The War on Tesla, Musk, and the Fight for the Future
Upfront: If you think that anything is justified against a person simply because that person is wealthy, this is not an article for you. If you think it’s okay to lie, mislead, or otherwise attack a person simply because of their financial status, consequences be damned, then you should probably look elsewhere. You won’t have far to look.
We, Model 3 owners and people on the waiting list, have noticed a strange, disturbing, but all too explicable trend whenever the topic of Tesla comes up with people who don’t follow the company in detail.
- “Tesla… didn’t they go bankrupt?”
- “Too bad you’re never going to get your car, given that they’re going bankrupt. They lose money on every car they sell.”
- “Isn’t that that car that killed people?”
- “I wouldn’t get into one, with all those fires.”
- “But all their management is fleeing!”
- “I can’t support Tesla, they treat their workers terribly.”
Yet the reasons for these sorts of reactions, as frustrating as they are, are all too clear. Let us begin with the basics.
1. It’s hard to overstate how much people stand to lose from Tesla’s success.
Contrary to a newly emerging narrative that Tesla has “had it easy” in the press, Tesla has been smeared from Day 1. Back in the Roadster Days, TTAC for example ran a “Tesla Deathwatch” series, supposedly counting down the days until Tesla’s inevitable bankruptcy. Top Gear famously staged a scene where the Roadster supposedly ran out of power on the track and had to be pushed off (it didn’t), suffered a dangerous brake failure (it only suffered a blown fuse and never lost braking power), and a bunch of myths about EVs in general and the Roadster in particular, concerning charge time, range, and general usability.
But then, it was just an ideology at stake. Today it’s much, much bigger.
Tesla is the most shorted stock in the United States — 10,7 billion dollars bet against it. What does this mean? In short selling, you pay a stockholder interest to “borrow” their shares, which you promptly sell, with an obligation to buy them back for the stockholder later. Because these stockholders would not have otherwise sold their stock, it injects new stock into the market, which depresses the stock value. Inversely, when shorts cover their position by buying the stock back later, this creates extra buying that otherwise wouldn’t have happened, elevating the price.
Short selling is always dangerous, but it’s unusually dangerous when a large portion of the stock is in short positions. The downside to a short position is technically unlimited; if you shorted a stock at $1 a share and it rose to $1 million a share, your losses would be a million times your investment. To prevent shorts from getting into a situation that they can’t get out of, short positions come with contractual obligations to cover their shorts (aka, buy back the stock) if the stock price rises too much. However, as shorts buy back stock, this raises the price of the stock, which can trigger other shorts to be forced to cover. This self-perpetuating cycle is known as a short squeeze. The more of a company’s stock is shorted, the more of a risk there is for a short squeeze, and the more the price will spike during it; in a Tesla short squeeze, the shorts would have to buy nearly a quarter of all of the stock in the market in a relatively short period of time. But most entities holding Tesla’s stock are long-term investors, and correspondingly don’t want to sell. This puts even more upward pressure on the stock.
Tesla has gone through several short squeezes before (due to the large number of people who either don’t believe in EVs, don’t believe in automotive upstarts, or just simply don’t like Musk). But never on this scale. To reiterate, if Tesla’s stock rises too much, people with 10,7 billion dollars bet against Tesla stand to utterly lose their shirt.
So far, they’ve managed to control this. As production delays with the Model 3 have been being resolved and the company moves toward an increasingly clear road to profitability in Q3/Q4, short sellers have been increasing their short positions, offsetting the gains in Tesla’s stock that would normally occur.
But this tactic has run out of rope; they’re running out of stock to short. Only a fraction of the available stock is in institutions that lend to short sellers; they cannot endlessly borrow more to sell, and what remains is now charging much higher interest rates to do so.
Literally the only thing short sellers can do at this point to try to hold the price down is FUD (Fear, Uncertainty, and Doubt). And they have $10,7 billion dollars on the line in order to do so.
