What’s Ailing Tesla?

Tesla is one of the worst-performing stocks on the S&P 500 Index this year amid falling sales of its electric vehicles and intensified competition with Chinese brands. That recently led the company to lay off around 14,000 employees, including the entirety of its team responsible for its U.S. Supercharger network.

The shift in Tesla’s fortunes is being interpreted by some as symbolic of growing U.S. anxiety about falling behind China in critical technologies. What exactly has gone wrong with Tesla? Why is China’s electric car market so much more robust? And will Elon Musk be remembered as a Henry Ford-like figure?

Those are a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast that we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.

Cameron Abadi: How would you define what’s recently going wrong with Tesla? Are its problems characteristic of an industry upstart, or those of an industry incumbent?

Adam Tooze: This question of identity is, in fact, the central question in the valuation of Tesla as a company. Tesla in 2008 was a clear, innovative disruptor, right? It was the company that made electric vehicles chic and proved that they were desirable to affluent Californian customers. That was the Roadster, the breakthrough. We did an episode about this way back. Bears on Tesla now basically see it as an incumbent first mover in a rapidly growing segment of an existing industry.

So, it’s gone from being this boutique, innovative, out-of-the-box, disruptive purveyor of high-end EVs to being a car company in an industry where all car companies are moving toward various types of hybrid and electric vehicles. And it’s just one of those, and it’s caught up in that transition.

The response by Musk—and this is where the identity thing comes into it—is to say, “No, no, no, no. We’re not a car company first and foremost; what we basically are is an AI company on wheels.” So, you get analysts who engage in this bizarre rhetoric about [how] artificial intelligence is looking for its robot body and the robot body is the car. But if you actually look at the revenue of the company, of Tesla’s total quarterly sales so far this year, that was $21 billion, and 82 percent of [that] came from automotive. So the effort is to sort of rebrand it as something that it’s not. The Tesla official line is, “No, we’re not a car company,” believe it or not. But 82 percent of their business is cars.

And if you look at their car business, they increasingly look like just another competitor in an extraordinarily intense, fierce competition for no longer the ultra-high-end, but the middle market of electric vehicles. They have come under and are now a major driver of price pressure. They were once a premium producer with very large margins. And the consequence of the competition that has entered this segment across the board is that their average vehicle prices have fallen from over $50,000 down to $38,000. Margins are squeezed in the same way. And at the same time, there is huge pressure for them to engage in capital-expenditure investment to develop new models, to roll out production, to meet demand, and so on.

None of this would be as intense and frenzied were it not for the extraordinary stock market valuation that the company had attracted. In its disrupting-the-car-industry mode, it attracted absolutely spectacular valuations. And the worry in the American commentary on this is as much about the sustainability of those valuations as it is the fate of Tesla as the producer of decent-quality, high-performance electric vehicles.

And the numbers here are staggering, right? The price-to-earnings ratio—the price that you pay to buy a unit of Tesla stock in relation to the earnings that it generates—is 86. For VW, which is a plausible comparator in the automotive space, the ratio is 5. So even if for the sake of argument we say that Tesla is, as a car maker, four times more promising than VW, you’d be at a valuation of 20 as opposed to 5-to-1, in terms of the price-to-earnings ratio. And that would involve a 75 percent fall in the value of Tesla’s stock.

This frantic effort to rebrand it essentially as an AI company on wheels, by way of the focus on autonomous driving, is all about maintaining that gigantic equity premium on which Elon Musk’s wealth, his fame—the entire Tesla-Musk phenomenon—is based. If he was just the CEO of a VW or another marginally better-valued car company, we wouldn’t be in Musk World in the way that we are. And this frantic effort to innovate, to create new narratives around the company, is part of the effort to justify this 20-times-higher price-to-earnings ratio that Tesla enjoys over VW.

CA: Electric cars have a much higher market share in China than in Europe or the United States. What are the factors that have contributed to that success in China?

AT: Yes, China is really the giant, the driver of this technological shift. And it’s important to note that this, along with solar power and wind, is an area where China is really leading the world in modernization. There are certain European societies with very high rates of EV adoption, but they’re tiny by comparison, whereas China is the largest vehicle market in the world: 26 to 30 million units, depending on how you count it. It’s absolutely gigantic. It decides the future of the global industry. Certainly the globally active players, like Toyota or VW or Hyundai, are all essentially focused on the Chinese market.

