Tesla is one of the most innovative and disruptive companies in the auto industry. Led by CEO Elon Musk, Tesla has achieved tremendous success with its luxury electric vehicles. However, the company also faces some major challenges as it aims to reach mass market production and profitability. In this article, we will explore Tesla’s biggest problems and issues that could hamper its future growth.
Reliance on Elon Musk
One of Tesla’s biggest vulnerabilities is its heavy reliance on CEO Elon Musk. Musk is the visionary and driving force behind Tesla. He has led the company from being a small startup to a major player in the auto industry. Musk is deeply involved in product design and technology development at Tesla, and he commands immense respect from customers and investors.
However, Tesla’s fortunes are tightly linked to Musk. He works long hours, manages several major companies simultaneously, and has created controversy at times with some of his public statements. If Musk were to leave Tesla, it could severely damage the company’s brand image, stock valuation, and long-term vision. The company lacks a solid second-in-command who could take over leadership from Musk.
Production challenges
Another major problem for Tesla has been production and delivery challenges. The company has struggled to ramp up manufacturing at its California factory to meet demand for its vehicles. Tesla has faced delays and quality issues which have resulted in customers waiting months to receive ordered vehicles.
Tesla is making efforts to become a higher volume manufacturer with the launch of its Model 3 sedan. However, it acknowledged “production hell” during the Model 3 ramp up. Meeting Musk’s goal of making 500,000 vehicles in 2018 will require overcoming steep production hurdles.
Fierce competition
The auto industry is undergoing massive changes with the rise of electric vehicles. Tesla enjoys a first-mover advantage but is facing intensifying competition from established automakers.
Major car companies like GM, Volkswagen, BMW, and others are investing billions into electric vehicle development and production. These players have far greater financial resources, manufacturing capability, and brand awareness than Tesla. Over time, it may become increasingly difficult for Tesla to fend off competition and retain market share.
Unproven in mass market
While Tesla has built a strong luxury brand, its ability to produce affordable mass-market vehicles remains unproven. The Model 3 starts at $35,000 before incentives and is Tesla’s attempt to appeal to regular consumers. However, production issues have kept Model 3 output limited and delayed initial deliveries to many reservation holders.
Musk has described the Model 3 production ramp as “production hell” and manufacturing will need to expand quickly to support higher volume. It remains unclear if Tesla can successfully transition to being a mass-market automaker while retaining the quality and experience customers expect.
Negative cash flow
Tesla continues to burn substantial cash and has accumulated significant losses over the years. The company has funded investments by raising external capital through debt offerings and equity raises. However, pushing Model 3 output higher will require heavy spending on top of existing expenses.
Tesla had over $3 billion in cash reserves at the end of Q2 2018, but was burning through over $700 million per quarter. Turning cash flow positive will require reaching mass production of Model 3 and improved gross margins. Tesla has targeted profitability later this year, but that depends on achieving manufacturing goals.
Reliance on credits
Tesla generates over hundreds of millions in revenue each quarter from selling regulatory credits to other automakers. These credits allow Tesla to offset emissions from its electric cars against other companies. However, this source of revenue could dwindle once competitors launch more of their own electric models.
While credits provide a short-term cash infusion, Tesla cannot depend on them over the long-run. Profits will need to come from vehicle sales as the company scales up production. Reduced credits in the future could impact Tesla’s bottom line if operational costs are not properly managed.
Legal and regulatory uncertainty
Tesla also faces some legal and regulatory risk as electric vehicles gain more market share. Dealers and dealer associations in multiple states have challenged Tesla’s direct sales model as a violation of franchise laws. While Tesla has prevailed in several court cases, its business model remains under legal uncertainty.
On the regulatory side, changes to tax incentives or emissions policies could negatively impact Tesla. The company also needs to ensure rigorous compliance as a public company following incidents like Musk’s controversial “funding secured” tweet regarding a potential Tesla buyout.
Key Takeaways
Here are some of the key points on Tesla’s biggest problems and challenges:
- Heavy reliance and dependence on Elon Musk
- Ongoing production problems and delays
- Increasing competition from other automakers
- Unproven capability for mass market vehicles
- Continued negative cash flow and need for capital
- Dependence on regulatory credits for revenue
- Legal and regulatory uncertainty
Comparison to Other Automakers
It can be illustrative to compare Tesla against some of its major competitors in the auto industry. Below is a table highlighting Tesla’s challenges relative to established players like GM and VW:
| Automaker | Brand Awareness | Manufacturing Capability | Financial Strength | Management Depth |
|---|---|---|---|---|
| Tesla | High | Limited | Negative cash flow | Heavily centralized |
| GM | High | Extensive | Positive cash flow | Deep bench |
| VW | High | Extensive | Positive cash flow | Deep bench |
The table shows that while Tesla has built a strong brand and demand for its vehicles, it lags established players in manufacturing footprint, steady finances, and management depth. Ramping production to mass market levels may prove difficult unless Tesla can stabilize operations and strengthen its organization.
Tesla’s Strengths
While Tesla faces steep challenges, the company also has important strengths and opportunities that should not be overlooked:
- Industry-leading electric powertrain and battery technology
- Advanced manufacturing techniques and processes
- Direct sales model provides customer experience and pricing advantage
- Strong brand built on innovation, sustainability, and performance
- Visionary leader in Elon Musk guides the company’s strategy
- Talented employees attracted to Tesla’s mission and culture
- Large addressable market as more consumers consider electric vehicle adoption
Tesla will need to leverage these strengths as it deals with its challenges and grows into a mass production automaker.
Steps Tesla Can Take
Here are some steps Tesla could take to address its key problems and strengthen its position:
- Continue ramping Model 3 production to achieve cost efficiencies, positive cash flow
- Build out Gigafactory battery production capabilities
- Open additional factories closer to target markets like China and Europe
- Hire more experienced auto executives for key management roles
- Raise additional capital to fund growth while managing cash burn
- Invest in service infrastructure to provide support for growing fleet
- Expand Supercharger network to facilitate long-distance travel
- Refine autonomous driving technology to enable full self-driving capabilities
- Introduce Model Y crossover and new Roadster to expand product lineup
- Improve build quality and manufacturing processes to reduce defects
Taking these steps could help Tesla overcome challenges, achieve sustainable profitability, and transition toward becoming a high-volume auto manufacturer.
Conclusion
Tesla faces serious challenges around production, competition, finances, and organization as it seeks to drive the future of electric and autonomous vehicles. Mass producing affordable cars will require overcoming steep hurdles in manufacturing, quality control, and management processes.
However, Tesla has already achieved remarkable success by proving the demand for high-tech electric cars. With focused execution across production, new product development, and operations, Tesla is positioned to grow into a leading mass-market automaker. Tesla’s ambitions appear daunting but not impossible – if the company can properly manage its rapid growth and learn from the industries’ established players.