2. It should be understood who, exactly, the shorts are betting against.
When people picture Tesla’s stock holders, they generally picture a bunch of silicon valley hippies investing to save Mother Earth. Reality, however, tells a different story. The largest owners of Tesla stock are, in order:
T. Rowe Price Associates, Inc. (9.21%)
Fidelity Management and Research Company (8,23%)
Baillie Gifford & Co Limited. (7,53%)
Tencent Holdings Ltd (4,95%)
Vanguard Group Inc (4.20%)
Capital World Investors (2.62%)
BlackRock Institutional Trust Company (2.04%)
Jennison Associates LLC (2.00%)
BlackRock Inc (1.29%)
State Street Corp (1.47%)
BAMCO Inc (0.96%)
Invesco PowerShares Capital Mgmt LLC (0.81%)
Susquehanna Financial Group, LLLP (0.75%)
PRIMECAP Management Company (0.65%)
Geode Capital Management, LLC (0.61%)
Goldman, Sachs & Co. (0.57%)
Morgan Stanley & Co Inc (0,55%)
Around 3/4ths of Tesla’s stock is held by major institutional investors — companies who have built their empires based on choosing good stocks. Furthermore, institutional investors have recently been increasing their stakes in the company.
The shorts aren’t betting against dirty ignorant hippies that Tesla is going to fail. They’re betting against ruthless Wall Street bean counters.
Why did these firms invest?
3. Tesla’s vehicles have large margins.
A common myth is that Tesla loses money on every car they sell. This can only be arrived at by the most naive of calculations: taking their quarterly losses and dividing by the number of vehicles sold. But Tesla has been spending massive amounts of money on capex in order to build huge factories and expand their store, service and charging networks in advance of the flood of new Model 3s. Rapidly growing companies run negatives (see Amazon), and it’d be utterly irresponsible of them not to. No investor in such a company wants the company to start paying dividends when they’re small; they want them running at as much of a loss as they can sustain while they divert all of their funds into scaleup.
So how does Tesla actually do on a per-vehicle basis? To that, we turn to the quarterly reports. Before Model 3 production became significant — aka, just S and X sales — Tesla was earning a 25% non-GAAP margin / 27,9% GAAP margin in their automotive division. These are very healthy margins. As Model 3 production ramped up — and famously encountered difficulty — Tesla’s gross margins fell, bottoming out at 13,8% non-GAAP and 18,3% GAAP, before rising back to 18,8% non-GAAP and 19,7% margin.
Now, working against Tesla’s budget sheets has always been two big line items: research and development, and SG&A (Sales, General & Administrative expense). The first, however, rises little to none in proportion to the volume of vehicles being manufactured. The latter rises somewhat in proportion to manufacturing volume, but less than linearly, and more to the point you have to pay much of it in advance of reaching high volumes. In short, over the coming years, these will become swamped by the (ever growing) automotive margins. Nothing to mention Tesla’s emerging solar and energy storage product lines, both of which should start becoming significant late this year.
4. Let’s just pretend that none of that was true.
And let’s pretend that Tesla was actually in trouble, for the sake of argument.
- Tesla has significant physical assets which they can borrow against which they have not yet borrowed from.
- Tesla can reduce R&D at will (and to a lesser extent, SG&A) — the two main negatives on their balance sheet.
- Tesla can dilute its stock by issuing new shares; with nearly half a million people on a waiting list, the intrinsic value of the company means that there’s always going to be a buyer.
- Musk can create contracts at will from SpaceX (and, to a lesser extent, Boring Company). SpaceX is on a roll and flush with cash.
- Musk can sell off a portion of his SpaceX stake to personally bail out Tesla. There’s a massive demand for buying into SpaceX that hasn’t been able to be filled because it’s privately held. And Musk has shown repeatedly throughout his history that he isn’t, if anything, afraid to go personally “all in”.
To sum up: Tesla is in no way, shape, or form going away. Period.
Oh, and I forgot to mention the executive departures: there have not been an unusually high rate, Tesla just has an unusually large number of people at the director/VP level or higher. But don’t let that interfere with breathless headlines like “Tesla Executives Continue To Flee As The Company Goes Rogue” (Forbes), “There's something wrong: Tesla's rapid executive turnover raises eyebrows as Musk thins the ranks” (Financial Post), etc.
5. The scaremongering, however, does not appear to be going away either.
1,3 million people die in road accidents per year. How many of them do you hear about? Yet literally every time someone dies in a Tesla (vehicles which are becoming increasingly common, and thus will be crashing more often), it’s front-page news — sometimes covered for weeks on end. If there’s a fire, the story is “EVs are dangerous in fires” or “Teslas are dangerous in fires”, despite this having been debunked years ago, and again recently. A gasoline vehicle is statistically five times more likely to catch fire per unit distance travelled than an EV. In the US alone, 174000 gasoline and diesel vehicles burn per year; where’s the headlines?
