Tesla’s ‘roller-coaster’ year has shown why it needs to be more like a traditional car company to have long-term success

Elon Musk.

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Elon Musk.
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Max Whittaker/Getty Images

  • The first six months of 2019 demonstrated the limits of Tesla’s ability to create optimism through big promises and unconventional decisions.
  • Big announcements about retail strategy and autonomous-driving technology appeared to fall flat with investors.
  • But Tesla scored a major victory with strong second-quarter sales numbers.
  • And the electric-car maker has taken steps to improve weaknesses that are essential parts of the car business, like delivery logistics, vehicle service, and cost discipline.
  • Visit Business Insider’s homepage for more stories.

During the first half of this year, Tesla has faced the prospect that to have long-term success it will have to master the areas where traditional automakers excel, even as the electric-car maker has built its business on the idea that the auto industry’s future will look very different from its past.

The first six months of this year demonstrated the limits of Tesla’s ability to create optimism through big promises and unconventional decisions, with two announcements that highlighted the differences between the company and its more traditional competitors. Both appeared to fall flat with investors.

“It’s been a bit of a roller coaster,” Jeremy Acevedo, the manager of industry analysis at Edmunds, told Business Insider.

Tesla did not immediately respond to a request for comment on this story.

Elon Musk.

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Elon Musk.
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Mark Brake / Getty Images

Unconventional moves fell flat

In February, Tesla said it would close many of its stores and convert the remaining ones into galleries and information centers as it shifted to an online-only sales model. Less than two weeks later, the company said in a blog post that it would “keep significantly more stores open than previously announced.” Between the two retail announcements, Tesla’s share price fell by a little over 7%.

“I’m still not sure what they were trying to do there,” said Gene Munster, a managing partner at Loup Ventures.

A little over a month later, Tesla gave a presentation to shareholders about its autonomous-driving technology, during which CEO Elon Musk said the company was far ahead of its competitors and would have fully autonomous technology ready next year. The prediction was met with skepticism by experts, and Tesla’s stock fell a little over 7% in the week after the presentation.

“It was unwise to make the prediction of full self-driving by the end of next year, because I genuinely don’t think that’s going to happen, and I think people are going to remember that one,” said Karl Brauer, the executive publisher of Kelley Blue Book.

The two announcements bookended a disappointing first-quarter delivery report that created temporary concerns about demand.

Read more: Tesla has always had a paradox at the heart of the company. But that might all be about to change.

From the beginning of January to the end of June, Tesla’s share price fell by over 31%, suggesting investors are beginning to rethink the way they value the company.

“I think that the company today is being viewed more as a traditional auto company,” said Maryann Keller, the principal at the automotive consulting firm Maryann Keller & Associates. Tesla’s share price is unlikely to return to its highest levels unless the company becomes profitable, Keller said.

Even then, Tesla’s shares, priced at about $250 when markets opened on Tuesday, still trade well above those of competitors like General Motors, Ford, and Fiat Chrysler, each of which is much more profitable than Tesla, suggesting there is still considerable optimism among investors about Tesla’s future.

Tesla Model 3 Review

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Matthew DeBord/BI

Strong sales numbers fueled optimism

Despite the difficult start to this year, Tesla scored a significant victory by setting a record for vehicle deliveries in one quarter from April to June, its third record-setting quarter in the past four.

“The sales results for Tesla have been strong,” said Michael Ramsey, an automotive analyst at Gartner. “Even if they haven’t met some people’s expectations, it’s still somewhat remarkable that they’ve had the volume they’ve had, considering they only have three vehicles.”

And while Tesla failed to generate excitement with its more unconventional decisions, it has taken steps to improve weaknesses that are essential parts of the auto business, like delivery logistics, vehicle service, and cost discipline.

The strong second-quarter sales numbers indicated an improved system for delivering vehicles to international customers, an area the company blamed for its poor first-quarter results, and multiple service initiatives Tesla introduced this year could make the repair process easier for customers.

The efficacy of Tesla’s cost-cutting measures, which Musk described in a May email to employees, will become clearer in the company’s upcoming earnings reports, the first of which is scheduled for July 24. The report will follow a big first-quarter loss, which came after Tesla’s first consecutive quarterly profits in the second half of 2018.

The site of the new Tesla factory.

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The site of the new Tesla factory.
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Reuters

The China factory and the Model Y are keys to long-term success

How Tesla executes on two big projects will play a major role in determining how sustainable future profits could be.

The first, a factory in Shanghai where Tesla hopes to start production before the end of this year, is designed to lower delivery costs and allow the company to avoid tariffs in China, the world’s largest market for electric vehicles.

The second, the Model Y crossover SUV, will give Tesla a new entry in the lucrative SUV market when it’s released late next year.

“SUVs are very appealing right now for consumers,” Brauer said. Of the Model Y, he said that “there’s more profit built into that car.”

The Model Y shares many parts with the Model 3 sedan, which should help Tesla avoid the expensive production issues that hampered the Model 3’s rollout.

“Their biggest priority in the next six months should be ensuring that the Model Y is produced with as little drama as humanly possible,” Ramsey said.

If Tesla successfully launches the Shanghai factory and the Model Y, it will represent a big step in the company’s quest to join its strengths in vehicle engineering, software, and branding with the operational competence needed to turn them into profit generators. But if Tesla runs into significant logistical and financial difficulties with the two projects, it may find that investors are hesitant to fund continued losses.

“What would really worry me about Tesla is if there was any indication that they went out to borrow money and people weren’t interested in giving it to them,” Ramsey said. “So far, that hasn’t happened.”

Have you worked for Tesla? Do you have a story to share? Contact this reporter at mmatousek@businessinsider.com.