Talk About a Shift Away from Ordinary: Tesla in its Flop Era?
In an ever-changing economic scope, there is not one business that hasn’t undergone periodic waves in wellbeing. Ups and downs are often correlated with changes in habit — change in management, changes in price, or more. Though frequent micro-shifts are considered the norm, there is significance to when big-name companies experience losses because they often reflect changes in the company’s business tactics, and are often representative of the state of the overall stock market. This is the case we are seeing with Tesla, the indisputable leader of these ‘big-name’ businesses.
As of Oct. 2023, Tesla has kept its long-held position as the number one most valuable automobile company in the world, boasting a market capitalization of $801.1 billion. Toyota is lined up in quite a far second with $244.4 billion. However, with Tesla’s sudden rapid downward trend, this gap may diminish more quickly than we would expect. As Forbes writes, Tesla stock dropped 5.5% to $210, as of Nov. 9, 2023. Over October, Tesla shares decreased by 20% and Musk lost $8.7 billion, which is $7 billion more of a decline than any other billionaire experiences in typical situations. What changes occurred to generate such a sharp decline?
According to a report from Business Insider, Musk decided to cut average prices of all Tesla models by about 25% in order to increase sales and surpass competitors. But instead of seeing these results, sales have actually fallen. Tesla reported its third-quarter numbers: revenue, vehicle deliveries, and free cash flow were down to $848 million from $3.4 billion the previous year. The company's once prosperous profit margins (the margin between sales revenue and production costs) are at 17.9%, compared to 25.1% a year ago. And competitors have not been driven out of business — rather the opposite, actually. Tesla's share of the US market has now fallen to 50%, while it was at 62% in the beginning of the year.
Mark Schirmer, the director of communications at Cox Automotive, comments on Musk’s decision: “I can't think of another point in the history of automotive when a brand that wasn't going out of business cut prices 20% a year.” This leads many to wonder why Musk decided on such a drastic measure.
The world's electric vehicle market is experiencing challenges, in large part due to prices. Although the average selling price of an electric vehicle is on a current decrease — from $65,000 last year to $53,633 this July — it is still higher than the average selling price for vehicles overall, which is around $48,451, according to Business Insider. Traditional carmakers, such as Ford and BMW and Mercedes, have responded to the electric vehicle challenges by bolstering production of their popular gas cars. For example, according to Ford’s chief financial officer John Lawler, “Ford is able to balance production of gas, hybrid, and electric vehicles to match the speed of EV (electric vehicle) adoption in a way that others can't.” Unfortunately, Tesla cannot resort to this solution because it has no gas models to rely on. The company was left with no other choice but to cut prices.
While Tesla’s recent losses are mainly owed to the price cut, another factor could be an accumulation of longer-term issues in the Tesla company. Musk acquired a new unfortunate title to accompany his “wealthiest person on earth” label — he was named “the biggest risk for Tesla’s future” by Michael Tyndall, HSBC analyst. Tyndall diagnosed the Tesla company with the ‘singleman’ risk, which is where a company’s success is almost entirely dependent on one leader or founder. However, public opinion on leaders is nearly impossible to maintain constant. Musk has made a few key decisions that stirred the public’s willingness to trust him.
For one, Musk is not the most accountable when it comes to following up on past promises — namely, his promise for self-driving Teslas. Constantly disappointing consumers can negatively impact a company’s performance. The first time Musk officially announced that Tesla would boast self-driving vehicles, it was 2016. He has repeated the same promise annually, yet to no avail. As Andrew J. Hawkins, transportation editor for The Verge, said, “Musk’s repeated claims that autonomous vehicles were just ‘a year’ or so away are now part of Tesla lore.” Then in early 2023, news came out that Tesla’s 2016 video promoting its driver-assistance Autopilot feature was staged and exaggerated. This recent discovery of Musk’s misleading promotion “comes at a time when the executive’s reputation and trustworthiness are increasingly at stake,” wrote Rebecca Bellan on TechCrunch. This claim holds extremely true, especially looking at Musk’s recent acquisition of Twitter and other controversial events.
Musk’s decision to buy Twitter could serve as another contributor to Tesla’s declining performance. His ambitions to revamp an entire other company aside from Tesla and SpaceX led many consumers to doubt Musk’s devotion to Tesla.
Furthermore, Musk has faced recent accusations of exhibiting anti-semitism. On Nov. 15, Musk wrote on Twitter, "You have said the actual truth," in response to an X post claiming that Jewish communities support "dialectical hatred against whites." Needless to say, this unleashed a wave of public attacks towards Musk on the Internet. Musk tried to backtrack, claiming that his message was directed towards his advertising nemeses at the ADL, but that didn’t stop Tesla stocks from falling billions of dollars immediately on Nov. 16.
Some say that Tesla losses could also be owed to the overall market’s poor performance in the past year. But in reality, Tesla has underperformed the overall market significantly this past year. According to statistics from MarketWatch Automation, Tesla shares fell 3.81% to $233.59 as of Nov. 16. It was an all-around mixed trading session for the stock market, with the NASDAQ Composite Index COMP rising 0.07% and the Dow Jones Industrial Average DJIA falling 0.13%, but evidently, Tesla experienced the steepest decline.
What does Musk himself have to say about his company’s declining statistics? In a recent Tweet, Musk set out to explain the situation. “In simple terms: As bank savings account interest rates, which are guaranteed, start to approach stock market returns, which are *not* guaranteed, people will increasingly move their money out of stocks into cash, thus causing stocks to drop.” Musk blamed his company’s declining performance on the overall stock market’s poor performance.
We can conclude that Tesla’s current struggles are mainly accredited to recent shifts in paradigm — primarily the drastic price cuts and recent controversy surrounding Musk. From what I see, most of the changes (whether recent or long-term) circle back to Musk and his decisions; the singleman risk is definitely becoming evident. At this point, I do not believe that Tesla will ever return to its previous relentless rate of growth. Instead, I agree with Investor’s Business Daily in their claim that Tesla will look increasingly like a "regular auto company." While I trust that it will remain one of the top-selling, top-performing vehicle companies in the world, Tesla will eventually settle to the same status as other well-known companies such as Ford and BMW. Ford took a similar path — it started out as a bombshell in the automobile industry, led by a single leader Henry Ford, but gradually blended in with other common car brands; its luxury value decreased over time.
However, I do believe the trajectory of electric vehicles will improve after this current minor setback. Although EV prices are a concern for now, EV popularity has been on a consistent rise over the past few years. The share of EVs in sales has more than tripled — growing from around 4% in 2020 to 14% in 2022, as the International Energy Agency cites. Going forward, we will only become more and more desensitized to EV prices. This also means Teslas will become a less unique, less unattainable good. It is hard to believe that in 50 years, Tesla could be the equivalent of today’s Toyota.