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Tesla Motors Inc (TSLA) Model X Turmoil Is a “Sculptural” Window

Tesla Motors Inc (TSLA) Model X Founders Edition Presentation

Tesla Motors Inc  can’t build the Model X right now, at least not up the standard it thinks that buyers deserve. In its most recent shareholder letter (PDF Download), published on Tuesday November 2, the firm said that delays in the Model X shipment date would continue. The problem, according to the firm’s CEO Elon Musk, was with certain parts manufacturers.

Tesla Motors Inc (TSLA) Model X Founders Edition Presentation

The Model X delay can tell us quite a lot about the way the firm deals with problems. As a result it’s a useful tool for those betting on long term success at the risky venture to judge whether Elon Musk and his team have what it takes to get over the hundreds of hurdles that face them in the coming years.

Tesla Motors can’t compromise on quality

The most important metric for Tesla Motors is consumer satisfaction. The firm’s Model S buyers support Elon Musk’s mission almost universally, and they’re a resource that Elon Musk will need in order to make the firm a real contender going forward.

Consumer Reports, despite being down on Tesla Motors for other reasons, says that 97 percent of Model S owners would buy the car again. That’s a number that’s almost impossible to achieve, and it’s one of the most important intangible assets that Tesla doesn’t record on its books.

Tesla Motors is very weak

The Model X delay has been going on for years, so recent issues can’t be fully blamed for the problems with the rollout. That said, Tesla Motors is saying that the real issue right now is the second row of seats in the car. We know that the firm can’t compromise on quality, but we can also see that it’s easily hurt by issues that are small to big car makers.

It’s not that Ford or GM don’t get hit by part problems. They do, all the time. It’s that their annual sales forecasts don’t fall by 9 percent as a result, and people don’t call their entire future into question.

If Tesla Motors has part problems with the Model 3, as is likely in the roll out, the firm’s shares will, once again, be hit by claims of huge risks to the firm’s bottom line.

Tesla Motors is weak for a couple of reasons. First of all, it’s a low volume car maker. That means that low volume problems affect it a lot more. It also means the firm has less market power. It takes more work for Elon Musk to convince someone to produce parts for the Model X, than it takes for Ford to get someone t retool for F150 parts.

There’s also the matter of how Tesla Motors pays for its problems, of course.

Tesla Motors burns cash on dreams

Tesla Motors  won’t compromise on the Model X, but that kind of attitude is leading the firm down a risky road. Elon Musk hired a new CFO this week. His job will be to balance cash raising and cash burn at the firm. Tesla’s reaction to the Model X problems won’t make that job any easier.

Because Tesla Motors refuses to compromise, the firm won’t cut costs on long term projects it thinks will pay off in future. The Gigafactory and the Supercharger network are supposed to drop costs feed demand, but they won’t pay for themselves for quite a while.

That’s expensive. Each new debt issue costs the firm valuable cash flow, while each new stock issue reduces the relative value of each other share out there right now. At some point that will make shareholders think of their shares as less valuable. Should that happen issuing new shares would become a lot more damaging.

Tesla Motors is decisive, and Elon Musk solves problems

Bringing the Model X seat-building facility inside the Fremont plant was likely expensive, and the whole SUV operation is going to end up costing Tesla Motors a whole lot of money. What matters for those watching the firm is that Elon Musk makes a decision and he sticks to it.

That decision may not be the best. Some prospective Model X buyers might have preferred more generic seats. What matters is that when faced with a problem Tesla Motors took a decisive action to solve it.

That’s a necessary attribute in a CEO, particularly one like Elon Musk who has grandiose visions of the future. He made a decision, spent the money and started making seats in Fremont.

What does the Model X mean for the Model 3?

We know that Tesla Motors , and those with shares in the firm, care more about the Model 3 and the firm’s 2020 delivery target than anything else. What’s most important, given the firm’s star-bound valuation, is that the firm manages to grow as quickly and convincingly as possible in the coming years.

What can the Model X teach us about Tesla Motors’ decision making, and the release of the Model 3?

It tells us first of all that the Model 3 has a good chance of getting delayed. JB Straubel, Tesla Motors founder and CTO, says that the car is going to use a lot of new tech. Some of that tech could throw up problems that can’t be foreseen now.

Tesla Motors isn’t likely to compromise and release a car that isn’t up to spec. The firm’s management, lead by the very able Mr. Musk, will solve those problems. What really matters is how they’re going to pay for it.

The stock market could turn against Tesla, despite the massive support it’s received up until now. That would make raising more capital from the stock market more unlikely, and could raise the interest the firm would pay on new loans.

Market conditions could, likewise, cause the firm’s plans to derail. Right now the firm is just a luxury car maker. It’s going to stay that way for many more years. If a major recession causes a drop in spending the firm could be hit hard. Some consumer reaction to EVs in general, or the Tesla Motors brand, could happen, though there’s no clear mechanism on how that might come to pass today.

The big things that could derail Tesla Motors are out of the firm’s control. Even though the Model X is delayed, the firm has been doing things right inside the rules it has set up for itself. Those rules are what gave it the 97 percent satisfaction rating, and they are why the firm appears alongside much bigger car brands in surveys on quality and innovation.

The future is unknowable, and those betting on shares in Tesla Motors are taking a major risk. The Model X delay shows more about Tesla Motors’ inherent qualities than unexpected failures, and that’s important to recognize as it heads toward the roll-out of the Model X and the launch of the Model 3.

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