Elon Musk definitely knows how to take his fans for a ride. Musk had customers chomping at the bit for production of the long-awaited, affordable Tesla Model 3, claiming that their orders would start to be fulfilled when Model 3 production reached 5,000 cars per week. Tesla started taking deposits for the $35,000 Model 3 over two years ago, with Musk repeatedly stating that mass production of the model “is just around the next bend in the road.” The world was waiting for Musk to make the Tesla Model 3 available to mainstream consumers, and he kept the world waiting much longer than anticipated.
There’s no question that Elon Musk is a great strategic storyteller. The Silicon Valley billionaire has the rare ability to spin Tesla’s decade of losses, massive short interest and production hiccups into a narrative that positions Tesla as a market disruptor on the verge of breakthrough success, resisted at every turn by forces of reaction, incumbency and inertia. More recently, however, Musk’s Ambien-fueled midnight Twitter rampages and inability to deliver on promises have investors and potential customers alike wondering if his mouth is writing a check that his production lines can’t cash.
After a relatively placid 2nd quarter earnings announcement and investor call on August 1st, it seemed that Musk had recognized the need to trim his sails and temper his behavior. However, on August 7th, Musk ignited a new firestorm by tweeting that he was considering taking Tesla private at the price of $420, a considerable premium to the price at which the stock was then trading. Musk concluded the tweet with the phrase, “funding secured.” The stock soared on the news, even as investors struggled to understand the strategic logic behind the move.
We, too, were perplexed and tried to think through Musk’s possible reasoning.
It could be that Musk is engaging in the routine over-optimism for which all great entrepreneurs are famous. He had a promising conversation about the possibility of taking Tesla private, in which some preliminary commitments were made, and he interpreted these statements as evidence of having secured funding. The company’s subsequent communiqués want us to believe this is the case, but if it were, a proper corporate announcement would have followed soon thereafter. Nevertheless, perhaps this illustrates an honest reflection of Musk’s understanding of the situation.
If we look beyond the technicalities of the tweet, would it make sense for Tesla to operate as a private company? We doubt it. Musk rails against the near-term orientation of the public market and promises to “burn the shorts”—sellers who question Musk’s vision and have made Tesla the most shorted stock on the market—but public investors have been extremely patient and generous with Tesla. For a company that has produced $9 billion in operating losses over its 13-year existence, the fact that the market capitalization continues to hover around $50 billion suggests that investors have given Musk considerable latitude to pursue his long-term goals. Patient public investors are the ones who have “burned the shorts” thus far.
If Musk really wants to punish those who have doubted Tesla by betting against him, he should focus on profitably making and selling electric vehicles, not sending tweets that will land him in court. Further, Musk benefits enormously from the managerial discretion afforded the leader of a public company. A privatized Tesla would surely have an empowered board composed of owners with power equal or greater than Musk.
Finally, we must consider the possibility that the privatization tweet reflects an increasingly desperate attempt to change and control the Tesla narrative. Our research on technological change and financial speculation found that narratives are critical elements of boom-and-bust episodes. Over the course of the past several years, Musk has mastered this craft, deftly deflecting criticism by changing the conversation. Recent spats about the challenge of scaling Model 3 production have obscured more fundamental questions: Can a mass-produced Model 3 be sold for a profit? And how deep is demand for such a vehicle? Tesla touts that Model 3 is outselling competing offerings in the luxury sedan segment—cars made by BMW, Audi, Mercedes-Benz and Lexus—but what about Toyota and Honda? Many people would like to drive Tesla’s “rainbow-farting spaceship” (as Dan Neil recently called the Model 3 Performance version in the Wall Street Journal), but even a $35,000 price point positions Tesla beyond the range of most mid-market, mainstream car buyers.
What Musk needs more than anything now is time: time for the cost of his battery packs to come down; time to find new partners or customers; time to come up with yet another narrative. A slap on the wrist by the SEC is nothing relative to the existential threat to the firm posed by the possibility of running out of time, so Musk effectively changed the narrative by tweeting about privatization. Many times in the past few years, Musk has toed the line between over-optimism and deception. In this latest instance, investor lawsuits will eventually sort the fluff from the facts.
For many reasons, we want Tesla to succeed, but eventually, the company has to start making money. Wall Street is not known for being tolerant of the emotions and whims of billionaire CEOs. The bottom line? The tech billionaire is running out of alternate narratives. Eventually, investors will lose patience. When, exactly, that happens is difficult to predict, but when it does, the consequences may be extreme. At that point, no number of soothing tweets from Musk’s production floor sleeping bag will stanch the bleeding. From Twitter outbursts at financial analysts to the 24-hour-a-day workweeks that it took for Tesla employees to successfully deliver on Musk’s promises about the Model 3, to outrageous claims about his intentions about taking the company private, it is only a matter of time before the CEO has to level with the world about his company’s capabilities.
David A. Kirsch (@darchivist) and Brent Goldfarb (@brentdg2) are associate professors of strategy and entrepreneurship at the University of Maryland’s Robert H. Smith School of Business. Their forthcoming book, Bubbles and Crashes: The Boom and Bust of Technological Innovation, will be published by Stanford University Press in 2019.