April 3, 2020 / 7:38 AM / 4 months ago

Breakingviews - Virus hands Elon Musk electrifying cost challenge

Tesla Inc CEO Elon Musk attends the World Artificial Intelligence Conference (WAIC) in Shanghai, China August 29, 2019. REUTERS/Aly Song

NEW YORK (Reuters Breakingviews) - Elon Musk has a chance to prove to skeptics that he has finally wrapped his head around the basics of running a carmaker. Tesla’s boss seems to have ironed out most of the production problems that have plagued the electric-car maker for much of the past three years, if first-quarter sales numbers unveiled on Thursday are anything to go by. He has also amassed a decent stash of cash, which should be enough for Tesla to go almost a year without revenue before running out of juice. That’s better than either Ford or General Motors can manage. But Musk can only pull that off if he has finally mastered how to keep costs under control.

Musk appeared to be making progress towards the end of 2019: Fourth-quarter automotive revenue of $6.3 billion exceeded expenses by $500 million, as production and sales both recovered from a poor start to the year. That appears to have continued into 2020, with production numbers exceeding 100,000 vehicles for the second quarter in a row. That’s despite operations being curtailed by the coronavirus, which forced a shutdown of Tesla’s California factory in the second half of March.

The company hasn’t just stopped burning cash. Thanks to strong earnings and a surprise $2.3 billion share sale in February, it’s also sitting on almost $9 billion of it. That equates to almost half of the automotive unit’s overall expenses in 2019. A general rule of thumb is that 50% of a carmaker’s costs such as wages are fixed. The rest come from various production needs, which should shrink, if not disappear, when plants are idle. Musk should be able to make that last until March 2021. Ford and GM, by contrast, have enough greenbacks to last around six months.

That gives Musk a significant advantage over his larger rivals. And even if the Covid-19 crisis passes sooner rather than later, Tesla’s better starting position should leave its balance sheet in a relatively better state. But that’s only if its boss grasps these fundamentals. If not, his financial-management shortcomings will soon be apparent.

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