The S&P 500 concluded the first quarter of 2024 with an impressive gain of over 10 percent. However, while the index soared, one prominent company saw its stock plummet dramatically.
The Boeing Company finished the quarter with a staggering loss of more than 25 percent in its stock value. Surprisingly, this was not the worst performance in the S&P 500; that title belonged to Tesla Inc., which experienced a decline of over 29 percent.
This downturn translated to a loss of $230 billion in market capitalization. Additionally, Forbes reported that this affected Tesla CEO Elon Musk’s net worth by $55.1 billion, knocking him from the top position of the world’s richest individuals, now ranking behind French luxury magnate Bernard Arnault and Amazon’s Jeff Bezos.
Amidst this decline, short sellers profited handsomely, earning $5.77 billion as Tesla’s stock price plummeted. Nevertheless, Altimeter Capital’s Brad Gerstner is reportedly investing in the downturn, expressing his belief that Tesla is making “massive progress at an accelerating rate” in its self-driving technology.
Back in 2015, Musk assured shareholders that Tesla’s vehicles would achieve “full autonomy” by 2018. Will 2024 finally be the year that vision materializes?
Regardless, it is unlikely to enhance the company’s Q1 earnings report set for April 17. Currently, expectations for vehicle deliveries and revenue fall short of Wall Street’s forecasts.
Analysts predict an average of 457,000 vehicle deliveries. However, Emmanuel Rosner of Deutsche Bank recently revised his projection from 427,000 to 414,000 units. Likewise, Adam Jonas of Morgan Stanley has reduced his estimate from 469,000 to 425,000 units.
Wells Fargo analyst Colin Langan recently noted that Tesla “is a growth company with no growth.”
Rising Chinese Competitors
In late 2021, Tesla appeared to have reached its peak, with stock trading above $400 and a market capitalization exceeding $1 trillion. Investors were eager, but then the growth slowed down.
Tesla’s Q4 2023 earnings, reported in January, highlighted a troubling 40 percent year-over-year drop in quarterly profits. Today, its market capitalization has been halved to $544 billion, and the stock price has dropped roughly 60 percent from its pinnacle.
The challenges Tesla faces stem from increasing interest rates and diminishing demand for electric vehicles (EVs) in both the U.S. and Europe. However, the significant downturn in China—where Tesla generates about one-fifth of its revenue—has emerged as a more pressing concern. Insurance data from CnEVPost indicates a 5 percent year-over-year decline in China over the last 12 weeks.
The issues affecting Tesla extend across the entire EV landscape. Despite government subsidies, EVs still carry a higher price tag than traditional internal combustion engine vehicles. Additionally, due to their weight and energy-efficient driving mechanisms, EV owners find they wear through tires every 6,000 miles.
After dominating the EV sector for the past decade, Tesla is now lagging behind formidable Chinese competitors. In particular, BYD has overtaken Tesla as the leading EV manufacturer, showing no signs of slowing down.
In the first quarter, BYD introduced the Qin Plus EV starting at around $15,200, followed by the BYD Seagull, a compact all-electric hatchback priced under $10,000. In stark contrast, Tesla’s Model 3 retails for approximately $34,000 in China.
What conclusions can be drawn?
Industrial Mutation
Tesla is actively participating in the evolution of the electric vehicle market. Whether it can adapt to the rapidly shifting landscape and thrive for years to come remains to be seen. Alternatively, its best days could be behind it. The process of adaptation is crucial.
The concept of creative destruction was first articulated by Austrian economist Joseph Schumpeter in his 1942 work, Capitalism, Socialism, and Democracy. He described it as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”
According to Schumpeter, economic growth begins with entrepreneurial innovations. As demand escalates for new businesses, production costs rise, impacting existing companies that must navigate a higher cost environment. Often, they face dwindling market shares due to competition from these innovative firms.
Over time, as consumers gravitate toward products that incorporate the latest technologies, demand for older products dwindles. Prices then drop, signaling the end of a growth cycle.
This innovation temporarily saturates the marketplace, resulting in consolidation and potentially leading to a depression. Schumpeter asserted that the depression phase is both constructive and necessary, as it facilitates economic equilibrium and drives new innovations in the subsequent recovery phase.
The process of new, innovative enterprises overshadowing established companies is what Schumpeter referred to as creative destruction.
This disruption can be jarring to the current industrial order, often leading to mass layoffs of workers whose skills become obsolete. Nevertheless, it is paramount for achieving sustained long-term economic growth.
Innovation opens new pathways for workers in more progressive and productive sectors, while also delivering improved and more affordable products to consumers.
This cycle reflects the nature of the economy. Remarkably resilient industries, such as Kodak, Pan American Airways, Bethlehem Steel, Montgomery Wards, and Blackberry, have vanished as new, agile companies have emerged.
Janet Goes to Guangzhou
As Tesla loses its grip on market share, its workforce is feeling the repercussions. Recently, Tesla scaled back production at its Shanghai facility, reducing worker schedules from six and a half days per week to five days.
This environment of creative destruction instigated by Tesla’s Chinese competitors also underscores the flaws in President Biden’s ambitions to transform the U.S. economy into a green energy leader.
The influx of affordable, Chinese-manufactured clean energy products, including EVs and solar panels, is disrupting the market and driving prices down globally. U.S. and European clean energy producers struggle to keep pace.
Similar to their American and European counterparts, Chinese companies benefit from substantial governmental support, encouraging production that exceeds market demand.
This week, Treasury Secretary Janet Yellen traveled to Guangzhou and Beijing, requesting Chinese officials to curtail their production practices. This request seems futile, much like asking an elite athlete to intentionally lower their performance.
Governments typically resist creative destruction when it threatens their economic agendas. To counter China’s advantage in producing clean energy products faster and cheaper, the Biden administration is likely to reinstate some of Trump’s tariffs.
Yet, competition from Chinese enterprises extends far beyond EVs and solar energy. Historical attempts to impose trade barriers against Chinese firms have often backfired.
Take the case of Huawei Technologies. Years ago, the U.S. restricted advanced chip sales to the company. Instead of faltering, Huawei developed its own chips and, in 2023, celebrated record profits.
Investors caught in the AI stock hype surrounding Nvidia should take heed. Shares have surged 19,000 percent over the past decade, largely based on the notion that no other company can create chips as advanced as Nvidia. However, that narrative might no longer hold true.
According to the Wall Street Journal, “Huawei has managed to deliver AI chips that developers say match the capabilities of some of Nvidia’s top processors.”
Just like Tesla’s stock in November 2021, Nvidia’s share price has a considerable distance to fall.
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Sincerely,
MN Gordon
for Economic Prism
