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Panasonic Wavering on Tesla Commitment

This is not investment advice. The author has no position in any of the stocks mentioned. WCCF TECH INC has a disclosure and ethics policy.

Ahhh Tesla (NASDAQ:TSLA), it seems that you lurch from one crisis to another, whether it’s missing Model 3 production ramp targets (again), burning cash like crazy, joke bankruptcy tweets by your CEO or oddball earnings calls where Elon refuses to answer “bonehead” questions from serious institutional analysts and spends it talking to a YouTuber retail investor. Well now we have more in the way of Tesla’s continued march to world domination in the shape of partner Panasonic (TYO:6752) which is apparently being overly cautious on whether to commit to its Tesla partnership further in the form of the new Tesla Gigafactory in China.

For those that aren’t aware, Tesla currently has one Gigafactory in Nevada and the two companies are investing up to about $5 billion to make Panasonic electric car batteries for Tesla’s cars like the Model 3. So far, Panasonic has put in about $1.8 billion and is debating internally whether to put in more but according to Nikkei citing a Panasonic executive, this will be decided “based on a frank assessment of the situation”.

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A statement like that is frankly somewhat shocking coming from a culture as reserved as Japan’s and it seems likely that a comment like this means there are currently serious misgivings at Panasonic HQ over whether Tesla is in over its head. The stream of new vehicle announcements including the Tesla Semi and the new Roadster also seem at odds with the company’s ability to deliver on its supposed money-earning saviour, the Model 3. Although Tesla is sitting on a huge pile of pre-orders where customers pony up a deposit long in advance of receiving a car, effectively providing Tesla with interest free financing, it has struggled and repeatedly delayed its commitment to investors that it will hit 5,000 units per week.

This, coupled with the somewhat erratic behaviour of Elon Musk on the earnings call during which he said that he expects soon “to announce the location of the Tesla Gigafactory in China” which will combine car and battery production lines are what has probably led to something of a retrenchment from Panasonic, with Nikkei also citing “several Panasonic executives” as saying that the plans are “not solidified yet” and that “nothing is set in stone”.

Nikkei, which seems to have the inside track on unnamed Panasonic executives cited another saying “He’s in no position to say something like that” with respect to Elon’s statement that “boring bonehead questions are not cool”.

Is Tesla in Trouble?

It’s a really difficult call. Tesla at this stage feels like a $50 billion dollar startup which could go either way. The company has half a million orders for the Model 3, so it’s doing something right, but even if it hits its 5,000 cars per week target, it will still take 2 years to churn through that backlog. It’s a nice problem to have but sooner or later, the company has to stop burning cash and start making some. 5,000 cars per week will allegedly do it but it has debt coming due later this year ($230 million) with another tranche of about a billion dollars in March 2019. If the market loses faith in its ability to deliver, rolling that debt forward may not be as straightforward an affair as Musk would like. If Tesla actually hits breakeven, you get the sense that (barring a global economic downturn), the stock will run and run.

Add onto this the obvious cash grab in the new Roadster pre-orders (due in 2020 if we can believe that) with a $50,000 deposit required against a $200,000 car, although the first 1,000 to be made will carry the “Founder’s Series” prestige and require the full $250,000 payment to be made up front if you wish to order one. It feels like an extreme version of a Kickstarter, big money in now with a possible reward later on (assuming the company doesn’t implode in the meantime). The cash is obviously going towards funding current operations given the rate at which Tesla is burning through cash and racking up losses. Whispers of whether Tesla would be classified “too big to fail” in the event of a major cash flow problem have already started to be discussed given its size.

Panasonic is likely trying to figure out whether its partner is going to last the distance if it ponies up more cash. Sure there are risks, but at the same time, if things go to plan (this time), Panasonic would greatly benefit from being the sole battery supplier to Tesla’s Chinese operations. Erratic behaviour by a partner company CEO is the kind of thing that might make a traditional Japanese company nervous. At the same time, it’s also the kind of thing that might make that same company a fortune…

News Source: Nikkei Panasonic - Tesla Piece