After coming back from the brink of death, Tesla could have an edge over its rivals during the COVID-19 crisis, an industry watcher says (TSLA)

May 30, 2020 at 08:32 AM EDT

Mike Blake/Reuters

In the past two years, Tesla has gone from the verge of bankruptcy to earning profits (albeit, small ones) three quarters in a row.
During that time, the electric-car maker has made significant improvements to its manufacturing process, suggesting Tesla may be reaching a turning point in its financial and operational stability.
While the company still has to deal with the fallout from the novel coronavirus, the pandemic likely won't disrupt the company's progress in the long term, said Ed Kim, the vice president of industry analysis at AutoPacific.
In fact, Tesla may be in a better position to handle the crisis than other automakers due to its relatively wealthy customer base and years of experience delivering vehicles to their homes, Kim said.
Are you a current or former Tesla employee? Do you have an opinion about what it's like to work there? Contact this reporter at mmatousek@businessinsider.com.
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In 2018, Tesla was on the verge of collapse as it frantically worked to fix the production issues responsible for the disastrous rollout of its Model 3 sedan. Now, Tesla has made profits (albeit, small ones) in three consecutive quarters for the first time in its 17-year history and put bankruptcy concerns behind it, said Michael Ramsey, an automotive analyst at Gartner.

"I think that they are in it for the long term," he said. "I don't see them going out of business."

Even during the first quarter of this year, as its operations in the US and China were hit by the coronavirus pandemic, Tesla eked out a razor-thin profit while Ford and Fiat Chrysler lost money. Tesla also started delivering its Model Y SUV well ahead of schedule, shortly after the first Model 3s rolled off the line at its new factory in Shanghai, which was built in less than a year.

The past three quarters suggest Tesla may be reaching a turning point. The electric-car maker has always received acclaim and enthusiastic demand for its cars, but the company is now starting to pair its strong engineering and innovative technology with the operational and financial discipline needed to avoid the crises that have made skeptics doubt the company's long-term viability.

To be sure, the company has not yet put its tendency to create controversy and drama behind it. CEO Elon Musk has spent the past month criticizing shelter-in-place orders and fighting with local officials over the near-closure of Tesla's Fremont, California, car factory (the company was allowed to perform maintenance, but could not make cars). The plant resumed production earlier this month, though not before Musk publicly defied shutdown orders and threatened to move the facility elsewhere.

There's also the question of how much the coronavirus will impact Tesla. While the fallout from the pandemic will hurt Tesla and the rest of the auto industry, it isn't likely to push the electric-car maker off-course in the long term, said Ed Kim, the vice president of industry analysis at AutoPacific.

"I do think they'll get through this," he said.

In fact, Tesla may be in a better position to handle the crisis than other automakers due to its relatively wealthy customer base and years of experience delivering vehicles to their homes, Kim said.

Production improvements have helped Tesla's stock price soar

The positive momentum Tesla has built over the past three quarters has helped push the company's stock price to record highs — nearly 20 times above the combined share prices of General Motors, Ford, and Fiat Chrysler when markets opened on Friday – indicating investors believe Tesla will eventually perform much better than its larger and more experienced competitors. Yet the degree to which Tesla's stock price has jumped has even made Musk skeptical.

"Tesla stock price is too high imo," he tweeted on May 1.

The company's rivals have often made healthy annual profits over the past decade, while Tesla has yet to reach that milestone once. And the electric-car maker's quarterly profits have been smaller, both in absolute and relative terms, than those typically earned by GM, Ford, and Fiat Chrysler.

"Automakers, historically, do not carry huge valuations," because the auto industry is cyclical, capital-intensive, and requires high fixed costs, said Maryann Keller, the principal of the automotive consulting firm Maryann Keller and Associates. Tesla "cannot avoid the simple economics of the business."

But while a company can influence how investors feel about it, it cannot control its own stock price. And, amid the heated debate about Tesla's valuation, the company has performed better in the areas it can control, like manufacturing, which may be Tesla's largest and most visible area of improvement.