The reason for the safety, in case anyone is curious, is that the individual battery cells are not only physically isolated from each other, but also surrounded by non-flammable coolant; the rupture of one cell just dumps its heat into the coolant. A pack generally has to be severely mangled to be able to burn. Here’s the front of a Model S that was literally burned to the ground without managing to catch the pack (further back, under the driver and passengers) on fire:
Of course, if there’s no fire, the standard fallback is, “blame it on Autopilot”.
Tesla has by far the most vehicles on the road with level 2 autonomy features. Level 2 means a combination of a human and a computer, with the human in charge. This contrasts with level 3 (the computer is in charge, but the human must be able to take charge at a moment’s notice), level 4 (the computer is in charge and can get itself out of trouble, but cannot drive in all conditions on its own), and level 5 (the computer never needs assistance). 1/3rd to 1/2 of all miles in Teslas are driven on Autopilot. Every time there’s an accident, there’s immediately entirely-baseless speculation that Autopilot was on.
Take, for example, the recent Tesla crash near San Ramon, CA. Right away in the first paragraph, speculation that Autopilot was on! Then again, 4th paragraph! Then concluding with a paragraph talking about deaths that have occurred when on Autopilot. Because of course, when you don’t know the facts, the perfectly responsible course of action is scaremongering, right? Of course, nestled in-between in this little nugget:
The driver's speed in the 35-mph zone was not yet known, but "it was great enough to leave the roadway, hit a fence, keep going down an embankment and into a pond on the property," Jacowitz said.
The fastest AP would allow you to drive on that road is 40mph. If the car was moving at a great speed, by definition Autopilot was not on. Despite having all of the evidence right in front of them, did they bother to mention this? Of course not.
By the way, Autopilot was not on. As is most commonly the case. The initial story got a huge amount of coverage. The reveal? Very little.
Of course, when Autopilot was at fault, they cover it for weeks or more. They’re still covering the highway speed crash into a stopped fire truck that left a woman (who was using her phone and not looking at the road) with a broken ankle. I’ll repeat: a highway speed crash into a stopped fire truck left her only with a broken ankle. Teslas have an amazing safety record, with an average fatality rate of 1 in 320 million miles, compared to the US average of 1 in 86 million. Yes, they’re on average newer, and yes, they’re on average in a higher price category. But this is nonetheless an amazingly good safety record. And to reiterate, 1/3rd to 1/2 of all miles on Teslas are on Autopilot.
One can rightfully understand why hearing “Is that the car that kills people?” is amazingly frustrating.
As an aside: we’ve probably all heard of the Consumer Reports testing, where they talked about how much they loved the vehicle, but couldn’t recommend it because after one emergency braking stop, subsequent braking stops were inconsistent in length, and sometimes worse than a pickup. They also reported problems with wind noise and a stiff ride (although these have been fixed for months; the CR cars are early production). Not as widely reported: Tesla diagnosed the problem remotely (ABS calibration), fixed it in a day, and rolled out the fix within a week. Compare that to, say how GM handled the ignition switch controversy — a decade of denial and downplaying. Just days ago, Fiat announced a recall for 5,3 million cars due to cruise control getting stuck on, leaving drivers in the terrifying position of having to fight their car to a stop with the brakes. But it got almost no coverage compared to the Model 3 testing, which required two emergency stops in a row, to brake like a pickup.
Regardless, Consumer Reports plans to retest.
6. Who needs shorts when you have UAW?
I’m normally very pro-union. I'm a union member at my current job, and (unsuccessfully) voted to unionize in my last job. But UAW’s actions in this regard have left a very bitter taste in my mouth.
Tesla’s Fremont factory used to be NUMMI, a GM-Toyota joint venture — and a UAW shop. During the automotive downturn in the late ‘00s, there was pressure to cut back on US manufacturing. To save their Detroit base, UAW dropped NUMMI like a hot potato. Workers were furious.
Because Tesla moved in, many of these same people now have jobs again, and UAW is about as popular there as the plague. They’ve been trying to unionize the Tesla factory for years and haven’t been able to get enough signatures; they can hardly even get anyone to show up to a free BBQ. But hey, if you can’t beat them, why not spend nearly half a million dollars to smear Tesla?
