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Tyler Durden
Tesla Faces New Model 3 Delay As German Workers Threaten Strike; More Headaches For Musk Emerge
2 months ago




In the latest potential setback for the on-time delivery of Tesla's Model 3, I4U reports that Tesla is facing a potential strike at its new German subsidiary. Tesla acquired Grohmann, a specialized machine manufacturer, for about $150 million several months ago and now the German Trade Union IG Metall has warned that it is exploring a worker strike at Tesla Grohmann. A key supplier, the machines built at Tesla Grohmann are used to manufacture the Model 3. As a result, the Model 3 production start in July could face another imminent delay.

According to I4U, the 660 Tesla Grohmann employees are paid 25 to 30% less than the union rate. While Tesla, which says it seeks to maintain good relations with Grohmann workers including competitive wages, has offered to pay each employee €150 per month more that does not satisfy IG Metall. Tesla has also offered to increase compensation through a Tesla stock program, however that will be a tough sell as German workers are not used to this kind of compensation.

As a result, the trade union is exploring the possibility of a strike at Tesla Grohmann next week, IG Metall Trier speaker Patrick Georg told the German Welt am Sonntag newspaper, with the union stating that "we’re checking next week if a strike is possible."

Meanwhile, Tesla has cancelled all outside contracts at Grohmann. This move has fueled the labor dispute as employees fear about their jobs. Tesla has countered that it plans to grow Tesla Grohmann, but the focus is on its own needs for machines to make electric cars. Another factor for the increased insecurity of the Grohmann workers is the sudden departure of the founder.

The launch of the Model 3 has already been delayed later than originally planned. Another delay would give the competition more time to counter the looming flood of the electric car market with the affordable Model 3. Elon Musk confirmed last week that the final production version of the Model 3 will be unveiled in July, although a prolonged strike will likely lead to further delays.

* * *

Separately, in another union-related complication, Electrek reports that the United Auto Workers union has tentatively probed Tesla’s Fremont factory to potentially join their union on a few occasions in the past few years, but it looked like they quickly let it go. This time, however, appears to be different since the organization has kept the pressure on the company since a first publicized effort in February.

According to Electrek the UAW sent out organizers who have now enlisted “community groups”, mainly labor groups, to call on Elon Musk and Tesla “to revise their strict confidentiality agreement to allow employees to discuss working conditions” – aka “talk about unionizing.” Since the beginning of the effort to unionize, a few employees have gone public about concerns they have with salary and working conditions at the plant.

In February, CEO Elon Musk said that he would investigate the claims and a week later, he addressed the concerns in an email to all employees, which was leaked. It seemed to have stopped the UAW’s effort until now. A recurring concern that came up in the previous complaints is that the confidentiality agreement that Tesla makes its employees sign is “preventing them from speaking up about working conditions”.

It seems to be the main issue brought up in this new letter to Musk that the UAW signed, along with other local labor groups. The full UAW letter can be found here.

That’s the second effort of the sort. In January, local California state assembly members reached out to Tesla to ask the same thing.

 

In his response, Tesla General Counsel Todd Maron clearly stated that the confidentiality agreement is to prevent leaks about Tesla’s products and business, and that it is not about preventing employees from discussing work conditions.

While the UAW and a few employees have been vocal about their concerns over working conditions at Tesla Fremont, it’s impossible to say if it’s actually a widespread sentiment among the more than 6,000 workers at the plant. In the past, UAW President Dennis Williams said that they were “respecting Tesla’s startup status” up until now, but they are seeking to get involved apparently since Tesla is about to increase its production capacity with the Model 3, which could involve hiring 3,000 more workers at the plant.

* * *

Meanwhile, as Tesla is facing growing labor pains, Apple continues to gain ground on the holy grail pursued by both Tesla and Uber: self-driving cars. On Friday, Reuters reported that Apple has secured a permit to test autonomous vehicles in California, "fuelling speculation that it is working on self-driving car technology in a crowded arena of companies hoping to offer those cars to the masses."

The permit allows it to conduct test drives in three vehicles with six drivers, the state Department of Motor Vehicles said on Friday. The vehicles are all 2015 Lexus RX450h, according to the DMV.

 

Although it has never openly acknowledged it is looking into building an electric car, Apple has recruited dozens of auto experts in recent years, and the permit pulls the curtain back a bit on any possible plan.

 

"This does confirm what's long been rumored: that Apple is at least toying with the idea of getting into the autonomous game in some capacity," said Chris Theodore, president of consultancy Theodore & Associates, and a former vice president at Ford Motor and Chrysler.

While Apple executives have been traditionally coy about their interest in cars, Tim Cook has suggested that Apple wants to move beyond integration of Apple smartphones into vehicle infotainment systems. In doing so, Apple joins a growing list of traditional carmakers, technology companies, and small start ups to test drive cars in California - all vying to be the first to have commercially viable vehicles on the roads.

* * *

Finally, in today's Heard on the Street, the WSJ's Charlie Grant once again looks at the age old question: "what is Tesla really worth", noting that even as Tesla becomes the most valuable US carmaker by market cap, its profits remain far behind:

"Tesla now trades at 271 times projected 2018 adjusted earnings, according to FactSet.  Ford and GM, in contrast, trade at less than seven and six times the 2018 estimate, respectively. Tesla gets that valuation because it is expected to upend the auto industry, while earning big profits that would bring down the multiple."

Is that possible? Here is Grant's math on what Tesla, which sold about 76,000 cars in 2016 and lost $675 million on sales of $7 billion, would need to do:

... to actually earn enough profits to reduce Tesla’s multiple to something in the realm of reasonable would require almost heroic assumptions. First, the basics: Say Tesla’s valuation should be 10 times higher than GM and Ford’s, and say Tesla’s share price stays constant at about $300. That means Tesla would need to earn $4.29 a share in 2018, which equals $700 million in total net income, assuming the current share count doesn’t change.

And the assumptions:

CEO Elon Musk forecasts Tesla can produce 500,000 cars in 2018, while analysts, a bullish lot, peg the number of deliveries at 302,000. Let’s say the delivery number is 380,000. Pencil in an average selling price of $50,000—Tesla will still be selling high-priced Model S and Model X vehicles along with the  Model 3. That scenario yields just under $21 billion in automotive revenue. Add another $2 billion in sales from its residential solar and energy businesses. If Tesla gets the same 5.4% operating margin that  GM and Ford averaged last year, it would generate operating income of $1.1 billion. Subtract $200 million for interest expense and tax the remainder at 25%: The result is $700 million in net income, giving Tesla a multiple roughly 10 times bigger than GM and Ford.

The bottom line: "the company would have to quintuple the number of cars it sells, earn margins equivalent to those of its highly efficient competitors and not sell new shares." It is also priced to perfection: should any of these variables be adversely revised, be it lower sales, lower margin, lower selling price, and Tesla doesn’t come close to earning enough to get to 10 times the multiple of its bigger rivals by the end of 2018.

Oh well, as Grant concludes that just like during the dot com bubble, "valuation has never mattered before for Tesla’s investors and it may not matter at the end of next year. Shareholders may be willing to wait five years instead of two for Tesla to generate big profits, or they may continue to figure that valuation doesn’t matter for a game-changer like Tesla."

One thing is clear: the longer TSLA shareholders wait to take Musk to task, giving him the benfit of the doubt, the more tweets such as these will hit Musk' timeline, which instead of focusing on fundamentals...

... suggest that the genius inventor is more interested in even greater boondoggles and even more burned cash, even as Musk's personal vendetta with shorts and competitors grows. 

For now, judging by Tesla's record price, it's working.