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Risks to Tesla business

Discussion in 'TSLA Investor Discussions' started by Auzie, May 10, 2014.

  1. Auzie

    Auzie Tree Hugger Member

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    #1 Auzie, May 10, 2014
    Last edited: May 10, 2014
    There were some discussions in The Short Term Tesla Price Movements with traders who are posing very different points of view on Tesla business. Such discussions on that forum and on other forums tend to deteriorate to the point that all value is lost.

    SteveG3 proposed that it might be a good idea to start a thread where we can discuss business risks:
    SteveG3:"I think collectively we're so concerned to be objective about Tesla and to not discount negative information, that we go overboard a bit to tolerate the disingenuous behavior Curt is talking about. Earlier today I was thinking I wish we had a rational, respectful TSLA skeptic here if only to prove the point that it is not a contrary point of view we take exception to, but simply the sudden flood of FUD delivered with arrogance and contempt by an individual or two. I was even thinking perhaps we should have a thread where we take turns playing devils advocate to compensate for our lack of skeptics challenging us on the real issues at hand rather than gibberish FUD meant to distract from core issues."

    It is a great idea to have a rational discussion on business risks.

    Below are the risks as they are listed in Tesla Annual Report. I have copied them all below, for a start. The list is quite comprehensive but please add to it if anything is missed.

    All listed risks are not equal threat to Tesla business and it might be an idea to clean up the list progressively, and focus on say top 5 or 10. It might be a very good idea not to discuss no.39 as I can not see any value in having a discussion on that risk.

    Standard risk rating methodology involves evaluating probability of event happening and the potential consequences.

    My pick for top 10 is, in the order of severity: 6, 2, 1, 13, 19, 11, 22, 44, 53, 38.

    At this stage I am not sure of the best way to keep score of the top ten as I do not know what the response will be, if any. Perhaps we could weigh the scores, from 10 to 1 for the highest risk to the lowest on the individual's list of top 10, and come up with the aggregate scores. Any ideas are welcome.