UAW frequently argues that the Tesla factory is “unsafe”. Most commonly they rely on data from three years ago (when Tesla was still learning mass manufacturing), which showed their factory as having a 33% higher injury rate than the national average (8,8 recordable incidents per 100 workers). Ignoring that they’re around the national average now, UAW neglects to mention that when the plant was a union shop, it had an injury rate of 30-45 recordable incidents per year before Toyota stepped in, and even in its later years was double the rate at the Tesla factory today.
(And for the record — Musk has publicly called for a vote on unionization).
7. But hey, send in the cavalry.
Step up Reveal, an “independent journalism organization” to start “reporting” on Tesla. Quotation marks are normally considered to denote sarcasm, and boy do I ever mean it.
Reveal seems to have made it their goal to prove that Tesla’s Fremont factory is some horribly dangerous place — in a manner that’s covered with UAW’s fingerprints. Strangely, they never thought to bother to mention a single injury anywhere else in the auto industry, because I guess everyone else is spotless. They additionally push the notion that Tesla has been “keeping injuries off the books”, ignoring that Cal/OSHA is probably the most stringent auditor in the nation and Tesla has never been cited for doing so (while the Big Three have been repeatedly cited — but you wouldn’t know this from listening to them). Mainly, though, they focus on “personal stories”, which are nice and convenient because even if they’re false, the company can’t respond because it would interfere in any potential litigation.
The first of their “personal stories” was about how a person involved in developing the factory was told that they can’t use yellow caution tape or beeping forklifts because they offend Musk’s sensibilities. The lack of these things, according to Reveal, could be to blame for the “high” rate of injuries.
Now, apparently Reveal never discovered The Google, or couldn’t allocate 30 seconds for fact checking, because literally you just go to Google Images or YouTube and search for the Tesla Fremont factory, and here’s what you see:
Etc, etc, etc.
After being repeatedly badgered by Reveal on Twitter, Musk responded sarcastically:
Cool, we can do the interview at Tesla in front of the yellow barriers & beeping forklifts you said didn’t exist. Please send your meeting request to firstname.lastname@example.org.— Elon Musk (@elonmusk) May 21, 2018
Now, having been duly corrected about their error, Reveal did the proper journalistic thing and promptly posted a retraction... haha no, I’m just kidding, they made no mention of their falsehoods and just doubled down on their single-target hit piece series.
In Reveal pieces, you can see the similar fact checking quality applied to everything they do. You’ll learn about the guy injured in an arc flash which threw him “15-20 feet through the air”, because apparently the laws of physics have stopped working and we now live in a cartoon. (Yes, we’ve all seen people “thrown long distances by explosions” in the movies; that doesn’t happen in real life. That’s done with hydraulics). You’ll also hear about the guy who was left with “permanent lung damage” when a piece of metal being welded near him caught fire and he breathed in the fumes. As someone who also welds, I know the sickness well; if you heat galvanized steel too much the zinc coating can catch fire, and the resulting zinc overdose you get from breathing the fumes leads to uncomfortable symptoms very similar to the flu. Also similar to the flu in regards to the fact that unless you overdose so much that it kills you, it goes away. Zinc is an essential dietary nutrient; your body digests it over time. You cannot be left permanently disabled by a zinc overdose.
Of course, Reveal has shown no interest whatsoever in fact checking. If you have anything bad to say about Tesla, by all means, give them a call. They'll write an article about whatever you tell them.
8. Enter Twitter.
For a while I had thought it was just we — Tesla owners and people on the waiting list — who were getting extremely frustrated by the way Tesla was being covered. Musk had — with the occasional snarky comment or retort — mostly been staying silent. That changed late last week. Irked on by a combination of aggressive UAW supporters on his twitter feed, Reveal, and an unfortunately timed false article condemning him for meeting with the Saudi crown prince due to Yemen (he never met with him; the journalist posted a retraction), Musk started tweeting about his annoyance with false reports and announced plans to create a crowdsourced site where users can rate journalists for accuracy. And Twitter lost its collective mind.
Just over the weekend it spawned four new controversies. From least significant to most:
1) NanoGate: Musk criticized a person (in response to their criticism of him) as them not being an actual scientist because they were crowdfunding “nanotech” research, and Musk considers nanotech to be a vacuuous buzzword. This is being widely spread (somewhat in the press, but mainly on Twitter) as “Elon hates science”.
