Tesla CEO Elon Musk’s “bad feeling” about the economy could be the auto industry’s “canary in the coalmine” moment, signaling a recession for an industry whose bosses have shown no signs of concern.
Musk said the electric car maker had to cut about 10% of its workforce in an email to executives seen by Reuters. He later told staff that the servants’ ranks had been blown up and that he would continue to hire workers to make cars and batteries.
Musk’s warning is the first loud and public dissent in a unified auto industry position that underlying demand for cars and trucks remains strong despite two years of global pandemic. An executive this week called the question “sky high.”
“Tesla isn’t your average canary in the coal mine. It’s more like a whale in the lithium mine,” Morgan Stanley analyst Adam Jonas said in a research paper, referring to the metal used in EV batteries.
“As the world’s largest EV company warns about jobs and the economy, investors should rethink their margins and revenue growth forecasts,” he added. Tesla shares fell 9%.
The auto sector was hit two years ago by the onset of the COVID-19 pandemic, which forced factory closures. That shutdown then played a role in the shortage of semiconductor chips that further hampered vehicle production.
Supply chain wailing, exacerbated by the Russian invasion of Ukraine, has plunged sales. New car sales in the US ended at a weak year-over-year of 12.68 million in May, according to Wards Intelligence. That’s a long way from the pre-COVID glory days of 17 million a year.
However, these problems mainly affect supply, while inflation threatens demand.
“The risk of a recession is high, so what he’s saying is certainly not extreme,” Jeff Schuster, president of global forecasting at LMC Automotive, said of Musk.
Ride-hailing companies Uber Technologies Inc and Lyft Inc said last month they would scale back their workforce and cut spending, while online used car dealer Carvana said it would cut 12% of its workforce.
Other companies are watching closely.
“We are not as pessimistic as Elon Musk, but we are cautious about our hiring and spending,” said John Dunn, America’s CEO for Clean Energy Systems, a Plastic Omnium unit that makes fuel and emissions reduction systems.
Industry officials are concerned about a potential recession.
“The auto industry is rushing into the safe haven of pent-up demand that could carry sales for years to come, as looming economic storm clouds pack that could destroy much of that demand,” said Tyson Jominy, vice president of the auto industry. JD Power’s president of automotive data and analytics.
Josh Sandbulte, the chief investment officer of Greenhaven Associates, a money management firm that is a major investor in General Motors Co. stock, was in New York City this week to attend an Alliance Bernstein conference. He said financial CEOs there are much bleaker in their outlook than other business leaders.
While Musk’s email sounds much more pessimistic than other manufacturing executives, Sandbulte said he’s learned not to fire the Tesla CEO because “he’s watched other people zigzag and he’s proved right.”
“We are in a period of confusion, and quite frankly, the financial world and the world of business leadership are in disagreement,” Sandbulte said. “At some point we will get the answer who is right.”
Publicly, many other automakers still say underlying demand remains strong. Ford Motor Co said Thursday, while reporting monthly sales in the US, that its inventories continue to run at a record pace.
“Consumer demand is skyrocketing right now. Manufacturers don’t have the inventory,” Allyson Witherspoon, the US marketing chief of Nissan Motor Co, said at the Reuters Automotive Retail conference in Las Vegas on Wednesday.
And industry officials are also pointing out that Tesla has its own issues, including possibly hiring too quickly compared to its growth.
According to the company’s annual reports, Tesla’s employment has doubled since late 2019, and Morgan Stanley’s Jonas noted that Tesla’s revenue per employee of $853,000 isn’t much higher than Ford’s much larger $757,000.
In addition, Tesla’s US sales are highly concentrated in California, and especially in the San Francisco Bay region where Silicon Valley companies are based.
High-tech employees with stock-based wealth are a critical customer base for Tesla. But now some large tech companies are cutting staff and smaller startups are finding it harder to get funding.
All that may be true, but Musk’s fears cannot be ignored, said Barry Engle, a former Ford and GM executive who founded Qell, an investment company focused on transportation.
“An economic downturn is increasingly likely,” he said. “Elon and everyone else know. The difference is that as an entrepreneur he is naturally more inclined to action and express the truth, even if he is not popular.”
(Except for the headline, this story has not been edited by DailyExpertNews staff and has been published from a syndicated feed.)