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Is There a Light at the End of the Tunnel for Tesla?

By: Bridget Clerkin April 4, 2018
Tesla's problems with its autonomous features and production capabilities are starting to impact the California electric carmaker's bottom line.

The race to perfect battery-powered cars may be one of the world’s fastest-growing initiatives, but even one of its oldest proponents isn’t immune to the breakneck pace at which fortunes can change.

Last April, Tesla was crowned the country’s most-valuable auto manufacturer, as it rode an economic tailwind powered by favorable public opinions, generous government incentives, and fervent financial backers.

Yet almost exactly one year later, the electric vehicle producer is making headlines for all the wrong reasons.

In a succession of days, Tesla sustained a number of substantial setbacks, including a massive voluntary recall, enough bad economic news to spur a crisis of faith in its stockholders, and, most troublingly, another death at the hands of its autopilot system.

The California-based company has taken past difficulties in stride thanks to its deep pockets and scrappy spirit, but the weight of these compounded calamities may prove too heavy to get out from under. Will Tesla be able to survive its darkest hour?

Headstones

A fiery and fatal crash in Mountain View, California on March 23 marked the latest issue facing the electric car giant, when it was revealed that the Tesla Model X SUV involved in the event was in autopilot mode at the time of the accident.

Driver Wei Huang, 38, was killed after his car—guided by the semiautonomous program—struck a concrete divider along the highway. Neither Huang nor the autopilot system activated the brakes or attempted to swerve away from the danger.

This type of tragic news is unfortunately not new for Tesla, whose autopilot system was deemed partly responsible for the 2016 death of test driver Joshua Brown—the first known fatal incident involving a self-driving car.

Tesla engineers updated their system in the aftermath of the accident, adding more warnings—both visual and aural—to dissuade drivers from going hands-free for too long, with CEO Elon Musk declaring at the time that the revised program was “really going beyond what people expect,” making the Model S and Model X the safest cars on the road “by far.” But those revisions came under scrutiny last week after it was reported Huang didn’t touch the wheel for at least six seconds before the crash.

The more recent incident also brings into question Tesla’s hesitation to adopt LiDAR technology to help guide its semiautonomous cars. Previously, video images alone informed the autopilot, but after the car’s camera failed to recognize a white semi-truck trailer against a stark white sky—leading to the 2016 crash—the company began incorporating a radar system to back up the video.

The March 23 death of a California man whose vehicle was in autopilot mode brings into question Tesla’s hesitation to adopt LiDAR technology to help guide its semiautonomous cars.

Still, LiDAR—a laser-based technology that builds a 3D map of the world for autonomous cars—creates imagery many in the self-driving industry contend is integral for the vehicles to pilot themselves.

Musk has repeatedly downplayed LiDAR's importance, though it remains to be seen whether a second deadly accident will change his mind on the tech, or if the company will once again adopt additional self-driving systems in the wake of a fatal crash. But even if Tesla begins incorporating the laser technology, the move will be costly—and the company has no shortage of current financial woes.

Headwinds

Even as the Model X accident was being reported, Tesla was facing an economic crash thanks to a nearly simultaneous plummet in its stock market value and an official downgrading of its credit score.

Rating powerhouse Moody’s last week lowered Tesla’s overall credit rating and marked some of the company’s most mature debt as Caa1—a label bestowed to those in poor financial standing who are perceived as exceptionally risky borrowers.

The designation could prove especially troubling for a company increasingly kept afloat by the benevolence of bond backers, who just last August raised a collective $1.8 billion to finance a new round of loans taken out by the electric car maker. Tesla secured the advance at a record-low interest rate of 5.3%, but the new Moody rating will make it much more expensive for the company to borrow money in the future.

Yet it seems almost inevitable that Tesla will need another cash injection before it can get its products moving at the proper speed. The company has made a habit of incinerating money, burning through more than $1 billion a quarter last year in its pursuit to mass produce the Model 3—a car that, with a market value of $35,000, will take some time to return any profit.

Model3Shot
The $35,000 Model 3 is popular with potential buyers, but the company has not met any of its production goals for the vehicle, and investors are taking notice.

All told, the auto manufacturer is currently spending $6,500 every minute of every day, with no end of the spree in sight, according to Bloomberg. Making financial matters worse for Tesla is the looming $1.2 billion in debt coming due next year, a sum the company will have to cover on top of its costly annual expenses. (The loan represents a different bundle of bonds than those taken out in August, which mature in 2025.)

It’s not the first time the company has faced such strong economic headwinds—it’s failed to return a profit in all of its 15 years—but the pile-up of problems hasn’t gone unnoticed by stockholders, who handed Tesla a two-day, 15% drop in stock prices last week, the largest hit the company has taken on the market since 2016.

Bond backers are also losing out on the deal, with their notes currently valued at just 86 cents to the dollar. Yet its financial sorrows pale in comparison to the pain felt on the factory floor.

Headstrong

Behind both the credit rating issue and the need to borrow so much money is the supply side of Tesla’s economic picture.

The company has languished in self-described “production hell” for months, as it has faced setback after setback in its attempt to mass produce its electric models.

Most recently, company officials issued a voluntary recall of 123,000 Model S vehicles—all built before April 2016—citing problems with the cars’ power steering, though no injuries or accidents had occurred because of the technical mishap, they said. (It’s not the first time the car has been called out for its faults. In 2015, 90,000 Model S cars were recalled for seat belt-related issues, and last year a combined 53,000 Model S and Model X vehicles were recalled over concerns with the parking brake.)

Still, getting the cars off the assembly line at all has proved by far the bigger challenge, with Tesla continuously falling short of its vehicle delivery goals.

In the fourth quarter of 2017, the company produced 1,550 of its Model 3 sedans, a vast improvement over the previous quarter, when only 260 of the cars were manufactured, but nowhere near past promises by Musk that Tesla would build 10,000 of the cars per week by December 2017.

“Battery bottlenecks,” faulty robots, and the need for hand-hewn parts were all blamed for lagging production times, and in a recent call to investors, Musk made much more modest production promises, saying the company was on track to produce 2,500 Model 3s per week by the end of this year’s first quarter, and 5,000 per week by the end of quarter two.

Moody’s noted the downshift in its official downgrading of Tesla’s bond rating, with the “significant shortfall in the production rate of the company’s Model 3” specifically named as the top reason for the credit score demotion.

Still, Tesla is nothing if not popular, boasting a waiting list of more than 400,000 customers who were willing to put a $1,000 downpayment on the chance to own a Model 3, seemingly no matter how long it takes. And the Moody’s report notes that the bond rating could see an improvement if Tesla can meet its current production goals. If the company can just kick its factories into high gear and avoid any more tragedies on the road or at the bank, it may yet be able to see the light.

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