Many years later, when Musk reflects on his Tesla career, he may still think of that distant winter afternoon when he danced excitedly at the Shanghai factory. It was China that enabled Tesla to tide over the difficulties, start the surge in its stock price, and unlock the code of his wealth.
It was January 7, 2020. Tesla's Shanghai Gigafactory held an official delivery ceremony. Musk took a private jet and came all the way from California to attend the event. Together with Shanghai leaders, he delivered 10 domestic Model 3s to ordinary car owners. , and officially launched the Model Y mass production project.
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At that time, Tesla's brand positioning in China was comparable to Mercedes-Benz and BMW. Faced with the screams of the fans in the audience, Musk felt so comfortable that he took off his coat on a whim and started twisting impromptu on the stage. His posture was quite stiff and his dance steps were a little awkward, but his excitement was palpable.
Shanghai resolves Tesla production capacity crisis
Shanghai is Musk’s blessed land, and this factory is Tesla’s savior. In the two years before the Shanghai factory was put into production, Musk had been worrying about the production capacity of Model 3, and almost slept in the only Fremont factory in Silicon Valley. If production capacity cannot be increased, deliveries will be impossible, and Tesla, which is rapidly depleting funds, is facing a serious cash flow crisis.
The Shanghai Gigafactory is Musk’s life-saving straw. This is China's first wholly foreign-owned automobile assembly plant and Tesla's first assembly line outside the United States. Musk was amazed by the speed of China: the 860,000-square-meter factory broke ground in January 2019 and was put into production and delivered at the end of December 2019. It only took 11 months.
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What moved Musk even more was Shanghai's investment policy, which provided help in times of need: the Shanghai government not only provided factory land at a very low price, but also provided a low-interest RMB 40 billion loan to help Tesla, which was extremely strapped for cash flow at the time, establish a factory. Of course, Tesla will need to meet future tax targets to fully receive these preferential treatments.
This is a win-win project. The Shanghai government introduced a facade project and established the best investment image; Tesla solved the long-standing production capacity problem and opened up the huge Chinese market through localization; and China's electric vehicle industry chain has evolved with the specialization Tesla's entry into the market began to accelerate its growth and development, and in just three years it became the world's largest producer and exporter of electric vehicles.
The commissioning of the Shanghai factory completely solved Tesla's production capacity crisis. In 2019, Tesla's production totaled 365,000 vehicles, which increased sharply to 509,000, 930,000, and 1.37 million vehicles in the following three years (2020-2022).
Among them, the Shanghai factory has become the absolute main force, producing 154,000, 486,000 and 725,000 vehicles in three years, accounting for 53% of Tesla's global output from 30%. Perhaps beyond Musk's expectations, the production capacity of the Shanghai factory not only guarantees the demand of the Chinese market, but also exports to markets such as Europe and Australia.
In addition, building a factory in Shanghai has also unlocked China, the world's largest new energy vehicle market, for Tesla. Tesla's sales in China were only 40,000 units in 2019. After localization in 2020, the number reached 148,000 units, 94% of which came from the domestic Model 3. In the following three years, Tesla's sales in China reached 320,700, 439,800 and 603,700 vehicles.
It was after the Shanghai factory was put into operation to resolve Tesla's production capacity crisis and open up the huge Chinese market that Tesla's stock price began to soar at an accelerated pace. The numbers speak for themselves. At the end of 2018, Tesla's market value was only US$57.4 billion. At the end of 2019, it reached US$75.7 billion. By the end of 2020, it reached US$668.9 billion. At the end of 2021, it exceeded US$1.06 trillion, becoming the world's No. 1 car company. One share.
It is not difficult to understand that in the following days, Musk has always had a good impression of China. In an American public opinion where the “China threat theory” is politically correct, Musk has repeatedly gone against the trend and publicly praised all aspects of China: from new energy to the aerospace industry, from China's business environment to the hard work of Chinese workers. He even praised China for being full of positive energy and criticized Americans for being “self-righteous.”
