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Tesla's business is a mess - but it's actually not that much different from every other car company

Jul 25, 2019, 20:29 IST

Elon Musk at SpaceX Hyperloop Pod II competition in Hawthorne, CaliforniaReuters/Mike Blake

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  • Tesla posted a bigger-than-expected second-quarter loss, even though it sold a record number of vehicles.
  • Tesla is a mess, but so are most car companies - we just don't notice because they're all so old and large.
  • On the positive side, attention has shifted away from Tesla's demand questions and talk of bankruptcy has died off; the focus is now rightly on paths to profits.
  • However, profitability might not be Tesla's best option at this point.
  • Visit Business Insider's homepage for more stories.

The big takeaway from Tesla's second-quarter earnings, reported on Wednesday, was that the company is up against the fundamental problem of being a car maker.

After record vehicle deliveries of roughly 95,000 units in the quarter, Tesla still lost over $400 million on revenue of about $6.4 billion. With $5 billion in cash on hand and triple-digit sales increases on a percentage basis, it's obvious that Tesla's critics have been wrong about the company's impending bankruptcy and flagging demand.

What they've failed to focus on has actually been right in front on them all along: Tesla is trying to become the first new American car maker to succeed in decades.

To an extent, Tesla has succeeded. It dominates the all-electric vehicle market (which is still quite small) and its vehicles, production glitches notwithstanding, have been generally excellent (I've driven them all and haven't found much to complain about).

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Read more: A major Wall Street analyst recently suggested that Tesla is 'strategically undervalued,' but is that true?

But now's a good time for me to haul out my two favorite quotes about the auto industry.

A tough business - that could all go away

Sakchai Lalit/AP

Number one comes from Bill Ford, great-grandson of Henry Ford and the Ford Motor Company's current chairman. At a dinner a few years ago, I asked him to sum up the industry. "It's a tough business," he said, bluntly. "You have to fight for every sale."

Number two comes from former Ford CEO Alan Mulally, who got the company though the financial crisis while General Motors and Chrysler were going bankrupt and being bailed out by the federal government. After the dust had settled, Mulally was in his office at Ford's headquarters in Dearborn, Michigan. In an anecdote I used for my book Return to Glory about Ford's comeback, Mulally said that he could look out one window and see GM's headquarters. He could look out another and just see Chrysler's.

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"I do this all the time, because I like to keep an eye on everyone," Mulally said. "But I also do it to remind myself of something. I remind myself that this could all go away."

From the outside, the auto industry appears solid, ancient in business terms. Ford and GM are each over 100 years old. But the business is almost always on the edge. Ford, under CEO Jim Hackett, is in the midst of an $11-billion restructuring and is struggling to fix its China operations. GM sold off its perennially underperforming European division in 2017 and had to deal with a crisis in its South Korean business in 2018.

The late Fiat Chrysler Automobiles CEO Sergio Marchionne spent much of his tenure paying down his company's debt, which prevented it from aggressively investing in new technologies - driverless cars and electric vehicles. Volkswagen was rocked by a emission-testing scandal that effectively wrecked its diesel business, a cornerstone of European sales. The former chairman and architect of the Renault-Nissan-Mitsubishi alliance has been in a Japanese jail awaiting trial on financial malfeasance charges since last year.

I could go on, but you get the idea. The people who run the global car business look sharp and confident in their suits and ties, but inside the armor, they're always sweating.

Read more: Cruise delays its launch of robo-taxis

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Money, money, money, and more money

Tesla

The basic challenge is that although a large automaker can bring in tens of billions in quarterly revenue, it costs a staggering amount of money to manufacture cars and trucks. Profit margins are usually 10% at best, for all but the highest-ticket luxury vehicles (and well-appointed pickup trucks, which have helped the Detroit Big Three bolster their balance sheets).

The more cars Tesla builds, the more it understands this. CEO Elon Musk had once hoped to alter the math by bringing much more automation to his factories, but that failed miserably. In fact, it failed so badly that Tesla had to erect a crude temporary assembly line under a tent in its parking lot to maintain production targets - it was an assembly line that wouldn't have looked unfamiliar to Henry Ford himself.

Investors simply can't seem to grasp this. Many want Tesla to be valued like a Silicon Valley startup, with epic growth but a cost structure that boils down to a dozen programmers in their twenties, some laptops, a WeWork space, and cold brew on tap. Gigantic rolls of aluminum and the machine to stamp them into body panels don't figure into the equation. Don't even think about a payroll of 40,000 employees.

Tesla's core business, therefore, is messy. But so is every other automaker's - we just don't notice because they're all so big. Smooth vehicle launches are actually quite rare; it's better to think of every new car that comes along as the culmination of an onerous, expensive, multi-year exercise in problem-solving at best and maddening frustration not at worst but as a matter of course.

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Read more: An all-electric Ford F-150 pickup truck prototype has towed more than a million pounds

A straightforward path to profits

Tesla

That said, with the focus now off Tesla's demand and the chimerical bankruptcy and back on the odds of profits, the company's path to a positive margin is straightforward: build fewer cars and charge more for them. For years, Tesla has been trying to be two automakers in one: a luxury marque selling $100,000-plus vehicles; and an entry-level premium brand that starts at $40,000 or so.

That isn't working, for various reasons. A big one is that Tesla, unlike BMW, sells only three vehicles that aren't well differentiated. BMW sells 18 models in the US, from all-electric compacts to large SUVs and high-performance sport sedans. Tesla is also trying to get away with avoiding a redesign of it's aging flagship Model S and Model X vehicles - understandable given that it's preoccupied with launching a crossover variant of the its Model 3. But there's a reason why BMW and others strive to keep their high-ticket cars fresh: sustainable profits.

OK, so with all that, here's why Tesla is run this way: Musk isn't terribly interested, down deep, in building a long-term electric-car business. He might disagree with that statement, but the reality of what Tesla has pulled off argues against his objections. There was no electric-vehicle market before Tesla; now there's one that, in the US, could could see overall EV sales become a meaningful component of the car market, after over a decade of disappointment. Numerous major automakers are now undertaking EV rollouts, encouraged by Tesla's validation of the market.

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The big guys can manage the mess better than Tesla because they're used to it. In a few years, Musk could plausibly declare mission accomplished and allow Tesla to be what it should be: a high-margin purveyor of luxury EVs. I sincerely hope the lessons of 2019 lead him to this conclusion.

NOW WATCH: Amazon invested $700M into an electric vehicle startup. Here's how Rivian is doing exactly what Tesla isn't.

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