Between 2020 and 2023—and the story is moving so fast that the numbers are rapidly rendered out of date—but in that period, electric vehicle production in China rose from 1 million to 6 million. So last year, EV sales were about 25 percent of the Chinese market. The figure will be even larger this year.

And the chronology is significant here because we think of 2020 to 2021 and 2022 as COVID time—kind of a paralysis of the Western economies—and we think of China as somehow having also suffered some terrible lockdown. But this is a misunderstanding, right? The Chinese economy was locked down early in 2020 and then actually rapidly grew for the rest of 2020 and 2021. And one of the leading sectors that we just weren’t paying any attention to—so it really caught the West by surprise when it exploded onto global markets in 2023—was this growth in Chinese electric vehicle production. So whilst we were obsessing about face masks and vaccinations, the Chinese were pushing really hard into this pioneering new space.

And a key element of this is subsidy, and one element of this is market size. It’s always easier to innovate when you’ve got a big, relatively homogenous market, which the Chinese have, and a market which isn’t deeply entrenched in internal combustion engines. The Chinese don’t have a long tradition of domestic internal combustion production: They bought Toyotas, they bought VWs for a time. They also bought General Motors vehicles. But it’s not a big wrench for the Chinese, unlike for the Europeans and the Americans, to transition to driving electric vehicles. So, it’s a big market which is uniform and relatively easy to shift.

It was also a market which was very heavily subsidized. The very latest package is an Inflation Reduction Act kind of scale package, which the Chinese government rolled out end of last year. It was 520 billion yen, so like $72 billion. That’s the largest single package they’ve done. But they’ve had 10 years of various types of tax-based subsidy and disincentives for internal combustion engines. The key thing in China is whether you can get a license plate, the permission to actually drive the vehicle. In urban areas, many local governments really crack down on the issue of internal combustion licensing plates. They have massive pollution problems.

And the scale of the Chinese subsidies per vehicle is significant. Again, it’s kind of similar to the levels of spending here—roughly $4,000 per vehicle. So, significant subsidies from the government to consumers to drive this transition for 10 years and the resolute and firm commitment by the government to doing this. You don’t have to worry if you buy one of these in China, unlike in the U.S., that there’ll be an election and the government will change, and then you’ll have a White House that is determined to actually roll back the subsidies. Not happening in China. There’s a credible commitment to this transition, which has now acquired huge scale.

But the Chinese miracle can only really be understood if you recognize the combination of the large, relatively uniform market, the very significant industrial policy subsidies, and—this is the crucial bit—hugely innovative, massively competitive, creative destruction within what is, broadly speaking, a hands-off, publicly subsidized but largely autonomous and private sector. They started out with over 100 producers and have whittled this down to about a dozen. There are bankruptcies across the board. And what you’re left with then is a champion group of producers; the two leading ones are BYD and Geely. And Geely is on the same level of Tesla in the Chinese market, about 150,000 units per quarter.

BYD is off in a space all of its own. BYD is producing electric vehicles at a scale which no one else is doing. They’re selling 600,000 to 700,000 units per quarter. These are gigantic sales. The other thing they’re doing is partnering with local government in a very effective way to build out charging infrastructure and figure out operational solutions. And then the third thing that the Chinese companies are globally notorious for is rigorous, absolute systematic focus on batteries.

This is the key technology, and they recognized this extremely early on, in the same way as Ford recognized that mass manufacturing internal combustion engines is really the key to mass production, because machining internal combustion engines is very difficult. With electric vehicles, the engines are much easier to make. The technology you have to master is powerful, long-duration, light batteries. And this is where the Chinese focused. Of course, they also have the rare-earth supplies within China, so it’s this combination of factors.

CA: Do you think we’ll remember Elon Musk as a Henry Ford-like figure—as the person who made the vision of mass-market cars into a reality? Or will there be some other figure, a Chinese figure, who will fill that role? Or is this at all a useful lens through which to think about the process of innovation and entrepreneurial creativity that’s involved in this kind of industrial transition?