Impossibly sky-high salary
For Musk himself, the commissioning of the Shanghai factory not only saved Tesla's production capacity crisis, but also unlocked his wealth code, boosted Tesla's stock price to soar, unlocked his sky-high salary plan, and made him a The world's richest man.
Musk's assets have soared mainly from a sky-high salary incentive agreement he signed with Tesla. In 2018, Musk reached a salary plan with Tesla's board of directors: Musk voluntarily gave up all wages and bonuses and only received a salary of $1 (just because of tax filing requirements). However, if Musk can lead Tesla to achieve many expected goals such as performance and market value, he will receive options equivalent to 20.3 million Tesla shares in 12 installments (accounting for approximately 12% of Tesla’s outstanding shares).
Of course, Tesla’s board of directors has set clear performance goals for this: Tesla needs to reach the minimum threshold of a market capitalization of US$100 billion before this compensation plan can officially take effect. After that, every time Tesla's market value increases by US$50 billion (up to US$650 billion), Musk can receive option incentives of 1.69 million shares, equivalent to 1% of Tesla's market value. Moreover, after these options are redeemed, there will be a five-year lock-in period.
In fact, this salary did not cause much controversy at the time. After all, in 2018, Tesla was still in the most difficult time. Model 3 mass production encountered difficulties and was delayed in large-scale delivery. Tesla's cash was rapidly consumed, and there was even a risk of running out of funds. Tesla stock has attracted short sellers in the stock market and has become the largest short-selling target.
Perhaps at that time, not many people would believe that Musk could actually achieve these performance goals one by one, and thus obtain all the incentive options originally agreed upon. But Musk really believes it. In early 2018, he publicly stated that he believed Tesla's market value would exceed the trillion-dollar mark in the next ten years.
Perhaps Musk himself did not expect that just three and a half years later, Tesla's market value would exceed one trillion US dollars. As these incentive options were realized one after another, Musk's personal assets expanded rapidly from US$20 billion to more than US$200 billion at one time, and he also surpassed Bezos to become the new richest man in the world.
Urge shareholders to approve sky-high remuneration
However, after Tesla became the first stock in a global car company, Musk's sky-high salary faced uncertainty and needed to be re-voted at the shareholders' meeting in June this year. Last Thursday, Tesla once again publicly urged shareholders to approve the largest compensation plan in history.
Due to shareholders’ rights lawsuits, Delaware Chancery Court Judge Kathhaleen McCormick issued a ruling in February this year, finding that there were serious problems in the process of Tesla’s board of directors awarding Musk’s compensation agreement (Deeply Flawed). , therefore rejected the salary worth tens of billions of dollars and asked Tesla’s board of directors to reconsider the salary plan awarded to Musk.
No one can deny Musk’s contribution to Tesla. As the earliest investor, he joined Tesla as chairman, and then directly led the team as CEO, leading Tesla to successively launch Roadster, Model S, Model X, Mode 3, Mode Y, Semi truck, Cybertruck, etc. models, opened super factories in the United States, China, and Europe, becoming the global leader in new energy vehicles.
In terms of actual results, Musk is fully qualified to receive this sky-high salary of US$56 billion. Because the tens of billions of dollars worth of options he received from Tesla were based on his achievement of many seemingly impossible performance and market capitalization indicators.
However, the reason why Judge McCormick made this judgment was not that Musk’s personal contribution to Tesla was worthy of the salary, but that Tesla’s board of directors, under the leadership of Musk at the time, failed to fully perform the duties of the board of directors. She has independent checks and balances, so she just asked Tesla’s board of directors to reconsider and vote on the compensation plan.
Musk was obviously furious with the verdict. Not only did he continuously complain and ridicule Judge McCormick on the X social platform (previously Twitter), he also publicly threatened to remove Tesla’s registration place from Delaware. By moving to Texas, you no longer have to be bound by the Delaware Court of Chancery in the future. Therefore, at Tesla's shareholder meeting in June this year, in addition to voting on whether to re-grant Musk's sky-high salary of US$56 billion, shareholders also voted on whether to change Tesla's registration place.
