Tesla’s Crash And Musk’s Acquittal Is Good News For Electric Vehicles

Elon Musk was acquitted by a US district court over a tweet that forced him to resign as Tesla’s executive chairman in 2018. Now, fresh off his victory in acquiring the very same Twitter for an inflated price, Elon Musk and Tesla were slammed by a historically low 2022 earnings report which prompted a 70% decline in stock in 2022. This earned Elon Musk the dubious distinction of having the largest net worth decline in history — $200 billion — and prompted critical evaluation of his abilities to simultaneously run Tesla and Twitter. In January 2023, Tesla’s stock subsequently climbed 38% in a single month. Tesla’s stock roller coaster has prompted premature panic concerning the long-term viability of the Electric Vehicle (EV) industry and misplaced attacks on EV technology.

Tesla’s tumble is not the end of EVs any more than PanAm’s declined doomed passenger air travel. In both cases, a previously hegemonic corporate innovator inadvertently taught its competitors everything it knew and found its mission creep exploited by established companies pivoting their operating models and emerging low-cost competitors. Tesla’s temporary decline is not a sign of uniquely inept management, but rather a symptom of a changing industry.

Even a cursory look at the rest of the EV market shows how Tesla’s woes are not industry-wide and the market is not shrinking, it is fragmenting. S&P associate director, Stephanie Brinley, reveals “from 2018 through 2020, Tesla had about 80% of the EV market. Its share dropped to 71% in 2021 and has continued to decline.” An 11.41% drop in the tech giant’s US market share in December 2022 was the worst drop since earlier in April, indicating the stock had lost 65% of its value since hitting a peak in November 2021. On top of this, while Tesla’s market cap sank 72%, its top 5 competitors declined only about 31% since last year.

In an attempt to arrest its decline, Tesla announced a price drop making higher-priced vehicles eligible for a $7500 tax rebate, an attempt to boost the market share back and remedy the loss in stock value. The rebate may not achieve its intended goal of promising shareholders a future of lower internal cost and high revenue yields.

Rare Earth Element (REE) problems also explain Tesla’s decline. Customer demand for a greater selection of affordable options as well as Tesla’s previous monopoly fueled their ‘resource-frenzy’ for more cost-effective methods of acquiring lithium and cobalt. The result was Tesla’s over-investment in many REE mines across the world.

This now conflicts with international “friendshoring” and government mandates that have pushed companies to restructure their manufacturing processes, reevaluating international resource supply chains to maintain cost-effectiveness and compliance with climate change legislation. The Biden Administration’s American Battery Materials Initiative, a new effort to mobilize the government to secure America’s REE and EV supply chains in order to combat China’s REE monopoly, threatens Tesla. Tesla’s carefully cultivated international supply chain, once the envy of its competitors, is now a liability, vulnerable to both American and Chinese tariffs.

Governmental initiatives designed to address problems caused by the focus on REE supply do help Tesla, but they help its competitors more. State-level VAT taxes, Federal EV tax deductions, and vehicle registration tax exemptions all offer financial incentives encouraging consumers to purchase electric vehicles and companies to “friend-shore” production, creating room for market competition while aligning demand with renewable energy policy. More importantly, they help corporate insurgents combat the market leader.

Supply chain issues may impede Tesla’s and its competitors’ plans and projections to respond to growing market demand. This will also impact the Biden Administration’s targets as the overall industry may experience a drop in growth- perhaps even the first electric-vehicle recession. While Tesla’s plans for Gigafactory manufacturing expansion and the 2023 CyberTruck and Semi Tesla launches underpin Tesla’s hope for a resurgence, it’s dubious that any of these initiatives will be successful enough to overcome the supply chain issues plaguing all EV manufacturers.

Despite leading the market in having the biggest driving range, a charging network across the country, and superchargers infrastructure, Tesla has fallen fatally short in one: affordability. Veteran automotive competitors, such as Mercedes-Benz, Toyota, and Ford, finally are waking up from slumber and have, and began diverting efforts towards expanding electric charger infrastructure, maximizing electric range mileage, and intensifying vehicular luxury. Mercedes-Benz has applied for certification in California and Nevada for Level 3 automated driving, enabling its electric vehicles to take over driving at up to 60 kmph on some motorways. The areas Tesla historically dominated are rapidly slipping away.

Ironically, Tesla may be saved by the same external forces pushing its decline. A mass shortage of computer chips and other integral parts “has stopped many competitors such as Ford, General MotorsGM
, Hyundai, Kia and Volkswagen from running factories at full capacity to meet demand.”

The EV industry is at a crossroads. Tesla will almost certainly survive and thrive even as the market and geopolitical forces beyond its control erode its monopoly. Increasing geopolitical concerns and Sino-American competition will force high-tech industries to divest themselves of Chinese REE supply chains, ultimately strengthening the industry. Some latecomers will prosper, and the market will change in ways nobody can yet predict. What can be certain is Tesla’s temporary stock price decline is not the beginning of the end of the EV industry. More accurately, Tesla’s Big Dip represents the “end of the beginning” and the industry’s coming of age.