Earlier this week, Elon Musk told Tesla employees they needed to get back to the office or forfeit their jobs.
“Everyone at Tesla is required to spend a minimum of 40 hours in the office per week,” Musk wrote, in a caustic, company-wide Tuesday email. “If you don’t show up, we will assume you have resigned.”
Two days later, in a Thursday email to executives, Musk said he had a “super bad feeling” about the economy. Tesla, he said, may need to shed 10% of its workforce.
The email was initially reported by Reuters. The shares fell 9% Friday.
Musk has repeatedly referenced a recession in recent weeks. Speaking remotely to the All-In Summit in Miami Beach in mid-May, he said the US economy was “probably” in a recession already and suggested it “will get worse.”
“It’ll be some tough going for — I don’t know — a year, maybe 12-18 months,” he mused, before noting, without apparent irony, that “boom times” encourage misallocated capital. “It starts raining money on fools, basically,” he told the conference. Yes, “basically”:
Musk’s May 16 remarks were almost too hypocritical to countenance, and that’s coming from someone (me) whose view on hypocrisy is that everyone is a hypocrite in one way or another and therefore we should all generally avoid throwing stones from glass houses. In early 2021 (so, “peak boom,” if you will), Musk took it upon himself to promote the gross misallocation of capital by, among other things, perpetuating the infamous “meme stock” mania and encouraging legions of fans to put money into Dogecoin, a cryptocurrency originally created as a joke.
I assiduously avoid making unequivocal statements, because nearly everything admits of caveats. But not Dogecoin. That was misallocated capital. And Musk was its champion. Amusingly considering recent events, Dogecoin’s market cap briefly matched Twitter’s in April of 2021 thanks in no small part to Musk’s tongue-in-cheek cheerleading.
In any event, it’s tempting to suggest Musk doesn’t know what he’s talking about when it comes to macroeconomics, but that’d be a mistake. Critics said his remarks on inflation in May (“The honest reason for inflation is that the government printed a zillion amount of more money than it had”) were a cartoonish oversimplification. Those critics were correct, but at the same time, Musk knows more about supply chain disruptions than any economist. After all, he’s a manufacturer, and one of his facilities is in Shanghai, until this week the site of the world’s strictest COVID lockdown. Over a third of Tesla’s global deliveries last year were attributable to China. It’s not possible to contend Musk doesn’t understand the role of supply chain frictions in inflation, nor is it possible to suggest he doesn’t grasp the role of raw materials scarcity, even as you might claim he’s “missing the big picture.”
Time and again, we’ve learned that if Musk oversimplifies, or comes across as oblivious or unduly aloof, it’s on purpose. Usually, he’s trying to rile people up or otherwise draw attention to himself. Calling his bluff when he suggests he might, for example, buy a large company for $40 billion in cash, is the best way to make sure he at least tries to go through with it.
Notwithstanding his highly unfortunate metamorphosis into libertarian provocateur, Musk is no idiot. We do have to take him some semblance of serious when he says he has “a super bad feeling” about the economy. It’s easy to say he’s just echoing Jamie Dimon and other magnates who’ve made similar comments over the past several days, but again, some of Musk’s recession remarks predate those warnings, if only by a few weeks.
The good news is, recessions can be a positive development. According to Musk, anyway. “This is actually a good thing,” he told a Twitter user a few days ago. “Some bankruptcies need to happen.” In his Tuesday email to Tesla employees, Musk said that if he hadn’t “lived at the factory so much… Tesla would long ago have gone bankrupt.”
Reuters noted that “Tesla had about 5,000 job postings on LinkedIn from sales in Tokyo and engineers at its new Berlin gigafactory to deep learning scientists in Palo Alto,” prior to Musk’s cautionary remarks on the economy.
I won’t speculate on any connection between Musk’s emails and his recession call, but others were happy to do so. Reuters quoted an executive at a tech talent agency who suggested Musk’s return-to-office mandate was a thinly veiled attempt to compel “a percentage” of workers to quit. If that’s true, and that percentage ended up being close to the 10% figure Musk cited in his email to executives, then problem solved. Cheaply. With no severance.
Musk’s Thursday email was titled “pause all hiring worldwide.” In the same remarks to the Miami conference mentioned above, he said, of recessions, “These things pass and then there will be boom times again.”
So, hunker down. Steel yourselves for Dimon’s economic “hurricane.” Comforted in the notion that it’ll be “raining money on fools” again in no time.
You cannot dismiss comments from someone in the trenches. Musk clearly is, although of course he talks his book like everyone else. Tesla’s big problem is that competion is going to get very hot in the very near future. The electric Ford F-150 truck is a perfect example of that. It does not mean Tesla cannot do well. But the company is no longer going to be the only game in town for electric vehicles. Volkswagen, Ford, GM and a bunch of other players are going to be solid in this market very shortly- I think Ford already is with the F-150.
