Ed Wallace

Wanted: Dead or Alive

In the 1980s famed American business thinker and guru Peter Drucker referred to Wall Street and its traders as “Balkan peasants stealing each other’s sheep.” After the Financial System Meltdown of 2008, many business journalists resurrected Drucker’s wisdom and advice; one, Bloomberg’s Rick Wartzman, pointed out that the collapse resulted from a disregard for the fundamental lessons Drucker taught about risk, reach, and responsibility.

This is worth considering, what with all the stories written since May 20 about the serious financial problems that are threatening to finally shut down America’s hippest, most desirable and worst-run car company, Tesla. Many resembled CNN’s May 22 headline, “Wall Street’s Love Affair with Tesla is Over.” That story related the company’s list of problems, which seems never-ending — its stock has fallen 40 percent, its sales have dropped massively, it’s been forced to close stores and raise prices, and its backlog of Model 3 sales seems to have been filled. The story went on to say that competition from “Honda, Hyundai, Kia, Volkswagen, BMW and Jaguar” electric cars now, and from Audi, Porsche, and Mercedes EVs in the future, might create more problems than Tesla’s Elon Musk can solve.

Tesla is far from fine. But for the record, almost everything said in that story is bunk.

First, persons of a certain age have seen Ford’s stock below a couple of bucks twice in our lifetime, while Amazon was down around $1.50 at one point in its history. A stock fluctuating in value has nothing to do with whether or not Tesla will survive.

True, Tesla did say it would close stores; but that statement was almost immediately retracted. Apparently, someone in accounting reminded the CEO that there were actually signed leases on those properties, and closed or not the expense wasn’t going away.

Raising prices is not a sign of anything bad in the auto industry. If it is, then every last car company in the world is about to collapse, because they all raise prices regularly.

As for the competition from other car manufacturers? So far, during many fiscal quarters, the more the competition ramps up, the more cars Tesla sells. So, the crux of the article — that Tesla is in trouble and Wall Street is falling out of love with Tesla — is true. It’s the explanation of why the company is in trouble that’s incorrect.

WTH is Happening Here?

Tesla has been in trouble since the day its doors opened, because of the fundamentals of cash intensive large-scale consumer manufacturing in something as fickle as the automobile industry. But let’s walk this story back to January of this year. The news was all positive then; Tesla had remarkable sales going into the end of 2018 — but more important, it turned the first two back-to-back quarters of profits in the company’s 15-year history. While things might have been tight, it looked like Tesla was finally over the hump.

Ninety days later it was Katy bar the door again. According to reports, Tesla’s sales had one of the worst collapses in the automobile industry’s history, quarter over quarter, and now the company was in desperate need of new working capital or it just couldn’t survive. One month later, or the first of May, Tesla was once again saved by Wall Street’s ability to raise another $2.7 billion from both new stock issuance and bond sales. Demand was so high that they raised $400 million more than Elon Musk had been asking or hoping for. So apparently Wall Street still loved Tesla a month ago.

Two and a half weeks later, the narrative changes to an endless run of stories that the Wall Street-Tesla love affair is now officially over.

Does anyone other than myself find it ominous that one week Wall Street easily raises so much money for a company that’s never made money — and just weeks later completely distances itself from the same entity? How is this any different from Wall Street’s buying up all those junk mortgages, cutting them up into tranches, paying credit rating firms to mark them as “AAA” investments, and selling them off to unsuspecting investors — and then, knowing those mortgages would go bad, buying credit default swaps so the Wall Street bank gets paid full face value a second time when the rube, excuse me, investor is burned?

Wall Street knows that the underlying problems that make Tesla a questionable company going forward are the exact same issues it has had since day one. More important, although Elon Musk disparaged America’s dealer system, that’s a crucial element: A manufacturer relies on dealers to stabilize factory output by guaranteeing X number of orders every week for any given factory. Without dealers Tesla becomes the object lesson, having the best two quarters in its history and then a near total collapse in business in the first quarter of 2019.

