On Tuesday, Tesla reported earnings and they weren’t great. The company reported a 9 percent drop in revenue, as well as a $1.4 billion drop in profits. Much of that slump was due to missing its delivery targets as well as a series of price cuts over the past few months.
Despite the bad news, the company’s stock price jumped on the promise that Tesla still plans to launch a lower-priced electric vehicle (EV) in the next year. That would, presumably, allow Tesla to sell more vehicles since the company could reach new customers who are leery of the higher price of EVs compared with their traditional counterparts.
Look, Tesla has sold lots of cars. The Model Y, after all, is already the most popular car sold that isn’t a pickup truck. Add in the Model 3, and Tesla has not only the two best-selling EVs, but two of the top five best-selling cars, period.
It’s not that Tesla isn’t able to sell cars. It’s that the automaker is pushing up against the limit of the number of customers willing to spend $40,000-$80,000 on a high-end vehicle. That’s just simple math.
Now, the promise is that Tesla will make a low-end, more affordable EV, presumably called Model 2. That promise is important because it’s pretty key to Tesla’s future. The idea is that it would sell for around $25,000 and appear to a far wider market of people, most of whom aren’t currently driving an EV.
On the other hand, there’s some question about whether that vehicle will ever actually ship, or if Tesla’s CEO, Elon Musk, is just making the promises investors want to hear. It’s not like Musk has never done that before.
For example, there was the time he promised that Tesla owners could recoup the cost of their purchase by renting out their vehicles as robo-taxis. Or the time when he claimed that autonomous driving was coming in a matter of weeks with one more software release.
Musk seems to operate from the principle of “say whatever sounds good and figure out later how to make it true.” But, the thing about making promises is that if you don’t keep them, eventually, you lose out on your most valuable asset: your credibility.
None of this is to say that Tesla doesn’t make good cars. I also happen to think that if it made a $25,000 EV, it would sell as many of them as it could make.
The thing is, eventually, you have to ship some stuff. Lately, the stuff Tesla has been shipping hasn’t been great. Take the Cybertruck. Sure, there are plenty of fans, but I think we can all agree it’s divisive. It’s definitely not for everyone.
Also, it was two years late, and every vehicle they did ship has been recalled over an issue where the accelerator pedal could get stuck, which, seems to be not ideal. The low-cost model is another example. It’s hard to know what really happened, but reports as recently as earlier this month suggested the entire product had been cancelled. That’s apparently not true, but it’s hard to know what to believe until something actually ships to customers.
The entire thing is a powerful lesson about incentives. If you’re managing for a stock price, you make promises your investors will like. You say things like “we have a product that lots of people will buy and no one can compete with.” If that’s true, it’s not just good for your stock price, it’s great for your business.
But, the way Musk actually seems to be to make a lot of promises, and then cajole people into trying to make them true, or hoping everyone forgets when he makes an even more fantastic promise later.
That, ultimately, is Tesla’s biggest problem. Its CEO is making promises the company can’t keep, instead of just focusing on building the best products it can.