However, this may be the most embarrassing time for Musk to demand astronomical compensation from shareholders, because Tesla is currently in unprecedented difficulties and its stock price continues to be depressed.
The U.S. stock market has risen across the board this year, but Tesla's stock price has fallen by more than 40% during the same period, making it the worst-performing S&P 500 index component. Tesla, whose stock price once surged several times with a market capitalization exceeding one trillion US dollars, has now become the lowest-performing stock, with a market value of only US$460 billion (but it is still the number one car company in the world).
Liao Kaiyuan, Tesla's third largest individual shareholder with a $3.5 billion stake, said he would use his 27 million shares to vote against Musk's $55 billion compensation plan. He was the first major shareholder to speak out against Musk. It is worth mentioning that Liao Kaiyuan was once Musk's staunchest supporter, and he also benefited greatly from investing in Tesla.
However, as Tesla's stock price has fallen into a downturn in the past year, Musk has dispersed too much energy on Twitter, SpaceX and the brain neural company Neuralink. Liao Kaiyuan is also dissatisfied with Musk. Since the beginning of last year, he even publicly stated that if Musk cannot focus on leading Tesla, he should resign as Tesla CEO.
Unprecedented sales dilemma
The main reason for the sluggish performance of Tesla's stock price is that the new energy leader is in unprecedented sales difficulties. If Tesla's previous crisis was that it was unable to increase production capacity and supply exceeded demand, then Tesla's current embarrassment is that supply exceeds demand and its cars cannot be sold.
Preliminary results released this month showed that Tesla produced 433,700 vehicles in the first quarter, but delivered only 386,800 vehicles, not only a year-on-year decline of 8.5%, but also far lower than analysts’ initial expectations of 449,000 vehicles. This is the first decline in deliveries in 2020 due to the impact of the COVID-19 epidemic. Deliveries of the two low-priced models Model 3 and Y fell by 10%, accounting for 95.6% of total deliveries. High-end models such as Model S/Y and CyberTruck only have a combined percentage of less than 4.5 percentage points.
Musk said at the beginning of this year that Tesla's new models will be mass-produced from the end of 2025 to the beginning of 2026, and sales growth may slow down significantly before then, but he did not give a specific growth target. Musk has completely stopped raising the previous target of 50% annual growth because it is simply impossible to achieve. Analysts predicted at the time that Tesla's sales might only grow by 20% this year, far lower than last year's 38%.
But judging from the situation in the first quarter, the actual challenges faced by Tesla far exceeded previous expectations. It was not just a slowdown in growth, but a sharp decline. China and the United States are Tesla's two largest markets. While the growth of the U.S. market is slowing down, Tesla has fallen into red ocean competition in the Chinese market.
The sharp decline in sales means increasing inventory pressure. Tesla's production has exceeded deliveries in seven of the past eight quarters, and it exceeded delivery by 46,600 units in the first quarter, which means Tesla is facing increasing inventory pressure. In the absence of new models on the market, Tesla can only cut prices again to stimulate sales and relieve inventory pressure.
The Cybertruck won't give Tesla a much-needed sales boost. Musk has previously said that Cybertruck is unlikely to bring positive cash flow by the end of the year. The Cybertruck currently in production is only the highest-end model priced at more than $100,000, and production capacity is also facing problems. According to US media reports, Tesla has recently postponed the delivery date of Cybertruck.
The only solution is price cuts and layoffs.
When the company faces a sales crisis, the most direct response that Musk can think of is to cut prices and layoffs.
Last Monday, Musk issued an internal memorandum, announcing the need to reduce costs and increase efficiency, and lay off 10% of employees globally. This is the largest layoff since Tesla was founded. At the same time as the layoffs, two senior executives including Drew Baglino, senior vice president in charge of the battery business, also announced their departure.