    1. We may be unable to sustain our current level of production and deliveries of Model S or increase production and deliveries in line with our plans, both of which could harm our business and prospects.
    2.
    We are dependent on our suppliers, the vast majority of which are single source suppliers, and the inability of these suppliers to continue to deliver, or their refusal to deliver, necessary components of our vehicles in a timely manner at prices, quality levels, and volumes acceptable to us would have a material adverse effect on our financial condition and operating results.
    3.
    If we are unable to adequately reduce the manufacturing costs of Model S or otherwise control the costs associated with operating our business, our financial condition and operating results will suffer.
    4.
    Our long-term success will be dependent upon our ability to design, build and achieve market acceptance of new vehicle models, specifically Model S and new vehicle models such as Model X and Gen III, in the U.S. and abroad.
    5.
    Our future growth is dependent upon consumers’ willingness to adopt electric vehicles.
    6.
    If we fail to manage future growth effectively as we rapidly grow our company, especially internationally, we may not be able to produce, market, sell and service our vehicles successfully.
    7.
    Our limited experience with our product offerings makes evaluating our business and future prospects difficult.
    8.
    We may fail to meet our publicly announced guidance or other expectations about our business, which would cause our stock price to decline.
    9.
    Our vehicles make use of lithium-ion battery cells, which have been observed to catch fire or vent smoke and flame, and such events have raised concerns, and future events may lead to additional concerns, about the batteries used in automotive applications.
    10.
    If our vehicles or vehicles that contain our powertrains fail to perform as expected, or if we suffer product recalls for Model S, our ability to develop, market and sell our electric vehicles could be harmed.
    11.
    We have a history of losses and have to deliver significant cost reductions to achieve sustained, long-term profitability and long-term commercial success.
    12.
    The introduction of our resale value guarantee may result in lower revenues and profits and exposes us to resale risk to the extent many customers elect to return their vehicles to us and the residual values of these cars are below the guaranteed value.
    13.
    Increases in costs, disruption of supply or shortage of raw materials, in particular lithium-ion cells, could harm our business.
    14.
    Our success could be harmed by negative publicity regarding our company or our products, particularly Model S.
    15.
    Our distribution model is different from the predominant current distribution model for automobile manufacturers, which makes evaluating our business, operating results and future prospects difficult.
    16.
    We may become subject to product liability claims, which could harm our financial condition and liquidity if we are not able to successfully defend or insure against such claims.
    17.
    We are currently expanding and improving our information technology systems. If these implementations are not successful, our business and operations could be disrupted and our operating results could be harmed.
    18.
    We may not realize the benefits of our Supercharger network, which could harm our business, brand and operating results.
    19.
    If we are unable to design, develop, market and sell new electric vehicles that address additional market opportunities, our business, prospects and operating results will suffer.
    20.
    We may experience significant delays in the design, manufacture and launch of Model X which could harm our business and prospects.
    21.
    The automotive market is highly competitive, and we may not be successful in competing in this industry. We currently face competition from new and established competitors and expect to face competition from others in the future.
    22.
    Demand in the automobile industry is highly volatile, which may lead to lower vehicle unit sales and adversely affect our operating results.
    23.
    Our financial results may vary significantly from period-to-period due to the seasonality of our business, fluctuations in our operating costs and other factors.
    24.
    If we are unable to establish and maintain confidence in our long-term business prospects among consumers, analysts and within our industry, then our financial condition, operating results, business prospects and stock price may suffer materially.
    25.
    We may need or want to raise additional funds and these funds may not be available to us when we need them. If we cannot raise additional funds when we need or want them, our operations and prospects could be negatively affected.
    26.
    We have limited experience servicing our vehicles and we are using a different service model from the one typically used in the industry. If we are unable to address the service requirements of our existing and future customers, our business will be materially and adversely affected.
    27.
    We may not succeed in maintaining and strengthening the Tesla brand, which would materially and adversely affect customer acceptance of our vehicles and components and our business, revenues and prospects.
    28.
    If our vehicle owners customize our vehicles or change the charging infrastructure with aftermarket products, the vehicle may not operate properly, which could harm our business.
    29.
    Our deposits for Model S and reservations for Model X may be refundable to customers, and significant cancellations could harm our financial condition and business prospects.
    30.
    Our plan to expand our network of Tesla stores, service centers and Superchargers will require significant cash investments and management resources and may not meet our expectations with respect to additional sales of our electric vehicles. In addition, we may not be able to open stores or service centers in certain states or Superchargers in desired locations.
    31.
    We face risks associated with our international operations, including unfavorable regulatory, political, tax and labor conditions and establishing ourselves in new markets, all of which could harm our business.
    32.
    Foreign currency movements relative to the U.S. dollar could harm our financial results.
    33.
    Developments in alternative technologies or improvements in the internal combustion engine may materially adversely affect the demand for our electric vehicles.
    34.
    The unavailability, reduction or elimination of government and economic incentives could have a material adverse effect on our business, financial condition, operating results and prospects.
    35.
    Our relationship with Daimler is subject to various risks which could adversely affect our business and future prospects.
    36.
    The operation of our vehicles is different from internal combustion engine vehicles and our customers may experience difficulty operating them properly, including difficulty transitioning between different methods of braking.
    37.
    If we are unable to keep up with advances in electric vehicle technology, we may suffer a decline in our competitive position.
    38.
    If we are unable to attract and/or retain key employees and hire qualified management, technical, vehicle engineering and manufacturing personnel, our ability to compete could be harmed and our stock price may decline.
    39.
    We are highly dependent on the services of Elon Musk, our Chief Executive Officer.
    40.
    We are subject to various environmental and safety laws and regulations that could impose substantial costs upon us and negatively impact our ability to operate our manufacturing facilities.
    41.
    Our business may be adversely affected by union activities.
    42.
    We are subject to substantial regulation, which is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business and operating results.
    43.
    We retain certain personal information about our customers and may be subject to various privacy and consumer protection laws.
    44.
    We may be compelled to undertake product recalls or take other actions, which could adversely affect our brand image and financial performance.
    45.
    Our current and future warranty reserves may be insufficient to cover future warranty claims which could adversely affect our financial performance.
    46.
    Unauthorized control or manipulation of our vehicles’ systems may cause them to operate improperly or not at all, or compromise their safety and data security, which could result in loss of confidence in us and our vehicles and harm our business.
    47.
    The range and power of our electric vehicles on a single charge declines over time, and this may negatively influence potential customers’ decisions whether to purchase our vehicles.
    48.
    We may face regulatory limitations on our ability to sell vehicles directly or over the internet which could materially and adversely affect our ability to sell our electric vehicles.
    49.
    We may need to defend ourselves against patent or trademark infringement claims, which may be time-consuming and would cause us to incur substantial costs.
    50.
    Our business will be adversely affected if we are unable to protect our intellectual property rights from unauthorized use or infringement by third parties.
    51.
    Our patent applications may not result in issued patents, which may have a material adverse effect on our ability to prevent others from commercially exploiting products similar to ours.
    52.
    Our trademark applications in certain countries remain subject to outstanding opposition proceedings.
    53.
    Our facilities or operations could be damaged or adversely affected as a result of disasters or unpredictable events.
    54.
    If our suppliers fail to use ethical business practices and comply with applicable laws and regulations, our brand image could be harmed due to negative publicity.
    55.
    We are obligated to develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.
    56.
    Servicing our convertible senior notes requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.
    57.
    We may still incur substantially more debt or take other actions, which would intensify the risks discussed above.
    58.
    The classification of our Notes may have a material effect on our reported financial results.