AT: I think the way to think of them is less as iteration or repeat, but more like bookends. So, Ford initiated the beginning of the internal combustion engine mass revolution. And Tesla, you could reasonably claim, initiates its end, in the sense that it points forward to a new future.

And if you look at the business press, there’s a bunch of other slightly less flattering comparisons being drawn. Both of them had kooky politics. In Elon Musk’s case, one has to say, a sort of ambiguous and hard-to-define extreme tolerance for right-wing opinion that’s very disagreeable. In Henry Ford’s case, just an out-and-out conspiratorial antisemitism. He’s one of the main channels through which the infamous, poisonous Protocols of the Elders of Zion made its way into the Anglosphere. He bought a newspaper like Musk bought Twitter.

You could also say, and this is where the backbiting really starts, that they may also be instances of the way in which distraction in senior corporate leadership leads ultimately to corporate failure. Ford bestrode the world in the 1920s. About half the world’s cars in the early 1920s were Model Ts. By 1929, Ford had been outflanked by GM. Ford was spending his time worrying about hydroelectric power, airplane manufacturing, projects in Central America and Latin America, whilst Alfred P. Sloan and General Motors actually became the dominant U.S. firm. And you could see a sort of similar story between Tesla and BYD playing out here. Ford was really rescued by his grandson and by the demand of World War II that shifted the company.

But I think the more important point to focus on is the car-making business and the political economy of this, because there’s a fundamental difference between the two men in this respect. And it’s very telling about the different epochs that we are in. I mean, Ford didn’t invent the car or demonstrate to people that the internal combustion engine was superior to horses. What Ford did was to find out a way of making them very, very efficiently and therefore cheap. And that’s really the key innovation of the Ford era. That’s not the same with Musk, right? Musk is a man who basically broke open the imagination of the world. But the product that he created in the first generation of Teslas is an extremely high-end vehicle, sold on larger scale than before, because the market for affluence is large in the United States today, but it was never a play on low price.

Whereas Ford was driving always toward the lowest possible price for his vehicles. I mean, the Model T Ford in the early ’20s was about $260. In modern-day money, that’s about $4,400. So even allowing for inflation, it was a cheap vehicle. Teslas have always been toward the high end of the medium- to high-end car market—a very, very different offering. Ford was able to do this because his production lines and the techniques that were deployed were so efficient. We could do a whole episode about the actual underlying logic. It’s quite interesting; it isn’t just simply the assembly line.

But the other thing that Ford did was to combine this with a very high rate of pay to compensate workers for the extreme stresses of the new production system. Famously, in early 1914, Henry Ford introduced the $5 day for an eight-hour day, six-day week. This suddenly created a newly affluent American working class. It’s the origin of the conflation and confusion in American discourse of the working class with the middle class, because somebody working in a Ford factory could buy a Ford car in a matter of months from their salary, right? And so, over the course of the year, if you were crazy and not doing anything else, you could afford several cars whilst earning a Ford salary.

Tesla’s model is completely different. Tesla’s model cars are expensive and its workers are non-unionized and are paid below UAW rates. Now, Ford was a dogged anti-union man, but the way in which he kept his plants union-clear was actually to pay—at the time—outlandish, fantastical wage rates. No one had ever earned this kind of money before. Tesla’s deal is much more, as [Musk] says, “hardcore,” right? You either want the job or you don’t, and you take it on his terms.

It’s been an extraordinary shock to Tesla to discover that there are highly sophisticated places in Europe in which you simply can’t do business like that. Tesla in Sweden right now is paralyzed by a mass of sympathy strikes, which mean that, for instance, people won’t deliver mail to Tesla showrooms in Sweden and therefore they can’t get the license plates to put on the cars because the postal union is striking in solidarity with the metalworkers union that wants the mechanics in Tesla garages in Sweden to be unionized. Massive ongoing struggles about the unionization of Tesla’s plants in Germany as well.

Will Tesla ever shift to a Ford model? Two elements would have to shift. Elon Musk would have to change his views about trade unions. I think that’s extremely unlikely to happen. But the real question on everyone’s mind is does Tesla have a value player? Does Tesla have a budget model car in its development pipeline? And frankly, we just don’t have clarity about this. And part of the obfuscatory talk about Tesla as an AI company and as anything other than a car company is really to avoid the question of what car they are going to make next.