Backing Away from Privatization Only Ended One Act of Tesla’s Drama

It’s the sudden end of Tesla’s short-lived effort to go private calmed one storm but it’s not smooth sailing yet. The much loved electric-car pioneer company still faces a looming cash crunch, supplier issues, growing competition and the uncertainty that goes along with being led by CEO Elon Musk, industry analysts say.

“The next couple of months will be very challenging for Tesla. Musk has blown a lot of credibility on this whole fiasco,” Navigant Research analyst Sam Abuelsamid told TU-Automotive via e-mail. However, Tesla’s biggest fans among financial analysts seem to remain supportive, he said. Less than three weeks after Musk tweeted that he was considering a buyout of the publicly held company and had secured funding for it, those plans went off the table. In a blog post, Musk told investors he had decided Tesla was better off remaining public after all.

“I knew the process of going private would be challenging, but it’s clear that it would be even more time-consuming and distracting than initially anticipated. This is a problem because we absolutely must stay focused on ramping Model 3 and becoming profitable,” Musk wrote.

Musk’s blog post suggested the main reason he called off the privatization push was that shareholders told him they didn’t want it. The prospect of Volkswagen taking a significant stake in Tesla may have helped to kill Musk’s interest, according to a Wall Street Journal story. Musk was wary about giving a competing automaker a major role in the company and possibly harming its popular brand, the story said. In addition, potential Saudi investors were put off by one blog post in which Musk said a conversation with them had convinced him funding for a deal was secured, the Journal said.

Musk’s change of heart removed one shadow over Tesla but legal and regulatory fallout from the brief drama itself may cloud the company for a long time to come. The Securities and Exchange Commission reportedly is investigating whether Musk’s original tweet violated securities law and some shareholders have sued, saying the talk of going private cost them money.

Tesla wants to enter the mainstream car market quickly by boosting production volume on the midsize Model 3 while simultaneously developing the Model Y crossover, the high-end second-generation Roadster and the Tesla truck. The costs of doing all of that are helping to push a long-awaited profit further into the future, Gartner analyst Mike Ramsey said. “They’re going to have to either reduce their expenses or raise more money and likely a combination of both.”

Musk shouldn’t have set the ambitious goal of producing 5,000 Model 3s per month, a quest that led to failed automation attempts, an extra assembly line in a parking lot and reportedly a high rate of defects, he said. To burn less cash, the company should abandon such production timelines, kill the Semi and build fewer of its own parts, Ramsey added. Most of all, it could really use six months without any more earth-shattering news. “They need to be boring for a while,” he said.

Yet, Tesla’s success may depend on having exciting new vehicles even as the company struggles to make money, Navigant’s Abuelsamid said. After years as the star of the electric-car market, it’s about to face stiffer competition in the form of the already shipping Jaguar I-Pace and Mercedes EQC and the Audi e-tron and lower-end Hyundai models coming out soon, he said. As for a change in leadership, don’t count on it. “Most of the value of the company is wrapped up in some kind of mystical Elon Musk valuation,” Gartner’s Ramsey said. “He has to change his behavior. I don’t know if he will.”

— Stephen Lawson is a freelance writer based in San Francisco. Follow him on Twitter @sdlawsonmedia.

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