    Risks Related to the Ownership of our Common Stock
    1.
    Concentration of ownership among our existing executive officers, directors and their affiliates may prevent new investors from influencing significant corporate decisions
    2.
    The trading price of our common stock is likely to continue to be volatile.
    3.
    A substantial portion of our total outstanding shares are held by a small number of insiders and investors and may be sold in the near future. The large number of shares eligible for public sale or subject to rights requiring us to register them for public sale could depress the market price of our common stock.
    4.
    Conversion of the Notes may dilute the ownership interest of existing stockholders, including holders who had previously converted their Notes, or may otherwise depress the price of our common stock.
    5.
    The convertible note hedge and warrant transactions we entered into in connection with the issuance of Notes may affect the value of the Notes and our common stock.
    6.
    Mr. Musk borrowed funds from affiliates of certain underwriters in our public offerings and/or private placements in 2011 and 2013 and has pledged shares of our common stock to secure these borrowings. The forced sale of these shares pursuant to a margin call could cause our stock price to decline and negatively impact our business.
    7.
    Anti-takeover provisions contained in our certificate of incorporation and bylaws, the provisions of Delaware law, and the terms of our convertible notes could impair a takeover attempt
    8.
    The fundamental change repurchase feature of the Notes may delay or prevent an otherwise beneficial attempt to take over our company.
    9.
    If securities or industry analysts publishing research or reports about us, our business or our market change their recommendations regarding our stock adversely or cease to publish research or reports about us, our stock price and trading volume could decline.
    10.
    We do not expect to declare any dividends in the foreseeable future.
     
  2. RationalOptimist

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    To me, 39 is the only risk I actually worry about. Elon truly is special. If something were to happen that limited or removed his ability to run the company, it would make the rest a lot harder. There would probably still be a great company there. But one that was a lot less likely to truly transform the automobile industry in the next 10 years.
     
  3. anticitizen13.7

    anticitizen13.7 Enemy of the Status Quo

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    53, "natural disasters", is something that I've kept in mind for a long time. The 2011 Tsunami that hit Japan caused a massive amount of disruption for Asian automakers. With the companies and their suppliers suffering heavy damage, production slowed down to a virtual halt for months. Honda was particularly hard hit, with the situation being so bad that dealer lots in the U.S. were down to almost 0 inventory at some points.

    An unpredictable event like earthquake or tsunami that disrupts production or suppliers could cause production and deliveries to plummet.

    A lot of this stuff is out of Investor control. For this reason I recommend that people never bet the farm on any one company or economic sector.
     
  4. Matias

    Matias Active Member

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    #4 Matias, May 10, 2014
    Last edited: May 10, 2014
    9. Fire causing casualties would be bad.

    "Mother and two small children die in Tesla's fire"
     
  5. Chickenlittle

    Chickenlittle Active Member

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    I am not aware of this happening. If you post something like that perhaps you should post the words if it happened or suppose
     
  6. NigelM

    NigelM Recovering Member

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    Agree, although I'd cut Matias a little slack considering ESL; I think everyone is aware that this hasn't happened. As an owner I see that risk as being very. very, very small.
     
