Can Tesla Survive a Recession?

If you think about electric vehicles, the first one that will probably come to your mind is ‘Tesla’. Tesla has grown to become an automotive industry giant, and the company has expanded at a rate that no other automaker has been able to achieve. This enormous success was driven by a few key features which include the charismatic personality of CEO Elon Musk, an increased consumer desire for environmentally sustainable products, and an incredibly strong economy with high consumer confidence. However, the current economic climate is changing. Covid-19 has essentially grounded some economies to a halt, so much so that over 31 million Americans have filed jobless claims within recent times. This means that over 31 million individuals would most likely severely reduce their spending, and they clearly will not be purchasing an electric vehicle any time soon. The lack of spending caused by the novel coronavirus has a trickle-down effect which could potentially lead to a recession. Recessions can be quite devastating as they create wide-spread unemployment and uncertainty within economies, especially because companies now run a higher risk of going bankrupt. So, despite its current success, Tesla [and the entire auto industry] is about to face one of the most challenging periods yet. But there are also key features which set Tesla apart from other automakers, and these features can make them better equipped to withstand a recession.

The automotive industry is one of the most hard-hit industries during a recession. This is due to a mixture of factors, but a major reason is the fact that the demand for vehicles plummets. Covid-19 has caused consumer confidence and overall consumer spending to decline significantly. Because firms cannot instantly respond to these changes within the economy, inventories begin to accumulate, and companies eventually decide to produce less. Therefore, companies either layoff their employees or reduce the number of hours that employees can work, and this can continue until demand surges again and companies need to ramp up production to meet their demands once more. This situation reduces the amount of income earned, and the average consumer then must reallocate their spending to meet their other needs. The purchasing of a vehicle is usually a big-ticket item for households and it often involves the borrowing of money from lending institutions. In the wake of the previous financial crisis, the American population ceased buying cars; and this makes sense, many households lost money and equity so they could not afford to buy new cars on their own, nor could they secure credit. But this recession is not hampered by credit issues. So far, credit is still available for the purchase of new cars. In fact, Tesla provides financing options for new owners which eases the process of purchasing their vehicles. It then means that if prospective Tesla buyers were in the market for a new vehicle before the pandemic and they are not severely constrained by income, they will still most likely go ahead and purchase a Tesla.

Which leads to the second key feature; the luxury market. Tesla operates within the luxury car market, even though it might not seem that way at times. The company combines performance, technology, and continuous improvements to produce a fine work of art that is becoming a must-buy for the wealthy. The luxury market tends to perform better than other markets during times of economic downturn because wealthier individuals have more discretionary income than the average individual, and thus, they can continue to spend. Teslas are not cheap, but their sales are highly skewed towards the wealthier population. Therefore, the falloff in demand for Tesla vehicles might not be as severe when compared to other automakers. Additionally, Tesla has developed this cult-like kind of mentality where customers are extremely loyal to the brand. It suggests that even if Tesla’s production line is disrupted by the coronavirus, consumer support will not fall apart, nor will they sway towards Tesla competitors. Tesla is a pioneer in the electric vehicle space, and most other companies are fighting to catch up to where Tesla is currently at. The company has invested significantly in research and development, and it can learn from all the vehicles sold thus far. We must remember that as much as Tesla is an automaker, it is also a big tech company which continuously rolls out software updates to its fleet. Therefore, even if the demand for vehicles decline, Tesla can redirect operations to areas where work is needed, and this can help them pull further away from the competition.

Lastly, and maybe most importantly, the success of these companies is derived from their auto sales and financial health. Tesla sold over 10,000 vehicles in China during March, and this is its highest-ever monthly sales in the world’s largest auto market. The Tesla Model 3 also currently outsells all other electric cars combined, and this is hurting the resale values of European-brand luxury cars; a trend now known as the ‘Tesla Effect’. But the bulk of Tesla’s revenue comes from the US market, and if consumers are hesitant to buy, sales will decline. Therefore, Tesla’s survival relies heavily on its financial health. By looking at quarter 1 earnings, Tesla managed to generate a profit of $16 million. The company can continue generating profits once their margins remain viable and they continue to be efficient. Tesla has a new factory in China, and this can continue to assist their productivity as coronavirus restrictions are being lifted in China. The company’s balance sheet also suggests that it can last for about six months of a shutdown. These points all suggest that Tesla should be fine, but we know that if the economy is truly shut down for 6 months, things most likely will not go as planned. We must also remember that is spending a lot of money very quickly; even during regular periods, Tesla is not necessarily always profitable and thus, they are burning capital. However, Tesla’s most valuable assets are their stock and they are looked very highly upon when it comes to Wall Street. Their market cap is also higher than most of their competitors combined, and they trade at about ten times the earnings multiplies of General Motors, Ford, Fiat and such the like.

The economic downturn caused by Covid-19 will not be easy for Tesla, nor any business in general. Although the automotive industry is one of the most hard-hit industries during a recession, it is also an extremely vital part of an economy and letting businesses like Tesla fail is not a favourable course of action. Whether an automotive bailout is upon us or not, it seems like Tesla has set themselves up in a unique position to be able to survive the effects of this fallout.