Tesla has long been renowned for its cutting-edge automotive technology, but it has struggled to make cars on schedule and without quality issues like large panel gaps and flawed paint. The company's production problems reached a nadir with the Model 3 after the company installed an automation-heavy assembly line for the car, only to find that it didn't work as planned when production began in 2017, forcing the company to redesign the system on-the-fly while falling well below its initial output targets for the vehicle.

Model 3 production eventually stabilized (though manufacturing issues have not disappeared entirely), and Tesla said the Model Y's ramp would be different, aided by the fact that it shares many parts with the Model 3. In January, Tesla began making the Model Y almost a year ahead of its original schedule, and, according to manufacturing expert Sandy Munro, with fewer quality issues than early Model 3s had. The Model Y also earned Tesla a positive gross margin (which only includes costs related to production and excludes items like sales and administrative expenses) during its first quarter in production, a feat Tesla had not achieved with its four prior vehicles.

At the end of 2019, Tesla started deliveries from its factory in Shanghai, a little under a year after construction began. The factory has since dealt with broken machinery, according to Bloomberg, echoing a problem the Fremont factory has faced for years. But the speed with which Tesla built the Shanghai factory surprised Gene Munster, a managing partner at the venture-capital firm Loup Ventures who writes research notes about Tesla, and said he thought the construction process would take 18 months to two years.

Competition has not hurt demand

A more efficient manufacturing operation has resulted in lower costs, as the company has found other ways to cut expenses without seriously disrupting its plans to develop new vehicles, build new factories, and work on long-term projects like improved batteries and driver-assistance technology. Critics have highlighted the disparity between Tesla's low level of capital expenditures (which includes spending on buildings and machinery) last year and its ambitious long-term plans, but the company has said lower-than-expected capital spending has resulted from unspecified efficiencies. According to David Whiston, an analyst at Morningstar who covers the auto industry, it doesn't appear that Tesla is keeping capital expenditures low to boost short-term earnings at the expense of long-term growth.

"When you look at what they're doing, there's no indication that they're pulling back on growth investment at all," he said.

Critics have also zeroed in on the money Tesla has earned by selling credits to automakers that are not meeting government fuel-efficiency standards. Without revenue from those credits, Tesla would not have made a profit, on an unadjusted basis, during the past two quarters. But, Ramsey said, regulatory credit sales still represent a small percentage of Tesla's total revenue and, Whiston said, they're not likely to go away anytime soon.

Neither is competition from established automakers and startups like Rivian and Lucid Motors, though predictions that rival vehicles would end Tesla's reign over the electric-vehicle market have not yet come true. Tesla's sales have only increased while the likes of Chevrolet, Audi, and Porsche have released electric vehicles once dubbed "Tesla killers," and a US tax credit has faded away.

"The demand is definitely sustainable," Munster said.

The Model Y has the potential to be Tesla's most profitable vehicle yet, Ramsey said, and next year, Tesla plans to enter the lucrative pickup truck segment with its Cybertruck. A 2019 Autolist survey indicated the vehicle may help Tesla attract customers who have never owned a pickup truck, while struggling to convert current pickup owners. After Loup Ventures spoke with 22 people in the construction industry, Munster said he expects the vehicle to sell better than he first thought, though he noted the survey's small sample size.

The analysts Business Insider spoke to said there are concerns that could potentially disrupt the progress Tesla has made. Musk's behavior has become increasingly erratic after a year of relative calm, Tesla is known for high levels of turnover in its executive ranks, and there is always the chance that Tesla will spread itself too thin by taking on too many projects. But, for now, the company looks healthier than ever, Kim said.

Tesla "is not living on the edge of survival every quarter like it did for so many years," he said. "They're in a much better position than they've ever been."

Tesla did not respond to a request for comment on this story.

Are you a current or former Tesla employee? Do you have an opinion about what it's like to work there? Contact this reporter at mmatousek@businessinsider.com. You can also reach out on Signal at 646-768-4712 or email this reporter's encrypted address at mmatousek@protonmail.com.

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After coming back from the brink of death, Tesla could have an edge over its rivals during the COVID-19 crisis, an industry watcher says (TSLA)

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After coming back from the brink of death, Tesla could have an edge over its rivals during the COVID-19 crisis, an industry watcher says (TSLA)

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