  7. Matias

    Matias Active Member

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    I thought that from context every one understands, that I was speaking of a risk that something like this would happen.
     
  8. Johan

    Johan Took a TSLA bear test. Came back negative.

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    44 and 39 worry me the most. But I sleep at night :)
     
  9. SteveG3

    SteveG3 Active Member

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    I'll go through the list systematically when I have more time, but what I generally think about...

    firstly the risk with Elon... with other risks resolved lately (fires, dealership situation improving), it's moved up the charts for me. frankly, the rest of the management team know what he wants at least 5 years left, but he has gifts that can simply not be replaced. I think the next best thing would be a worst case plan in place to pass the reigns to JB AND have the company sold within a year or two to Google... I think that would at least maintain sizable parts of the sense of mission and long-range thinking with JB, and strategic firepower (Elon's unique abilities not replaced, but some serious cash to make things happen becoming available). for anyone unaware, Google's Larry Page has said some extremely glowing things about Musk and the goals Musk is taking on at Tesla and SpaceX.

    near term... Gigafactory, until we see Panasonic on the dotted line, I think there will be market skepticism, to a degree with justification. fwiw, I got this wrong on the call Wednesday. I heard letter of intent, and I thought this was the big moment on Panasonic, and I wrote so on one of the short-term threads. I apologize if this influenced anyone. I still think this was a positive step, but frankly, subsequently I've come to understand letter of intent is a vaguer term than I realized.

    relatively near term... Model X. I think the odds are very high they will deliver a very compelling product, but until we see it there's some risk. the very subjective element of looks plays a significant role in the auto market, and I think Tesla nailing the Model X or not will either reinforce the very strong position of the brand or take a bit of the shine off of it. in the long run I don't think this will matter as they have enough money to get to Gen III, and that's really the future of the company.

    mid-long term... scaling up production for Gen III. I think it's very probable that Gen III will be a compelling product. but going from say 100K Model S/X to 500K vehicles in a few years, and then 2nd and 3rd plants making 1.5 million vehicles in a few years... pretty challenging to hire and train a workforce to produce all those cars and maintain the quality standard Tesla's been setting for itself. apparently they are going to ramp up Gen III to 500K cars over 3-4 years, so they do seem to be approaching this with some caution. even so there may be bumps, but if the product ultimately is to the kind of specs they've suggested, I see potential bumps but not cliffs.
     
  10. bonaire

    bonaire Active Member

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    Primary risk is consumer demand down the road and charging opportunities out there. A lot of analysts took the old NUMMI plant throughput and implied that Tesla WILL make 500,000 cars in 2020. Tesla fed the fire with wording about the gigafactory would be able to make batteries for 500,000 cars a year by 2020. These implications were what forced the stock price so high in Feb. However, to make that many cars would require more factories than Fremont unless they make some parts at outlier plants and drive them into Fremont for finishing. I just don't think the uptake of BEV will be that fast. Maybe 60-80k units in 2017 and 25% growth annually for a few years. I doubt 500,000 will be hit for a decade from now, or 2025, which would include a China-located plant for small Asian units. By 2018, the US $7500 tax credit may be gone and that has been a huge catalyst for sales of EVs below $40k. Low cost and very easy charging is a consumer requirement. I am sitting in my Volt right now, charging. Consumers won't do this. They will even see a 1 hour SC charge as inconvenient if traveling.
     
  11. Auzie

    Auzie Tree Hugger Member

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    It might help to come up with more meaningful risk evaluation if people consider two main aspects of a risk. I got the impression that some people consider only the severity of consequence of an event happening without considering the probability of the event as well.

    Lets say person L does not want to lose person B. Person B is critical to person L as person B provides some critical benefits to person L.

    Person L evaluates the risk of loosing benefits due to person B dying.

    Very simplified evaluation takes place as follows:

    1. Severity of consequence of person B dying --- very drastic consequence, assign weight factor 10
    2. Likelihood of person B dying in the next 5 years --- very low likelihood, assign weigh factor 1

    Multiply the two 10 x 1 score 10

    Severity of risk with drastic consequences and low probability of happening would likely be classed as moderate to low risk.

