by Jean-Louis Gassée

Many want to see Elon Musk as another Steve Jobs, defying old ways and ignoring naysayers, inviting us to Think Different as he pursues his goal of building the Apple of the auto industry. Others shake their heads in disappointment. A good lawyer, the saying goes, ought to be able to plead both sides of a case. Today, I’ll try to do the same for Tesla’s future: Failure or brilliant success?

Now 15-years-old, Tesla enjoys a media presence that’s well out of proportion with the size of its sales. In the first quarter of this year, the company sold fewer than 30,000 cars; for reference, Toyota sells about 2.5M per quarter, 80 times more. The extravagant attention can be explained, at least in part, by Elon Musk’s impressive PR skills. Musk is a veritable quote machine, constantly providing fodder across the whole spectrum of media from blogs to Twitter, from the Wall Street Journal to The New York Times and The Washington Post.

The attention may be inordinate, but it isn’t entirely empty. It would mean nothing if Tesla didn’t have a serious product, and Tesla’s Model S, a “green car for carnivores” as one wag rightly calls it, amply rewards those who pay $100K for the car’s sexy styling, swift acceleration, and pleasant road manners. As industry observers have noted, the Model S is outselling comparable high-end BMWs and Mercedes, first in the US and now in Europe.

And let’s consider the Tesla Model X, a quasi-SUV or CUV (Cross Over Utility) vehicle. Despite early production problems, which Musk deftly attributed to hubris while also implying that the car is ahead of its time (“[we added] far too much new technology to the Model X”), the X is selling well: 10,070 cars in Q1 2018, a volume that approaches the S’s 11,730 for the same quarter.

In the wings, we have the Model 3, Tesla’s first “affordable” vehicle (the basic model goes for $35K). Since its announcement two years ago, delivery has been slow — fewer than 10,000 shipped, so far — but not for lack of demand. Zealous customers had reserved nearly half a million Model 3’s by August 2017, an average of 1,800 added per day,

These are the numbers, the history, and where Tesla stands today. But what of Tesla’s future? Let’s hear from the prosecution, first.

Tesla may be the darling of the media and Musk may be a master showman, but facts are facts: The company has never made money. In order to survive, the company continues to rely on the generosity of shareholders and taxpayers. In 2015, cumulative state and federal subsidies were estimated at $4.9B — that’s $30K per vehicle.

Taxpayers have little choice, but shareholders? At this week’s close, TSLA was worth $49.6B vs $46.7 for Ford and $60.9B for GM. How long will shareholders support a company that doesn’t make money?

Furthermore, Tesla is the most shorted stock in the US market, meaning there are more people betting the company shares will plunge than with any other company. Today’s Tesla high stock market valuation gives it an opportunity to sell more shares, to raise more money without risking a sharp sell-off, but by the end of the year, the wisdom of the crowds could turn negative, causing the stock to plunge in an accelerated downward spiral as former believers rush to the exit.

And now we have the prospect of a Tesla Killer: The company’s own Model 3. I’m not talking about Musk’s confession that he only wants to ship more expensive versions, up to $78K, because the $35K version would “kill” Tesla. The killer is production volume.

Musk offers various reasons for the Model 3’s slow production start, ranging from excessive reliance on automation to problems with battery production at the much touted Gigafactory. But these are just excuses. The real problem is Musk’s delusional belief that Tesla can jump from making 20K cars per quarter to a million or more a year as the Model 3 demands. A tenfold increase in production volume calls for a completely different production system, as codified by Toyota and described in The Machine That Changed The World. Attempting to invent a new system on the fly (two, actually, if we include the Gigafactory) will doom Tesla.

Musk certainly understands this, and he must realize that there’s big trouble ahead. Perhaps a frayed temper stemming from this knowledge explains his recent and novel PR missteps. Musk, with a straight face, says Tesla is badly mistreated by an incompetent press — and (with thanks to @JohnPaczkowski), in the company’s latest 10-K (annual) SEC filing, explains how media coverage benefits Tesla [as always, edits and emphasis mine]:

“Historically, we have been able to generate significant media coverage of our company and our vehicles, and we believe we will continue to do so. To date, for vehicle sales, media coverage and word of mouth have been the primary drivers of our sales leads and have helped us achieve sales without traditional advertising and at relatively low marketing costs.”

To fight the injustice, Musk proposes to start a Pravda (Russian for Truth…) website to monitor media malfeasance, thus showing a great mix of sardonic humor and raw nerve endings as upcoming challenges look insurmountable?

Musk says that he “doesn’t want to raise more money”, and claims that Tesla will be profitable in the second half of the year, but few analysts believe him. The atmosphere surrounding Tesla has changed considerably since the go-go days of the March 2016 Model 3 lovefest.

Furthermore, the big bad wolf of Wolfsburg — the Volkswagen group with its Audi, Porsche, Volkswagen and other brands — is just around the corner. And so will be the rest of the industry, including EV champion Carlos Ghosn of Nissan Leaf fame and other German and Chinese EV makers.

Tesla won’t disappear, of course, but if it’s unable to survive as an independent company, it may go the way of Rolls-Royce, Bentley, Jaguar, Rover, and Volvo: It could become part of a conglomerate that has the money and large-scale manufacturing expertise to continue producing a boutique car. Obituaries would thank Musk for his ardent pioneering role, for rousing the auto industry out of its slumber, with the obligatory crocodile tears from industry grandees who are only too happy to bury an embarrassing gadfly.

“No, no, no,” argues the lawyer for the defense, “this is all too pessimistic.”

Elon Musk may not be another Steve Jobs, nor Tesla another Apple, but during the 15-year life of Tesla, the charismatic leader has proven to be a talented escape artist. (I’ll avoid the tempting reference to Houdini, a much more interesting man than the folk reference suggests).

The irrepressible Elon once said Tesla would some day be worth more than Apple. They’re not there yet — AAPL just closed at $935B — but hats off to the hypnotist for his ability to make investing crowds Buy Different while his company continues to bleed cash, more than $8,000 a minute, $4B per year.

And lets admire, once again, Musk’s talent for playing the press. He managed to convince a credulous Wall Street Journal writer that he had managed to slash battery production from seven hours to 70 minutes. The WSJ article include this miracle-man quote from a Tesla production technician:

“My co-workers and I were all giving high-fives at the end of [our] shift,” one technician at the Nevada factory said. “He came in and eliminated 80% of the problems we were having.”

Certainly, Tesla is far from profitable, but a recent “Tesla First Quarter 2018 Update” to shareholders shows strong Q2 2018 numbers for all models, and tells us that Model 3 production is on its way to the mid-year goal of 5,000 units per week, ascending to 10,000 by the end of the year (or early 2019). For escape artistry purposes, exact numbers matter much less than a trend line, especially if, as the CEO hopes, higher production volumes help Tesla reach or trend towards positive cash-flow. Just as a banker will lend you an umbrella as long as the sun is shining, Wall Street would easily find money for Musk if he shows he isn’t in dire need of it.

It’s that simple: If Musk overcomes, or just shows he’s beginning to overcome the Model 3 “manufacturing hell”, everything will be forgiven. Tesla will be successful, Musk will deservedly become a legend, and future entrepreneurs will be labelled the Elon Musks of their time.

Both sides considered, I think Elon will find a way.

— JLG@mondaynote.com