It is worth mentioning that Tesla’s Chinese business has also become the hardest hit area by Tesla’s global layoffs. According to Chinese media reports, Tesla’s layoff ratio in China is generally around 20%, and even as high as 50% in some departments. The sales department has become the largest layoff, with almost every store having layoffs.
Last Thursday, Tesla announced another global price cut. The minimum price of Model Y was reduced to US$42,900, the price of advanced assisted driving FSD software was also reduced from US$12,000 to US$8,000, and the monthly subscription price was reduced from US$199 to US$99. . Tesla China, which had just raised prices before, also cut prices across the board by 14,000 yuan, with the starting prices of Model 3 and Model Y lowered to RMB 231,900 and RMB 249,900.
However, price cuts are also a double-edged sword: not only will they lower Tesla's profit margins, but they will also seriously damage consumers' motivation to buy electric vehicles in the future. Tesla's sharp reduction in new car prices will naturally lead to a significant reduction in the residual value of second-hand cars. The industry leader's significant price reduction will also lower the overall price of other electric vehicles.
According to a survey by iSeeCars, a U.S. automotive industry research organization, the residual value of second-hand electric vehicles aged 1 to 5 years in the United States has shrunk by 31.8% in the past year, with an average annual value loss of $14,400, while the value of traditional fuel vehicles has only decreased during the same period. 3.65%, and the value of second-hand hybrid cars has shrunk by 6.5%.
iSeeCars analyst Karl Brauer believes that the decline in second-hand electric car prices will allow more people to drive electric cars, but it will also dampen consumers' willingness to buy new cars. “New cars depreciate significantly when you buy them. This is actually the most expensive part of buying a new car. More and more car buyers understand that the value of electric cars will decrease significantly, and their interest in buying new cars will also be affected.”
China’s market share continues to decline
Although Musk denies that Tesla has given up on the development plan for the entry-level car Model 2, he has shifted his future focus to building an autonomous taxi business based on the Model 2 and announced that he will release the autonomous taxi business on August 8. However, the concept of autonomous vehicles cannot effectively improve Tesla's sluggish stock price.
When Tesla's products were in short supply and they were busy increasing production capacity, Musk once proudly announced that Tesla did not need advertising or spokespersons. He even disbanded Tesla's public relations department in the United States, believing that there is no need to spend energy dealing with the media. Good products will attract media coverage on their own.
But now that Tesla is oversupplied and worried about sales, Musk has to give up his previous stance. Tesla has spent $200,000 on social ads on his own X platform, returned to the Facebook platform he despises, and even started paying for travel costs for media events. It turns out that when it comes time to worry about sales, Tesla is no different from other car companies.
The United States and China are Tesla's two largest markets. But Tesla faces different challenges in the two markets: the U.S. electric vehicle market has cooled down significantly, and hybrid vehicles are the favorite of consumers. In China, the world's largest new energy vehicle market, with the strong rise of Chinese automakers In front of the company, Tesla's product competitiveness and brand influence have declined significantly.
Different from four years ago when Tesla was the first to outperform when it was first domestically produced, competition in China's new energy vehicle market has become fierce: not only are there many new energy giants such as BYD and Geely, but also new powerful car companies such as Ideal and NIO. It has attracted technology giants such as Huawei and Xiaomi to enter the market. (Note: Huawei is cooperating to build cars and does not build the entire car itself.)
As domestic car companies continue to release new cars and market competition is intensifying, Tesla, which has yet to release new models, no longer has much product competitiveness. Tesla's market share in China has continued to decline in the past few years. At the end of last year, Tesla's market share in China dropped from 16% in 2021 to 6.7%.
The last time Tesla fell into a production capacity crisis, it was the highly efficient Shanghai factory that saved Musk. But this time Tesla is facing a sales crisis, and China may really not be able to help him.
