“WE ARE sad to report that Tesla has gone completely and totally bankrupt.” So tweeted Elon Musk, boss of the electric-car company, on April 1st. He even posted a picture of himself supposedly drunk and inconsolable as proof. It was meant as an April Fool’s Day joke, but the gag backfired. It is uncomfortably close to the truth. America’s leading manufacturer of electric vehicles is under pressure. Mr Musk is fighting battles on many fronts and they all exacerbate his main threat: a financial squeeze that could eventually push Tesla over the edge.
Even Tesla’s shareholders, who are rarely put off by bad news, are jittery. Its shares have fallen by 16% since the end of February, most steeply after a Tesla using the firm’s Autopilot software crashed into a roadside barrier in California on March 23rd, killing the driver and raising questions about the safety of its system for semi-autonomous driving. The crash is being investigated by the authorities.
The pile-up of woes continued on March 28th when a judge in Delaware decided to let a shareholder lawsuit proceed against Mr Musk and Tesla’s board over an alleged breach of duty involving the firm’s $2.6bn takeover in 2016 of SolarCity, a troubled solar-energy firm run by Mr Musk’s cousins. And on March 29th the firm announced a recall of around 123,000 older vehicles that may be susceptible to corrosion of a bolt that affects steering and parking. Such recalls are common among the world’s other carmakers. But in Tesla’s case it reinforces a view that the company is much better at developing the whizzy technology that underpins its cars than at mastering the humdrum business of making them in quantity.
Until recently Tesla made only small numbers of expensive long-range battery-powered cars. Its Model S saloon starts at $74,500 and its Model X sport-utility vehicle is pricier still. But Mr Musk has bet the future of his firm on mass-producing cheaper cars. The new Model 3, a smaller saloon costing as little as $35,000 with a range still exceeding 220 miles, has attracted over 400,000 deposits of $1,000 each from eager customers. Much of his firm’s expected future revenue and its lofty valuation (it stands at roughly $49bn today, even after the share-price falls) depends on rapidly scaling up production.
Alas, Tesla has repeatedly failed to meet its own targets (see chart). In July 2017 Mr Musk claimed that his firm would be cranking out 20,000 Model 3s per month by December of that year. In fact, it managed to produce fewer than 2,500 in the entire final quarter of 2017. He vowed to produce 2,500 Model 3s a week by the end of March, rising to 5,000 a week by the end of June. Despite superhuman efforts by workers and managers (Mr Musk is personally supervising production of the new model and claims to be sleeping at the factory), on April 3rd Tesla confirmed that it is producing only around 2,000 Model 3 saloons a week.
Expectations were so low among analysts and investors that Tesla’s flagging share price rebounded after that announcement. Glossing over the fact that it has yet again failed to hit its promised target, the company boasted that the Model 3 assembly line is now providing “the fastest growth of any automotive company in the modern era.” If Tesla’s production growth rate continues, it claimed, “it will exceed even that of Ford and the Model T.”
Such bluster does not withstand scrutiny. Tesla is struggling with bottlenecks in the production of battery packs at its “gigafactory” in Nevada as well as with assembly of the Model 3 at its car plant in Fremont, California. The central problem is that Mr Musk has overcomplicated the already difficult task of making a mass-market car. Rather than relying on the time-tested manufacturing methods used by established rivals, who still use people to do tasks that machines are as yet unsuited for, he wants his car factory to be a hyper-automated “machine that makes machines”, bristling with robots and keeping human involvement to a minimum.
Employees at the Fremont plant describe a chaotic workplace in which Silicon Valley ideals of nimble innovation and robotic automation clash with the unglamorous realities of car-making, from the safe use of fork-lift trucks on the shop floor to the dexterous insertion of plastic parts in car interiors. Max Warburton at Bernstein, an equity-research firm, argues that the big global carmakers have realised—owing to bitter experience with overzealous previous attempts at automation—that a sensible mix of man and machine produces the most efficient car-assembly for the time being.
Even if Mr Musk’s dream of turning his factory into an “alien dreadnought” of automated mass production really points to a better way of making cars, he could run out of money before proving his case. Tesla lost over $2bn in 2017. Well before it confirmed the latest missed production target, investors worried about the firm’s cash-burn rate in 2018. In addition to the $2bn or so of capital that may be required to expand production of the Model 3, Tesla has some $1.2bn in convertible debt maturing by early next year. On March 27th Moody’s, a credit-rating agency, downgraded Tesla’s debt, cautioning that the firm “will likely need to raise additional capital during the second half of 2019”. Jefferies, a bank, predicts that Tesla will need $2.5bn to $3bn this year.
Tesla maintains that there is no imminent cash crunch. In a statement released on April 3rd, the firm insisted that it “does not require an equity or debt raise this year, apart from standard credit lines.” Others think the moment of truth could come much sooner, perhaps in the summer. Whenever it arrives, the question is in what kind of environment Tesla will raise money. Rising interest rates, a wobbly share price and a continued inability to meet its own production goals would all conspire to make it harder for the firm to find capital. It does not help that General Motors, Volkswagen and other big rivals are making massive investments in EVs.
Many shareholders retain their belief in Mr Musk’s ability to overturn conventional wisdom. But many short-sellers are still betting on the firm’s demise and fixed-income investors, who tend to be more interested in getting their money back than changing the world, are becoming antsier. The price of Tesla’s junk bonds is well below the level at which they were issued last year. In another tweet this week, Mr Musk summed it up this way: “Car biz is hell.” This time he wasn’t joking.
Japan still has great influence on global financial markets
IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.
“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.
This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.
One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).
But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.
Tokyo storm warning
These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.
Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.
What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.
Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.
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