Is Tesla in Big Trouble? Signs Point to Yes

An April 5 report by Reuters news agency that Elon Musk had canceled the long-awaited low-cost Tesla small car sent shockwaves through Wall Street. And rightly so. The promise of a $25,000 Tesla subcompact electric car built in high volume has become the kite that has kept the company’s stock price flying. But analysts wondered: If Musk is abandoning this flagship project, should Tesla still be the most valuable automaker on the planet?

Making a big bet on a small car is a high-risk strategy, as many automakers have discovered to their cost over the years. However, having watched Musk turn Tesla from a niche startup into a world-beating EV company, the market was clearly willing to believe Tesla could succeed where established automakers had often failed. Underpinning that belief was the idea, colorfully nurtured by tech-bro-in-chief Musk, that Tesla was in fact a tech company, not an automaker, and so not subject to the same rules of engagement as traditional automakers like Toyota, Volkswagen, Hyundai, and Ford.

The reality suggests otherwise. And as Elon Musk is discovering, reality bites.

The ever-combative Musk immediately lashed out at the Reuters report, writing on his social media platform X, formerly known as Twitter: “Reuters is lying (again)”. But he’s been far from clear as to the status of Tesla’s small car program.

The Robotaxi Move Is Spooking Investors

Two years ago, Musk claimed the company was not working on the car—initially dubbed the Model 2, but rumored to be called the Model C or Model Q when it reached production—because it had too much else to do. In January, however, he said he was confident production of the car would begin at Tesla’s plant in Austin, Texas, in the second half of 2025. He immediately added a major caveat, however: “I say things that should be taken with grain of salt because I am optimistic.”

Then, late on the evening of April 5, Musk wrote on X: “Tesla Robotaxi unveil on 8/8”. That cryptic post was interpreted by some Tesla watchers as confirmation of rumors the Model 2 project was being repurposed to deliver the self-driving taxi concept Musk first talked about in 2019.

Pivoting to producing the Model 2 as a robotaxi rather than the Toyota Corolla of the EV era—Musk once claimed Tesla would build 700 million Model 2s over the car’s lifecycle—a represents a fundamental change in Tesla’s business model. When he announced the robotaxi idea, Musk said Tesla would provide the backend support for owners in return for a service fee of 25 to 30 percent. In theory, that pivots Tesla away from being an automaker to a business that, superficially, looks more like Apple, a company that designs its own hardware and software, but also makes money selling services.

It's a clever idea, but it’s far from clear if the numbers behind it add up. For example, a Tesla robotaxi would likely be built in far lower numbers than a Model 2 aimed at mass market car buyers, which means it can’t deliver the same economies of scale in terms of component prices and manufacturing costs. And its core premise relies on self-driving technology Musk has long promised but repeatedly failed to deliver.

Investors are right to be confused. And nervous.

On paper, Tesla looks strong. The Model Y was in 2023 the world’s bestselling car, and the company finished the year sitting on $29 billion in cash and cash equivalents, up from $4 billion in 2018. It owns its own well-regarded EV charging network and has established a manufacturing plant in China, the world’s largest EV market. But all that’s in the rearview mirror. The road ahead looks littered with potholes. Here’s why.

Tesla Is Heavily Exposed to Fluctuations in EV Demand

Tesla’s global sales for the first quarter of this year totalled 387,000 vehicles, which was 20 percent less than the same quarter last year, and significantly lower than most analysts’ expectations.

Tesla blamed the sales slump on shutdowns at its plant in Berlin and the fact its plant in Fremont, California, is ramping up production of the latest version of the Model 3. But it actually produced 433,000 vehicles during the quarter. As JPMorgan Chase & Co analyst Ryan Brinkman told Bloomberg, the fact Tesla is now sitting on almost 47,000 unsold cars and SUVs “dispels the notion that deliveries were somehow supply rather than demand constrained”.

Indeed, Tesla’s disappointing sales performance reflected what appeared to be worldwide cooling demand for EVs in the opening months of 2024. In China, for example, BYD reported its EV sales were down 43 percent compared with the final quarter of 2023, when it became the first automaker to sell more battery electric vehicles than Tesla.

Of course, a poor quarter does not define a market trend. There is no suggestion that consumers are about to walk away from EVs, especially in China, now the world’s largest auto market and where electric vehicles are accepted as a mainstream technology. But it has highlighted the fact that unlike other automakers, Tesla is uniquely exposed to fluctuations in demand for EVs. For example, BYD’s overall first quarter sales were up 13.4 percent, driven by a surge in demand for its plug-in hybrid models.

Until now, Tesla’s sales story has been one of year-on-year growth as it pioneered a whole new vehicle segment and sold EVs to enthusiastic early adopters. But as EVs become more mainstream, with consumers able to choose from an ever-larger number of products from rival automakers, the segment will increasingly begin to resemble every other segment in the auto industry, where sales growth depends on having the right product at the right price.

Bottom line: Tesla is now subject to the same demand cycles and shifting market dynamics that have challenged legacy automakers since Henry Ford’s time.

Tesla’s Model Range Is Looking Old

The real genius of Tesla—Elon Musk's masterstroke—was to create an ecosystem that made its electric cars viable alternatives to internal combustion engine vehicles. That Tesla’s first mainstream product, the Model S, looked great, was exhilarating to drive, and had a roomy interior was the icing on the cake.