Saab went out of business building more vehicles than Tesla does today, and Ford is killing its Fusion sedan too, a singular model that sells in similar volume to all Tesla products combined. And both Saab and Ford understood the auto industry and manufacturing far better than Tesla does. But that’s not the point. This is: Wall Street is well aware that Tesla has deep fundamental problems, but continued to convince others to part with their hard-earned money to fund the company’s inevitable losses.

Smack the Red Queen

And that’s not the only high-profile what-the-heck-is-happening-here? story in the industry today. As the week began, it was reported that Fiat Chrysler has laid out a plan to merge with Renault of France, right in the middle of the battle between the French automaker and its alliance partners, Nissan and Mitsubishi of Japan. Now, for speculation about the automotive world’s future, how much fun is that for news?

In my earliest days in the auto industry, GM products were what you sold if you owned new polyester suits; when they became worn out and your cat had pulled threads in them, then one was off to work at a Chrysler store. By 1975 Chrysler was the first to launch a Carnival of Savings promotion, where Joe Garagiola hawked $300 rebates on Chrysler products while we at GM dealerships laughed at their desperation. Then Lee Iacocca was fired from Ford and he took over Chrysler, becoming their spokesperson. Who can forget his memorable 1980s slogan, “If you can find a better car — buy it!”?

It’s a good thing hundreds of thousands of car buyers didn’t shop and therefore purchased enough K cars for Chrysler to survive. But as Madonna came on the music scene Chrysler launched its first minivans, and each scored a big hit. Within two years Iacocca’s Chrysler was flush with cash; he bought Gulfstream and raised money to restore the Statue of Liberty. There was talk of his running for president. But a couple of years later Gulfstream was sold, sales were off, and Iacocca was approaching Fiat about taking Chrysler over.

Fiat said no, but along the way Iacocca, in his last moment of greatness, purchased American Motors from Renault because it gave him their Jeep product line, too.

Quite possibly the best part of that deal wasn’t getting American Motors, which was quickly shuttered for good, ending its multi-decade fight for automotive relevance; nor was it getting Jeep. Instead it was getting Renault’s Francois Castaing in the deal. Many inside Chrysler weren’t happy about inheriting a French engineer from a failed car company, but Iacocca had a different take. He told his executives that AMC had actually done some incredibly remarkable things and had accomplished them without ever having any money in the bank. So maybe Castaing could teach them that kind of engineering efficiency.

Now with Bob Lutz over design and Castaing reorganizing Chrysler’s engineering for maximum efficiency, Chrysler enjoyed the best decade in its history for most of the Nineties, making more money per car in 1998 than any other mainstream car company in the world. Which is why Daimler purchased Chrysler in 1998, then turned around and bought Mitsubishi of Japan and then 10 percent of the stock in Hyundai — whose executives told Daimler’s to get lost.

In short order Chrysler and Mitsubishi were wrecked. Daimler walked on Mitsubishi and gave Chrysler to Cerberus Capital as a “farewell to U.S. mass production” parting gift. From there Chrysler failed, Japan’s banks had to rally around Mitsubishi to save it, and then came the Financial Crisis.

The Obama administration gave Chrysler away for free to Fiat, and here we are today. Fiat Chrysler wants to merge with Renault, which has a major auto alliance with Nissan Mitsubishi. That’s right, Fiat turned down buying Chrysler in the late Eighties, but Iacocca bought AMC from Renault, getting Castaing and Jeep, which in turn saved Chrysler and made it so valuable that Daimler wanted it, got it and broke it, along with Mitsubishi. So Fiat gets Chrysler for free 20 years after declining to buy it, and after saving it wants to give it back to Renault in a merger.

And baby, that’s considered a runaway success story in the auto industry. Elon Musk doesn’t have a chance.

Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, bestowed by the Anderson School of Business at UCLA, and hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. Email: edwallace570@gmail.com
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