Shares of Tesla are down 30% on the year, and its high yield bonds now pay over 7.5% versus less than 6.0% late last year. There is no one reason for these declines, but rather a litany of problems. The production ramp of the Model 3 has been slow. Investigators are looking into a recent crash of a Model S. Build quality has been sloppy. I personally have yet to see a Model X where the gullwing doors fit correctly across the roofline – every single example I see is crooked. And this, on a $100,000 car.
The financial issue is simple: Tesla is still burning cash and the slow pace of production increases on the Model 3 limits its ability to change that. Producing passenger vehicles at volume is a complex challenge, and not one where technology plays the dominant role. Plant managers and engineers – real people – make the difference in these cases. Old-line automotive companies do significant model changes and all-new launches every year and rarely see a hiccup. Tesla has shown it cannot match the industry it seeks to disrupt in the most essential commercial requirement: getting the metal out the door.
Many years ago I was on a small investment banking team that managed the sale of Chrysler to Daimler-Benz. Chrysler was in a strong financial condition, gaining share and wildly profitable. Daimler was similarly well positioned and had a fantastic global brand. Yes, the merger was eventually a textbook cultural disaster. But when it was announced, the presentation deck to investors looked fantastic.
I bring all this up because the clock is ticking on Tesla and it is still one of the most important disruptive companies in the world and certainly holds the title in the global auto industry. At the same time, they need help on the production side from a traditional automaker that knows how to get line speeds up to industry standards. It also needs some more capital. And stronger ties to regulators wouldn’t hurt either…
There is a deal to be done here, and the pitch book is simple:
- Sell 10% of the company to a major automaker ($4 billion at current prices) who will airdrop the right people into the Tesla factory to get production straightened out. Slow ramps are a people and process problem. You can’t write code to fix this. Yes, we know Toyota used to have a stake in Tesla and sold it. Someone else may want to step into this breach, though.
- Do a $4 billion primary issuance of new stock, with the management team of the new partner in tow. This will give the company the chance to tell the story, rebuild confidence in the stock price, and build a cash buffer.
You can jiggle the numbers around a little, but there’s probably no other way around this problem. We’ll see if Elon Musk bites, or tries to stick it out alone.