Tesla Model 3 Ramp Continues – Musk Survives as Chairman
Ah yes, it’s Tesla (NASDAQ:TSLA) time again! The story of the day is actually a weaving together of several items. Foremost among them that at the Tesla annual shareholders meeting, Musk indicated that the company is well on its way to the magical number of producing 5,000 Model 3’s per week, currently running at about 3,500. This of course is the number which has long eluded Tesla and the company sees as crucial to hitting profitability, something which needs to happen sooner rather than later given the bonds it has coming due later this year and next year if indeed it wishes to avoid a cash raise as Elon Musk suggests.
But that’s not all, there are of course still concerns, brought to light recently by Business Insider (here) which allege major lapses in the production of the Model 3 with significant cash being burnt on parts which are not fit for use and scrapped, parts which are not fit for use making it into cars themselves and also the genealogy of parts being compromised. For those unaware, cars typically have components tracked throughout the production cycle and tagged so that in the event of a problem down the line it simplifies the process of identifying affected cars which may need to be recalled.
There’s still more to talk about! It wouldn’t be Tesla without drama and the major twist here is that there was an attempt at the shareholder meeting to separate the roles of Chairman and CEO, which Musk survived.
Tesla Corporate Governance – The Independence Question
It’s a long running saga in the US. Corporate governance codes in many countries effectively preclude the ability of the CEO to also double as the Chair of the board in a significant sized company. The objective of course is to promote a degree of circular accountability which exists in most avenues of life. Boards are supposed to represent the interests of shareholders and hold executive management to account. That can be difficult to do if the person you are meant to hold to account is, well yourself. Other conflicts of interest are also created in the awarding of executive pay packages and compensation usually being set at the board level. Some jurisdictions dictate that the Audit Committee cannot include executives of the firm and must be made up entirely of independent non-executive directors but of course a board committee usually reports to… you guessed it, the Chair!
So the concept of circular accountability can (but not necessarily is) be lacking in some companies where a single person shares both roles, as is the case with Tesla. Many high profile people hold both positions, perhaps none more interestingly than Mark Zuckerberg who is both the Chair and CEO of Facebook (NASDAQ:FB) who despite giving up a lot of stock in his company, effectively retains total control via some financial engineering that gave others a piece of the pie, but not control in the form of voting rights, basically meaning that the only way he gets removed is if he himself decides to step down.
Well Tesla shareholders backed Elon Musk to remain in situ as Chair. To a certain extent, these kinds of suggestions are often made for form, rather than substance. Shareholders are in all likelihood at this stage, as invested in Elon Musk personally as they are in Tesla the company. A damaging split at this stage between board and management would risk everything and it’s clear that Tesla has a hit on its hands with the Model 3 (about half a million orders with effectively free loans amounting to almost half a billion dollars from the deposits paid), but an engineering problem associated with building enough of them fast enough. A production line throughput problem isn’t really the kind of thing that a new Chair is likely to substantially contribute to resolving.
Wrapping Up – Tesla Stock Sees Huge Gains
The final note here is that investors like what they’re seeing. The stock is up almost 10% today and has largely shrugged off the possibility of bad news associated with high cash burn rates and possible genealogy issues as part of the Model 3 ramp up and something to be worried about down the line if there does actually turn out to be an issue. What matters for now is that Tesla is close to hitting its target production numbers (finally!) for the Model 3 and it does begin to feel like the corner is being turned. This could finally be the turnaround in the stock which has taken a bit of a beating this year.
Other news from the shareholder meeting included confirmation of a Gigafactory in China which would ease the tariffs imposed on foreign automakers for Tesla, something which seems closer to reality now that restrictions on foreign ownership have been eased in the country. It could point to a positive picture, although there are still those who think that profitability may be achieved again through the sale of Zero Emission Vehicle credits to other auto makers who don’t have enough. Some estimates put the numbers as high as Tesla earning a billion dollars from the sale of these credits. This is fine for short term cashflow but what the company really needs is sustainable profitability and growth. Will this be enough for it to grow its way to profitability with Model 3 production? Only time will tell, but with the company well on the way, happy(ish) shareholders and a consolidated Chair/CEO position secure for now, all that remains is for Elon to execute on his vision.