’s actually quite an aggressive step. I think everyone was expecting some kind of price cuts, but not quite of this magnitude and not quite this early. And I think it’s a sign, you know, for Musk that he is clearly going to go for growth, hang on to his market share and throw down and challenge the rest of the industry. You know, Tesla’s cars had risk getting a little out of the price range of a lot of consumers. He put prices up during the pandemic because inflation took off. And the Model Y, for instance, has been selling in the US starting at $66,000, you know, which is a pretty high price point. So to take that down 20 per cent, bring it below 55,000, which is a key level really for opening up a slightly bigger market.
Michela Tindera
Yeah. I’m curious, where do you land on this, Richard? I mean, where do you see Tesla fitting in this car market in the future?
Richard Waters
The really fascinating thing about covering Tesla over the years is people way underestimate this company as a company and they way overestimate it as a stock price. So it’s been overvalued for many years. I personally think it’s still overvalued. But don’t take my advice, I’m not a stock picker. But on the other hand, they underestimate how well it’s come through, you know, the struggles. And there’ve been a lot of struggles. But the remarkable thing is that Tesla has ramped up its production to 1.3mn. I remember a few years ago when Musk predicted he’d reach a million — I think by 2020 might have been his target date — everybody laughed or a lot of people did and said, there’s no way, you know, there’s no way you could do this. Well, he didn’t quite make it, but he’s at 1.3mn in 2022. And that’s the thing about this company. I think that, it hit a groove. It’s got a great product. And so it has a profitable, a nice, profitable niche in this car industry. And how big is that niche gonna be? We all know electric cars are gonna be the future or a big part of the future, and they’re pretty well-positioned.
Michela Tindera
Thanks so much for being on the show, Richard.
Richard Waters
Well, it’s been great talking to you.
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Michela Tindera
Behind the Money is hosted by me, Michela Tindera. Saffeya Ahmed is our producer. Topher Forhecz is our executive producer. Sound design and mixing by Sam Giovinco and Breen Turner. Special thanks to Claire Bushey and Manuela Saragosa. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week.
