Does Tesla Still Need Elon Musk?

Tesla suffered yet another media black eye this week, when Reuters reported that the automaker had built deliberately false range estimates into its electric vehicles. According to the article, under the personal direction of CEO Elon Musk, the range estimation was rigged to exaggerate how far it could go, only triggering more realistic numbers when it got below 50 percent so the car could make it to a charging station. Then when that triggered mass repair requests from customers who thought their cars were broken, the company allegedly set up a “Diversion Team” to automatically close them out as quickly as possible.

This kind of thing is just par for the course for Tesla. Hyperbole, exaggeration, spin, and occasional outright dishonesty were how Musk built the company into a major force in the auto industry. But now his brand of careening irresponsibility is a threat to the company’s future.

Some good background on Tesla’s condition can be found in Ludicrous, an excellent book by automotive journalist Edward Neidermeyer, published back in 2019. He argues convincingly that Tesla’s initial success was precisely because Elon Musk is hilariously unsuited to the auto manufacturing industry. Building cars is an exceptionally challenging business, because of the huge capital requirements, strict safety regulations, and resulting low unit margins.

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Automakers also have to predict both what customers might like to buy several years in advance and predict how many sales they might make of each model, meaning heavy capital risk. And as the industry has evolved — particularly under competition from Japanese manufacturers — customers have come to expect extremely high quality and reliability even from cheaper mass-market vehicles, making success even more difficult.

In short, efficiency, standardization, and consistency are the name of the auto game. As Neidermeyer writes: “Successful automakers are giant, process-driven bureaucracies that rely on rigidly systematized cultures to manage a continent-spanning ballet of manufacturing operations, supply chains, service infrastructure, and regulatory compliance.”

Needless to say, Tesla was not anything like this. It came out of the freewheeling culture of Silicon Valley, with its motto of “move fast and break things,” its dogmatic ideology that every other institution in society but the tech industry is riddled with inefficiency and incompetence, and its belief that any problem can be solved by genius innovators hacking together solutions on the fly.

Musk viewed the stodgy, hyper-bureaucratic auto industry procedures with contempt, and assumed he could do better and cheaper with some good old Silicon Valley magic. He made wild-eyed promises, instructed his team to build factories that would move far faster than the deliberate pace at a traditional factory, and set impossible targets. As a result, Tesla consistently failed to meet its production goals, consistently struggled with factory operations, and suffered consistent quality problems. While Teslas are sleek and fancy-looking, customers have regularly complained of poor body panel alignment, leaks, rattles or other noises, bad service experiences, poor reliability, and other problems.

But Musk is — or was, at least — an hype man. He made grandiose promises about upcoming products and features — often shading into flagrant dishonesty, as shown in the range story above or the time when he oversaw a staged video of Tesla’s Autopilot feature. At the same time, he viciously attacked critics, often singling out journalists by name or even threatening to sue them, stifling much criticism. All this inspired a fervent cult of personality, heroic effort from key workers (though also high employee turnover), and a large cult-like community of investors who boost Tesla’s stock.

Musk also got lucky. He had the advantage that electric drive trains are dramatically simpler than internal-combustion ones, with far fewer parts and far less maintenance required, and also produce maximum torque at idle for breathtaking acceleration. He also got a large, low-interest loan from the federal government under the Obama administration, plus numerous other state and federal subsidies for producing zero-emission cars.

All this allowed Musk to keep raising money and selling stock to fund a consistently unprofitable business for years. His Silicon Valley-brained approach was terrible for actual factory production, but it helped him create a legend. And this really does seem to be the only way you could have built a mass market electric car startup. Realistic promises, careful engineering, and truthful marketing would have run headlong into the nearly impossible economics of the business. Nissan found this out when its Leaf project, in which it invested heavily, failed to live up to expectations, because it was a boringly useful appliance without any utopian dreams attached.

The problem for Tesla was that propaganda is not a sustainable business model. To keep the hype train going, Musk had to keep making more and more fantastical promises, and eventually his credibility started to erode. Meanwhile, the rest of the auto industry got into the EV game, including established fancy brands who took direct aim at Tesla’s aging luxury sedan and SUV models.

Neidermeyer thus predicted that Tesla would eventually stumble into bankruptcy, like every other major car startup since the 1920s. And this wasn’t an implausible idea at the time. Up through mid-2019, the company had posted a quarterly profit on just three occasions in its entire existence.

But a funny thing has happened since then. Starting in 2020, and accelerating through 2022, Tesla has posted consistent large profits, reaching a peak of $3.7 billion in the last quarter of 2022. There are two obvious explanations. The first is the subsidies in the Inflation Reduction Act. Tesla had previously run through its allotment of federal tax credits for its cars, but the law restored them for many of its models, boosting demand. The IRA also has a large subsidy for battery production, which granted the company between $150-250 million in the second quarter of this year.

The second explanation is that Musk is now spending most of his time running Twitter into the ground instead of fiddling with Tesla’s factories and models. As The Wall Street Journal reported back in May, Tesla’s Chief Financial Officer Zach Kirkhorn is now de facto running the company in Musk’s stead. By all accounts, Kirkhorn is exactly the kind of cool-headed, logical, spotlight-averse type of executive the company badly needs. Under his guidance over the last couple years Tesla seems to have focused on the boring nitty-gritty details of factory production, ironed out most of its production kinks, and is now delivering consistent numbers of vehicles. The company’s brand, meanwhile, remains strong enough that a critical mass of customers automatically turn to Tesla when considering an EV, despite it not releasing a new consumer model for the last three years.

Perhaps Musk’s Twitter purchase will be Tesla’s salvation. He’s already lost tens of billions of dollars on the deal, and his increasingly erratic antics on the platform have torched most of what remained of his reputation as a genius innovator. Most recently, he tweeted that he had reinstated the account of a QAnon conspiracy theorist who was banned for, in Musk’s words, “posting child exploitation pictures.” That’s an excuse for the Tesla board to give him the boot if ever there was one.

As a business, Tesla needed Musk’s megalomania and cult of personality to get off the ground. But now he is an existential threat. He remains CEO, and he’s gotten markedly more unhinged since spending hours and hours per day bantering online with antisemitic trolls. He could take back control at any time, demanding disruptive new changes to its factories or promising a new car that will, I dunno, fly into space. (The upcoming new Roadster — which Musk promised in 2017 to be delivered in 2020 and hasn’t been seen since — is supposed to have a package including “cold gas thrusters” from SpaceX.)

If Tesla wants to survive over the long term, it’s time for the adults to take charge.

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