By Andrew Boada, Editor at Large
Over the past year, battery electric vehicle (BEV) manufacturer Tesla has recorded losses of $2.7 billion, as much money in the past 12 months as the total it lost over the previous five years. The losses, combined with massive quality control and delivery issues, have begun attracting quite a bit of media attention and have caused a number of increasingly vocal analysts to predict that the electric car manufacturer’s days may be numbered.
So, what’s behind Tesla’s troubles? Do they have broader significance for BEV technology in general? And if Tesla’s troubles ultimately prove fatal, would the company’s demise spell the end for the BEV?
In fact, a review of what’s been happening at Tesla reveals that their troubles are the result of mistakes the company has made and the timing of its strategy. Fundamentally, Tesla is a case study in what happens when a company bets its life on a technology that has yet to reach maturity.
Three factors in Tesla’s troubles
There are at least three factors that have contributed to Tesla’s string of record quarterly loses that are not inherently related to the profitability of BEV manufacture. First, Tesla is trying to remake itself from a boutique maker of luxury-priced, hand-built BEVs to a profitable manufacturer for the masses. Making this transition has forced Tesla to spend huge sums of money, and since there is a lag between when capital spending takes place and when it generates revenues, losses can pile up.
Second, due to lack of experience in mass-producing cars, Tesla hasn’t been very efficient at manufacturing. Last April, CEO Elon Musk admitted that in pursuit of his goal to “build the machine that builds the machine,” Tesla relied on an assembly line dominated by robots that weren’t up to the job. Changing the balance of robots to people forced them to shut down production of the Model 3 for a week while they rethought their assembly process and reorganized production.
Meanwhile, its manufacturing problems have raised its costs. They’ve also resulted in quality control issues with such basic things as steering and doors, which have led to the recall of half of all the vehicles it’s ever built, and the company to fall deeply behind on its delivery and sales of vehicles.
Third, Tesla’s board decided in 2016 to acquire SolarCity, a company that produces, installs and leases rooftop solar arrays to residential and commercial customers, just as it was headed for bankruptcy. The acquisition cost Tesla $2 billion and transferred $2.9 billion dollars of SolarCity’s debt to Tesla’s balance sheet, where it now exerts financial drag. Elon Musk justified the acquisition at the time on the grounds that having a solar power subsidiary would generate lots of profitable synergies with its BEV division, but to date, Tesla has very little to show for its purchase and according to analysts, they appear to be winding down SolarCity’s operations.
No company makes money on BEVs
While these factors can explain most of the recent explosion in the rate at which Tesla has been losing money, they don’t explain all of the company’s recent losses or account for why the company only managed to record two (barely) profitable quarters in ten years, nor why they’ve generated consistent losses over this period, even though they’ve been the beneficiaries of billions of dollars of direct and indirect assistance subsidies from federal, state and foreign governments.
Fundamentally, the issues preventing Tesla from being profitable is the same one that prevents all the other OEMS, like BMW, Chevrolet, Fiat, Ford, Nissan, Peugeot, Renault and VW, among others, from selling the BEVs they make at a profit. The problem lies entirely with the current physical limitations of batteries and the fact that the cost of batteries, while having come down significantly over the last decade, remains high.
To date, no OEM has built a price-competitve BEV that has the range of a hybrid, much less that of a vehicle powered by an internal combustion engine (ICE). Given the current state of battery technology, for a BEV to achieve a range on a single charge that is comparable to an ICE-powered vehicle on a full tank, the battery needs to be big and heavy, which would make the vehicle uncompetitive price-wise.
Consumers and fleets alike have been slow to switch to BEVs because of their high upfront prices, relatively limited range, lengthy recharging times and a paucity of recharging stations. In short, shoppers have for the most part been unwilling to cope with these issues and pay the prices manufacturers need to make a profit. Demand sufficient to make BEV manufacturing profitable depends on advances in battery technology and economies of scale. Until then, BEVs will serve niche markets and depend greatly on subsidies to attract buyers.
Little effect on the future
So, what would Tesla’s demise mean for the future of BEVs? Probably nothing. Tesla is but one of many BEV manufacturers on a list that is steadily getting longer. A signficant difference between them and Tesla is they also make and sell hybrids and fossil-fueled vehicles at a profit, yielding funds they can use to cushion themselves from BEV investments and losses. Until and unless the challenges of currently battery technology prove insoluble, the rest of those on the list will continue to make, sell and invest to improve them.