    In our evaluation on this thread, some events carry drastic consequences. All these events have very low probability of happening, thus reducing the severity of these risks.
     
  12. tdelta1000

    tdelta1000 Active Member

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    Risk is inherent in everything we do so the risk that Tesla Motors may fail is valid. Companies like Apple and Microsoft have faced some of the same "investor fears" but they are still viable companies today. As a shareholder, I still see that TM has has not hit its peak so what will it take for folks to believe that TM is heading in the right direction??? I think the purchase of an established company will wake people up and until then TM is moving in the right direction.
     
  13. RobStark

    RobStark Active Member

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    When Tesla and analyst talk about max production at Fremont they are talking about factory workers working 50 hrs per week or 1.25 shifts.

    A factory can be operated on four shifts working 24/7 with eight hours left over per week for maintenance.

    If CA had 3% unemployment you might not find enough qualified workers for the graveyard shift.

    But with the current economic outlook for blue collar workers in CA for the foreseeable future Tesla should continue to cause freeway traffic jams when they have job fairs.

    JB is predicting 1 mile per second supercharging within 8 years. I think the uptake will surprise even TMCers.

    The US will consume 16 million automobiles this year and the world 85 million.

    The US will stabilize or fall but the world should steadily climb towards 100 Million over this decade.

    The global luxury market in 2014, 35k USD plus per vehicle, is about 4 million units.

    Tesla just needs 10%-15% of that to be wildly successful.

    They don't need most or the mean or 51% plus of consumers.

    Tesla does not need the average buyer. At least not this decade.
     
  14. green1

    green1 Active Member

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    The exception is Elon leaving, it's a high severity risk, and a high probability (he's already stated that he doesn't think one man should be CEO of more than one company at a time, and it's hard to imagine him choosing Tesla over spacex)
    This one worries me a lot. That said, I suspect he'll stick around at least until the gen iii launches, and hopefully he'll manage to find a proper replacement and do a smooth hand off.
     
  15. aznt1217

    aznt1217 Active Member

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    I don't think you should be worried. Although Elon is a HUGE part of the Tesla team, he's only as good as his team-- which needless to say is excellent. They are the ones executing the plan. He is sticking around till Gen III launches and will serve in a chairman capacity for sure because the widespread adoption of EV's still has to be achieved and will need to continue to grow. Remember it's Internet, Space Travel, and Sustainable Energy Production/Consumption.
     
  16. 30seconds

    30seconds Active Member

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    So do we put faster than anticipated progress with spaceX and Elon moving to Mars on the list? I'm pretty sure he's already mentioned this as a goal.
     
  17. Auzie

    Auzie Tree Hugger Member

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    #17 Auzie, May 10, 2014
    Last edited: May 11, 2014
    I did quick scoring of what people put in so far.

    The scoring method: The first risk mentioned in someone's post gets 10 points, every subsequent risk mentioned gets one point less. I will keep updating the scores with new posts.

    Here is what we got so far:
    1. 39. We are highly dependent on the services of Elon Musk, our Chief Executive Officer. 39

    2. 6. If we fail to manage future growth effectively as we rapidly grow our company, especially internationally, we may not be able to produce, market, sell and service our vehicles successfully. 28

    3. 11. We have a history of losses and have to deliver significant cost reductions to achieve sustained, long-term profitability and long-term commercial success. 13

    3. 44. We may be compelled to undertake product recalls or take other actions, which could adversely affect our brand image and financial performance. 13

    4. 53. Our facilities or operations could be damaged or adversely affected as a result of disasters or unpredictable events. 12

    5. 9. Our vehicles make use of lithium-ion battery cells, which have been observed to catch fire or vent smoke and flame, and such events have raised concerns, and future events may lead to additional concerns, about the batteries used in automotive applications. 10

    5. 4. Our long-term success will be dependent upon our ability to design, build and achieve market acceptance of new vehicle models, specifically Model S and new vehicle models such as Model X and Gen III, in the U.S. and abroad. 10

    6. 2. We are dependent on our suppliers, the vast majority of which are single source suppliers, and the inability of these suppliers to continue to deliver, or their refusal to deliver, necessary components of our vehicles in a timely manner at prices, quality levels, and volumes acceptable to us would have a material adverse effect on our financial condition and operating results. 9

