Why Does Tesla Have Such a Hard Time Making Cars?

 | Mar 16, 2018 | 9:06 AM EDT
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Following Tesla (TSLA) is like watching a five-days-a-week serial that is not unlike a soap opera. There is always something interesting emanating from the mouth of CEO Elon Musk or from what seem to be a legion of disgruntled employees. That's great for day traders of TSLA stock, but the fact that Tesla has so much difficulty with its core mission -- making cars -- continues to baffle me.

Tesla is a minnow in the world of global auto OEMs, and that is the existential problem that Tesla bulls always avoid: the company is small and owing to its extraordinary cash outflows, actually getting smaller by the day. Reconciling that fact with Tesla's $55 billion market capitalization is simply impossible, and I gave up on that math a long time ago.

But time really is the key issue facing Tesla, and that's why Wednesday's news du jour on Tesla was so important. CNBC's report on Tesla's manufacturing issues shined a light on the company's reliance on off-line assembly to produce its vehicles. Off-line assembly -- rework, in auto industry parlance -- is extremely costly, as the core profitability of any automaker is based on line speed, i.e. the number of units produced per shift.

The CNBC report noted Tesla's use of remanufactured parts, but after spending 11 years traipsing through auto plants and driving cars on all six inhabited continents, I just can't reconcile the notion of remanufactured parts being used on new vehicles, although the CNBC report did not explicitly state that Tesla does this.

Tesla's Fremont, Calif. assembly facility has a terrible reputation in the auto industry, and General Motors' (GM) attempt to force-feed its workforce the principles of lean production by contributing that plant to a joint venture with Toyota (TM) (NUMMI) proved to be an abysmal failure. If you don't believe me, check out the NUMMI entry in Wikipedia; it's actually quite amusing.

But "bad plants" are most frequently the result of the absence of design for manufacturability principles, and the more I read about Fremont, the more I realize that Tesla management simply has no idea how to build a car profitably. Note I said "build a car profitably," not just "build a car." Tesla's Model S has performed extremely well in industry quality and owner satisfaction surveys (though the Model X has not) and it seems that once a Tesla leaves Fremont it is in fine fettle.

Getting from the idea to the finished product is supposed to produce a return on capital, though, and Tesla never has. Tesla produced negative EBITDA in the fourth quarter for the second consecutive period and that is just unheard of in the automotive world.

Ferrari produced an EBITDA margin of 30.8% in 2017 and soon-to-be-public Aston Martin posted a 23.6% figure. In contrast Tesla's $1.6 billion of negative EBIT in 2017 was matched almost to the penny by the company's $1.6 billion of depreciation and amortization. So, Tesla's EBITDA margin in 2017 was zero. That's astounding for a car company focused on the luxury market, and it is simply not sustainable.

Tesla burned through $3.5 billion of cash in 2017, and with the Model 3 still in "manufacturing hell," I don't expect that figure to improve in 2018.

But what about the future and Tesla's role in disrupting the world of transportation? If you believe in electrified powertrains I would point you to Volkswagen (VLKAY) CEO Matthias Mueller's masterful presentation in Berlin this week on VW's plans to introduce an army of battery-powered vehicles by 2025. If you believe in the future of autonomous driving I would point you to General Motors CEO Mary Barra's terrific presentation from December on GM's strategy to exploit autonomous mobility.

Those are fact-based presentations, but the stock market doesn't always consider facts. So, if you believe in giving your money to a company based on the consistently unfulfilled promises of a faux-visionary who has never proven that he can produce a profit making cars, let alone produce a positive return on that capital, then you should buy Tesla stock.

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