Why Tesla Going “Hardcore” Might Be A Good Thing
This article describes my personal experience with the huge companies of IBM and Lucent that went soft and the current events at Tesla.
With all the focus these days on the “Magnificent 7,” it is easy to forget the lessons of history. Small and mid-cap stocks have historically outperformed large-cap stocks over the long term. During this recent fascination with fewer and fewer large-cap stocks, I think many investors don’t know the story of the Nifty Fifty. This list of stocks was never explicitly defined, but it described the prevailing “wisdom” on Wall Street in the 1960s and 1970s that a small group of companies, each a leader in its respective field, was a “one-decision stock.” That means you can just buy and hold and don’t really need to monitor the investment. I started investing in the early 1980s and this group of stocks significantly underperformed the market over the next 25 years. So, what happens to these leaders? In a word, they go soft. I’ve been on the inside of two very large companies that lost their way and I’ll describe what I saw.
- International Business Machines (IBM) was dominant in the early 1980s. A common saying of the time was “Nobody ever got fired for buying IBM.” That was for two reasons. 1) their products were good and supported for a long period of time. 2) If you bought the competition, IBM had a habit of calling your boss and telling them you made a mistake. When I joined in 1984, I saw a company that was afraid of its own shadow. They were investigated from 1969 till 1982 by the US Department of Justice for violations of the Sherman Antitrust Act, and I saw the results of this investigation took away their will to aggressively compete. They also were famous for never having had a layoff. What I saw was people taking advantage of this policy to do what is today called “quiet quitting,” or doing the least amount of work at your job to avoid getting fired. What I’ve seen is when some people (including me) see someone doing about 20% of the work of everyone else and getting away with it, they wonder why they are working so hard. In the 40 years since 1984, during the huge tech boom, IBM’s annual revenue grew from $46 billion to $62 billion (not adjusted for inflation). If revenue would have just kept up with inflation, it would be $141 billion today.
- Lucent Technologies was a spinoff of AT&T, and when I joined the company in 1998, it was known as the company that never missed its earnings estimates. Lucent used its high stock valuation to buy many startup companies in networking, and those hard-driving startups didn’t like the slow-moving culture of Lucent, so the best talent all moved on. That left Lucent with a wide variety of products that it didn’t have the talent to refresh. Lucent owned the famous Bell Labs that invented the transistor, but I noticed it had become a marketing driven company instead of the engineering powerhouse that made it great. As the company fell apart, it was very compassionate to the executives and employees alike, giving everyone that was laid off overly generous packages for leaving. But this just accelerated the downward spiral.
You may find it interesting that of the Dow 30 stocks, all except Proctor & Gamble were added after 1975. So, bringing this back to Tesla, this is what I think Elon is trying to avoid, the tendency of every company that is successful to become soft and rest on its laurels and wait for some smaller, hungrier company to disrupt it.
Some Of The Surprising Announcements Of The Last Few Weeks
- It all seems like it started about 2 weeks ago when Tesla decided to lay off at least 10% of its staff. At the time, we just thought this was a periodic correction of over-hiring during the last couple years. We now know it was the start of something bigger.
- Two important executives, Drew Baglino and Rohan Patel, announced they were leaving the company. Rohan had taken the role on X.com as a one-man PR department, frequently explaining things in Elon’s and the non-existent PR department’s absence. Drew, as the most senior technical person on the team and CTO after JB Straubel left a few years ago, had been thought to be a possible successor to Elon Musk. Some thought these two just burned out from the intense workload of working at Tesla, while others think that it is because of a major change in direction that they couldn’t support. It is also possible that Elon just didn’t think they were ready for the upcoming challenges, since they had both made their fortunes and might not be hungry for the 80-hour weeks needed to stay on top.
- Another significant event was the Reuters report that Tesla had dropped the “Model 2,” as we covered here. Elon tweeted that he was going “balls to the wall for autonomy.” Everyone thought Elon was giving up on more affordable models.
- While all this turmoil is happening, the reviews of Tesla’s Full Self Driving (FSD) V12 are surprisingly good. Even people like me who have been critical of the slow progress FSD has made over the last few years are impressed.
- Tesla announced the Model 3 Performance. An impressive car, but one unlikely to move the needle for the company.
- On the quarterly earnings call, the big announcements were that Tesla was actually going to make more affordable cars, but on existing production lines to reduce capital costs, and that Tesla was spending a lot of money on training its Full Self Driving neural network.
- Tesla announced it is ending its referral program for now. Tesla has had a lot of success with its referral program, but also a history of making frequent and radical changes to the program. I am grateful to the readers that have used my referral code over the years.
- Tesla announced that it was making price cuts, eliminating inventory discounts, and simplifying their pricing. It appears to me they are trying to get back to the time when there were no discounts for inventory cars (only on demo cars with significant miles). I am skeptical they will be able to put that genie back in the bottle, but we will see.
- Just when we thought the layoffs were over, it’s reported that Elon is frustrated that some executives didn’t do their jobs and cut as deeply as instructed to do.
- Tesla just laid off 75% of its outstanding Supercharger team. Although it was widely reported that Tesla laid off the entire team, according to a LinkedIn post, 75% of the team was let go. I find this more likely. Elon said they will continue to build out the locations they have planned but focus more on adding chargers to existing locations and improving uptime. I think he feels this is a low-margin business that can better be done by others now that the industry has matured. This was absolutely a key to Tesla’s success in the past, but is now becoming routine.
Conclusion
I think these radical changes will allow Tesla to invest the money Elon thinks it needs to train the Full Self Driving neural network. Now, could it just have continued down the path it was following and used its $30 billion of cash to do that? Sure, but that would risk the future of the company if FSD takes longer to perfect than expected. I think Elon wanted to ensure Tesla would be healthy even if FSD hits another roadblock that takes a few years to resolve. He is trying to get expenses down enough that Tesla has room for errors in the coming difficult times for the auto industry, which is transitioning to electric vehicles, but not very smoothly.
Disclosure: I am a shareholder in Tesla [TSLA], BYD [BYDDY], Nio [NIO], XPeng [XPEV], Hertz [HTZ], NextEra Energy [NEP], and several ARK ETFs. But I offer no investment advice of any sort here.
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