Yeah, in a lot of ways, Tesla’s position reminds me of Netflix. They disrupted a very slow moving industry and built a huge lead, but eventually the competition gets wise and starts offering real alternatives. I saw one of the new electric Mustang vehicles and it was sharp.
I’ll also be curious if Musk’s foray into politics will hurt Tesla sales. I’m sure it won’t matter outside of US markets, but I’d hazard a guess that the vast majority of domestic demand is from liberal voters, many of whom would consider themselves very liberal. Not saying that’ll be the primary consideration for most buyers, but it could make a difference at the margins. Of course, it’d be foolish to doubt Musk’s ability to keep Tesla at the forefront and I certainly won’t be shorting him or Tesla.
Maybe we can offer China a swap … they get Musk and we get Ma
The following was written recently by Brad DeLong about Musk and Tesla in his Grasping Reality Newsletter. Brad teaches economic history at UC Berkley. He’s a friend of Larry Summers and was a Deputy Assistant Secretary at the US Treasury Department during the Clinton administration under Summers who was then secretary.
“I found myself looking at Tesla’s stock price: after all, “crypto” today appears highly correlated in its stock market valuation with “tech”, and Tesla is now looking like a tech-factor stock rather than a manufacturing-factor stock. That is, Tesla is trading as if it is constructing a walled garden within which it will then leverage a piece of software written once that runs everywhere and harvests the activity of its users for some chain of actions vague in the middle that ends with “PROFITS LARGE FOREVER!”. It is not trading like a company whose profits depend on large-scale efficient execution of manufacturing processes—a company that makes large things out of metal using technologies for which the knowledge is widely distributed.”
“Consider: At its current stock price of $675/share, and with more than a billion shares outstanding, Tesla is “worth” $675,000 for each of the million cars it manufactured in the past year—it is selling, even now, at not just 90 times earnings, but 11 times trailing annual revenue. Think that, as equities, Tesla shares to have a long-run permanent earnings yield of 5%/year in order to support stock valuations. Thus the company’s realistic projected permanent earnings have to be $35 billion/year. Selling all the cars sold in America, and selling each for a profit of $20,000 per car, and getting there very quickly (for money in fifteen years is worth half of money today at standard equity discount rates)—that is what the marginal Tesla shareholder right now is “thinking” about Tesla and its prospects. (If you think it is going to take ten years for Tesla to reach market dominance, you need $30,000 profit per car.)
Or they could do it with a quarter of the American car market, with profits of $80,000 per car.
Or they could do it with a quarter of the American car market, with profits of $160,000 per car if it took them 15 years to get there.
It could happen. But do note that these numbers have your profits calculated after taxes and debt interest: this is not EBIT, let alone EBITDA.
Or some one of Tesla’s other future businesses could catch fire, at 1/4 of the iPhone scale of profitability—but what incentive does Elon have not to tunnel the valuable intellectual property out of Tesla and into another one of his vehicles as that happens?
Complicating matters is that Elon Musk is not a prudent fiduciary seeking to maximize the fundamental value of the payouts to shareholders from companies he is involved in. Elon wants to have fun and change the world: payment systems, electric cars, batteries, subways, travel to Mars, satellites! High stock market valuations are useful tools for that: they gave Elon social power in the form of wealth, and he then leverages that into social power in the form of celebrity influence. But if you own stock in an Elon company, he does not work for you. You are, if anything, his prey—or, at best, a spear-carrier in the background on the stage, not even part of the chorus.
Tesla is… unlikely to be near its fundamental value today. Five years ago it was valued at 1/10 as much—that would be, if it obtained maturity fifteen years (now ten years out, in 2032), a quarter of the American car market with a profit of $8,000 per car: the equivalent of the old Ford Motor Company in its glory days, in a boom year.
Let me hasten to add that just because it is unlikely that Tesla shares are valued near their fundamental values, when Tesla is assessed as a profit-making enterprise, does not say much about the true value of Tesla.
In particular, it does not mean that Tesla is in any sense unworthy as a productive enterprise—on the contrary: it is an extraordinarily valuable enterprise, considered from the appropriate point of view.
But shareholders are unlikely to receive a great deal of that value.
We all have learned enormous amounts from Tesla’s attempts to profitably make electric cars at scale. In particular, all of Tesla’s present and future competitors have learned. The world in the future would be a poorer place if Tesla had not taken the plunge.
But the ultimate valuable product of Tesla is not likely to be cars sold in the future for more than the cost of materials and labor.
The ultimate valuable product of Tesla is likely to be the public good of all the engineering and social-organizational learning that Tesla-as-an-experiment is generating right now.”
He has become a cluster f of a leader, people will quit him based on that, in the future people will be more hesitant to buy his concepts or his vehicles. He will become the new gimmick king once the current gimmick king croaks, if not sooner.