But mild exterior refreshes and interior upgrades, notwithstanding, there’s no escaping the fact the Model S is now a car that’s more than a decade old. The Model X is now nine years old, and still has its heavy, complex, and troublesome ‘Falcon Wing’ rear doors. The Tesla Model 3 and Model Y are relative newbies, being a mere seven and four years old, respectively. But their visual similarities to the larger Teslas mean they look dated.

Cybertruck aside, the company that once set the EV agenda now has one of the oldest product lineups in the industry, with no replacements on the horizon.

The problem is the rest of the auto industry isn’t standing still. Since 2019, the year Musk unveiled the excruciatingly hyped Cybertruck, archrival BYD has launched no fewer than eight brand new mainstream EV models—subcompact and compact hatchbacks, compact and midsize SUVs, compact and midsize sedans and a compact MPV—as well as a luxury EV brand called Yangwang.

Meanwhile, legacy automakers in Europe, the U.S. and Japan have splurged more than $500 billion on EV research and development over the same period. And then there are the disruptors, companies such as China’s Xpeng and Xiaomi, neither of which existed when Musk unveiled the Model S but are already manufacturing EVs that look fresher and better-built than any current Tesla, with their own end-to-end software architectures providing leading-edge functionality and user interface capability.

For a time, it seemed Tesla had overturned traditional notions of automotive model cycles; that over-the-air software updates would stimulate customer demand just as surely as GM’s annual restyling of Chevys did in the 1950s, obviating the need for regular hardware refreshes. But software is now a huge chunk of new vehicle development budgets at all automakers, and product improvements via over-the-air software updates are now becoming the industry norm. Regular restyles or wholesale redesigns of a vehicle’s exterior and interior will be just as important as ever in retaining existing customers and attracting new ones.

And that game is going to get even more intense: Stella Li, executive vice president of BYD and CEO of BYD Americas, says BYD can now develop a new EV from scratch in just 18 months. Its track record in product development suggests Tesla will struggle to compete with an automaker that agile and aggressive.

The Cybertruck Is Probably a One-Hit Wonder

“The Cybertruck speaks plainly,” wrote Scott Evans in our first test review of Tesla’s radical-looking pickup. “Everyone knows you bought it because you think it looks cool and everyone you know and will ever meet will want to take pictures of it and go for a ride in it.”

And that’s precisely the problem. Right now, the Cybertruck is all visual shock and awe and tech-bro street cred. But in five- or 10-years’ time, when its design no longer shocks, no longer awes—and when all the people who desperately wanted one own one—it’s hard to see what its reason is for being. Especially, as we have pointed out, the Cybertruck is neither the best nor the worst truck of all time.

Absent Tesla endowing it with truly compelling, class-leading capability or functionality—the sort of stuff that’s meat and potatoes to truck folks—the Cybertruck has all the hallmarks of a becoming little more than a fashion statement with a relatively short lifecycle, a Nissan Figaro writ large. Comprehensively redesigning the Cybertruck, updating it to make it as cool and confronting in 2034 as today’s truck is in 2024 without fatally compromising the visual DNA that defines the name, will be very difficult.

Thanks to a relentless focus by product planners and designers and engineers on honing and refining the features and attributes truck buyers hold dear, the F-150 has kept Ford Motor Company alive for decades now. The fashionista Cybertruck won’t do the same for Tesla.

Tesla Is No Longer a Premium Brand

With the Model 3 and Model Y compacts between them now accounting for more than 90 percent of worldwide sales, Tesla’s center of gravity has demonstrably moved downmarket since the launch of the larger, more expensive Model S and Model X. But it’s the company’s chaotic approach to pricing over the past 12 months, which has seen prices suddenly cut, and then sometimes raised again, that calls into question Tesla’s image as a premium brand.

The impact of the company’s pricing policy on residual values, how much a Tesla is worth after one, two, or three years, has been dramatic. HSBC recently claimed that while U.S. used car prices have fallen by 14 percent since July 2022, those for Teslas have halved. And customers are not happy. “If you’re a private owner of a Tesla, you’re $20,000, $30,000, or even $40,000 worse off,” a former Tesla executive recently told Britain’s Financial Times newspaper.

Premium brand automakers obsess over pricing and resale values, understanding they reinforce customer perceptions of value. In that context, Tesla’s cavalier approach doesn’t augur well, especially as it now must figure out how to shift those 47,000 unsold Model 3s and Model Ys.

China Is Tesla’s Biggest Threat

China should be a happy hunting ground for Tesla. Last year, Chinese consumers bought almost 6.7 million EVs, making it easily the largest EV market in the world. And Tesla, uniquely, has been allowed to build a manufacturing plant in China without being forced into a joint venture partnership with a Chinese automaker.

But Tesla in March reportedly slowed production of Model 3 and Model Y at its Chinese plant in response to sluggish demand that kickstarted a brutal price war.

China might be the world’s biggest auto market, but it’s also now the world’s most ferociously competitive, with about 150 different automakers chasing customers. And the competition is only going to get more intense. For example, Chinese smartphone and consumer electronics giant Xiaomi recently launched its first car, the Xiaomi SU7, a swoopy four-door it says is quicker than a Model S and boasts a far more innovative and intuitive user interface than anything Tesla has so far produced.

Roughly 80 percent of the 6.7 million EVs sold in China last year were made by Chinese automakers. President Xi Jinping, desperate to kickstart China’s slowing economy, now wants the country to be a world leader in advanced manufacturing, with global leadership in EV and EV battery design, engineering, and production one of the key pillars of a strategy rumored to be costing the Chinese government $1.6 trillion a year. Against that background, Tesla looks to be in real danger of slipping from top dog to scrappy underdog in the global EV business.