    6. 5. Our future growth is dependent upon consumers’ willingness to adopt electric vehicles. 9

    7. 1. We may be unable to sustain our current level of production and deliveries of Model S or increase production and deliveries in line with our plans, both of which could harm our business and prospects. 8

    7. 20. We may experience significant delays in the design, manufacture and launch of Model X which could harm our business and prospects. 8

    7. 18. We may not realize the benefits of our Supercharger network, which could harm our business, brand and operating results. 8

    8. 13. Increases in costs, disruption of supply or shortage of raw materials, in particular lithium-ion cells, could harm our business. 7

    8. 19. If we are unable to design, develop, market and sell new electric vehicles that address additional market opportunities, our business, prospects and operating results will suffer. 7

    9. 22. Demand in the automobile industry is highly volatile, which may lead to lower vehicle unit sales and adversely affect our operating results. 5

    10. 38. If we are unable to attract and/or retain key employees and hire qualified management, technical, vehicle engineering and manufacturing personnel, our ability to compete could be harmed and our stock price may decline. 1

    It is clear that most investors are concerned with Elon staying on with Tesla. I am curious to learn what investors need to see Tesla doing to mitigate that risk and other risks.

    In my personal evaluation, risk 39 is not high as I find it unlikely that EM will abandon Tesla. Elon has publicly stated his commitment to Tesla. Tesla runs with someone else in charge 2-3 days/week. Increased public exposure of Tesla management team might help to further mitigate this risk.

    Regarding risk associated with growth, any ground breaking on giga factory and other manufacturing facilities will help to reassure investors. So far Tesla has demonstrated good management of SC network expansion and ambitious strategic global expansion of stores and sales.
     
  18. 3mp_kwh

    3mp_kwh Member

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    I didn't see - Lose at their own game. EVs will become more popular, and we've seen the open invites to competition. What if Tesla loses to a large cell design, or if Nissan give an Infiniti long range. Staying away from EVs in the luxury segment won't be forever. Product concentration. An X-flop. To investors, a unit stall, or as mentioned falling well short of 500k, are big risks. I have no doubt electric drive will win in passenger cars, but we don't even know the victor of the EREV/BEV fight, yet.

    It's definitely clear other makers are fully capable of getting things wrong.
     
  19. green1

    green1 Active Member

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    I strongly disagree that he won't leave Tesla as he's already stated that he doesn't think one person should be CEO of more than one company at a time, and I don't think electric cars can compete with rocket ships when push comes to shove and he has to choose. That said, I think he'll stay around until gen III is well established.
    You're mostly right about the mitigation here, it's all about proper succession planning. He needs to get his successor in front of cameras and microphones as much as possible and gradually increase their presence over a few years until it just seems natural that the other person is in charge. They also need to prove that the new person has not just the ability to run the company, but the vision to really push the company the way that Elon has so far.

    I'm actually working at a company that just replaced a very high profile, and very successful CEO without the stock price taking a hit, but it was done by pushing the successor from inside the senior ranks and gradually putting him in front of the media more and more until, when the official announcement actually came, it just seemed natural, and nobody was afraid.

    Yes, we do know the victor there, BEV. There's no question about it at all. The only question is how long before the other manufacturers figure it out.
     
  20. Auzie

    Auzie Tree Hugger Member

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    I am concerned about the growth. Tesla is growing rapidly, into a large company. Tesla was perhaps very good at being a small start up, then at being a small manufacturer.

    That is very different than being a large organization. To be able to grow effectively, Tesla business must change into a different business to what it is now. To be able to control and manage large workforce and resources, a business needs to have countless set processes and procedures in place. That makes it bureaucratic and less efficient than a comparative small and nimble business, that operates at much smaller scale.

    Eventually Tesla might turn into gigabusiness that is slow to respond to internal and external demands for change. The same forces that are preventing ice manufacturers from entering ev space may take hold in future big Tesla and prevent it from being responsive and fluid. Something might be lost in growth. I already miss this crazy start up that is disruptor now, but is growing into a business that one day may need to be disrupted.:wink:

    The consoling thought for an investor is that Tesla has a chance to become a monopoly. :biggrin:
     

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