2) CultGate: A person with legitimate journalistic credentials (Jens Erik Gould) tweeted to Musk an op-ed on The Knife analyzing recent coverage of him in the press, noting their heavy use of weasel-words about him and generally only citing one side of any given story. What Musk didn’t know (and wasn’t immediately obvious) is that Gould is now involved with a recently-prosecuted cult (NXIVM), and The Knife is one of their websites. When this was pointed out to him, Musk deleted his retweet and apologized. This is being spun (particularly in the press) as Musk just randomly tweeting out op-eds from a cult site because they happened to suit him.
3) MisogynyGate: Journalist Erin Biba — who had previously written personal attacks against Musk on Twitter (including about his genitals), but then hid her twitter feed when they were pointed out — condemned Musk for “attacks on science”. He responded, “I have never attacked science. Definitely attacked misleading journalism like yours though.” Biba responded by accusing Musk of misogyny, in a conversation that had literally nothing whatsoever to do with gender. She recently wrote an Op-Ed on the Daily Beast talking about receiving personal attacks from “MuskBros”, saying that Musk’s following on Twitter is “angry men”, even though just a cursory reading of the comments shows around a 50-50 gender split.
Is it worth mentioning that SpaceX’s president of 10 years, hand-picked by Musk (and one of the company’s first employees), is Gwynne Shotwell?
4) AntiSemitismGate: Perhaps the most ridiculous. When someone tweeted to Musk suggesting that powerful people were trying to destroy the media, Musk responded, “Who do you think*owns* the media?” A concept that we here, annoyed at Sinclair and the Murdoch empire, would quite agree with. But of course, why interpret something according to context when you can turn it into a smear? That’s right — the interpretation Twitter went with — and shamefully, some press accounts — was that Musk was trying to say that Jews control the media. Even more annoyingly, this led to an influx of deplorables into Musk’s twitter feed.
In case it needs clarifying:
Pointing out to aspiring journo & Rodin spokesmodel, Josh Top, who thinks public polls are controlled by “powerful people” that the media is *owned* by same. Anyone who thought this was anti-Semitic is just revealing their inner bigot. The context is very clear.— Elon Musk (@elonmusk) May 28, 2018
For the record: while he’s not Jewish, Elon is a Hebrew name, and he’s proud of it. This year he took his children to Israel on spring break to learn about the country’s history.
To sum up: I have plenty of disagreements with Musk. I think his journalism rating site is a dumb idea (crowdsourcing just leads to fights and ballot stuffing). I disagree with his universe simulation hypothesis, or that intelligent AI is around the corner. I think self-driving will take longer to mature than he assumes, and I think Venus is a better colony destination than Mars. I could make a long list of disagreements. But this level of attempts to distort and smear literally anything about him have been taken to absurd levels as of late.
Likewise with Tesla. Tesla can rightly be called out for setting way too aggressive schedules for itself, then failing to meet them. Early production vehicles are often not as refined as they should be (although Tesla nonetheless generally gets stellar owner satisfaction ratings). The Model 3 delays will slow down their expansion plans, and allow some of the late-to-the-EV-party automakers a chance to catch up a few years from now if Tesla isn’t careful (VW in particular is finally spending big). But in general, I think they’ve plotted a very prudent course — recognizing first the potential for li-ion EVs, changing their image, changing the concept of how long charging should take, and seeking to bring costs down while maintaining profitability through sheer scale. And regardless of whether you like them or not, they’re going to be around long into the forseeable future. Regardless of how desperate the people who shorted the stock in the $250s are to see that not happen, or how much bad reporting they can generate.
And in case anyone’s curious...
Model 3 Timeline:
* Production rate before the most recent downtime: various lines running between 3,5k and 6k per week
* Current downtime targeted at bringing them up to 5-6k per week, this quarter’s goal
* Next quarter’s goal: stabilize at 6k and improve automation. Q3 is to be Tesla’s first sustainably in-the-black quarter (although I personally hope that they don’t slow down their investments into expansion just to look good to Wall Street).
* Current delivery focus: Canada and stockpiling, to avoid hitting the 200k trigger for the tax credit to start going away until Q3 (meaning the credit will remain full through Q4, halved Q1-Q2, and quartered Q3-Q4 of next year, then disappear).
* AWD and Performance packages: Being released right now. Deliveries of performance come before AWD.
* Standard battery pack: deliveries 3-6 months after hitting 5k/wk. So if they hit 5k/wk in June as planned, then Sept-Dec. If they do it next month, Oct-Jan.
* Eurospec / Chinaspec: early 2019
* Right-hand drive: mid 2019.