Elon Musk’s “super bad feeling” about the economy may be the “canary in the coal mine” moment for the automotive industry, signaling the onset of a recession for an industry whose leaders have shown little fear.
Musk indicated in an email to executives seen by Reuters that the electric vehicle manufacturer needed to eliminate approximately 10 percent of its personnel. Later, he cautioned employees that white-collar positions were overloaded and that he would continue to hire individuals to construct automobiles and batteries.
Musk’s warning is the first loud and vocal opposition to the auto industry’s unified statement that despite a two-year global slump, underlying demand for cars and trucks remains strong. This week, a chief executive officer described demand as “sky-high.”
“Tesla’s not your average canary in the coal mine. It’s more like a whale in the lithium mine. ” Adam Jonas, an analyst at Morgan Stanley, compared the metal used in EV batteries to a whale in a lithium mine in a research note.
“If the world’s largest EV company warns on jobs and the economy, investors should reconsider their forecasts on margins and top-line growth,” he added. The value of Tesla’s stock fell by 9 percent.
The beginning of the COVID-19 epidemic two years ago resulted in the closure of car industry businesses. This delay contributed to the shortage of semiconductor chips, which further hindered vehicle production.
As a result of Russia’s invasion of Ukraine, supply-chain snarls have now weighed down sales. In May, new car sales in the United States reached a low annualized rate of 12.68 million, according to Wards Intelligence. This is a far cry from the 17 million every year prior to the implementation of COVID mandates.
Jeff Schuster, head of worldwide forecasting at LMC Automotive, stated, “risk of recession is high, so what he is saying certainly isn’t extreme.” Uber Technologies Inc and Lyft Inc announced this month that they would reduce recruiting and spending, while online used-car retailer Carvana said it would lay off 12% of its workers.
Other companies are keeping a close eye on the situation.
John Dunn, Americas CEO of Clean Energy Devices, a Plastic Omnium company that develops fuel and emissions-reduction systems, stated, “We are not as pessimistic as Elon Musk, but are being cautious about our hiring and expenditures.”
Officials within the business are concerned about an impending economic downturn.
“The auto industry is racing to the safe harbor of pent-up demand that could carry sales for years to come, while the looming economic storm clouds are gathering that could destroy much of that demand,” said Tyson Jominy, J.D. Power vice president of automotive data and analytics.
Josh Sandbulte, the chief investment officer of Greenhaven Associates, a money management firm that owns a significant amount of General Motors stock, was in New York City this week for an Alliance Bernstein conference. He claimed that banking CEOs in the region have been significantly more pessimistic than other industry leaders.
Despite the fact that Musk’s email appears to be substantially more negative than those of other manufacturing executives, Sandbulte has learned not to overlook Musk because “he has zagged while other people are zigging and he’s been proven right.”
“We’re in a period of discombobulation, and frankly the financial world and the business leadership world don’t agree.” “At some point, we’ll find out who is correct.”
A majority of automakers continue to assert that underlying demand is robust. Ford Motor Company stated on Thursday, when reporting its monthly U.S. sales, that its inventory continues to turn at record rates.
“Consumer demand is sky-high right now. Manufacturers do not have the inventory,” Nissan Motor Co.’s U.S. marketing chief Allyson Witherspoon said at the Reuters Automotive Retail conference in Las Vegas on Wednesday. Officials in the industry note that Tesla has its own problems, such as perhaps hiring too quickly in relation to its growth.
According to the company’s annual reports, Tesla‘s staff has more than doubled since the end of 2018, and Morgan Stanley analyst Jonas stated that Tesla’s revenue per employee of $853,000 is not considerably greater than Ford’s revenue per employee of $753,000.
In addition, the majority of Tesla’s sales in the United States are concentrated in California, namely the San Francisco Bay area, which is home to Silicon Valley companies.
As a consumer base, Tesla heavily depends on high-tech personnel with stock-based wealth. Nonetheless, some large IT companies are abruptly laying off workers, while smaller startups are having trouble acquiring financing. Musk’s concerns cannot be discounted, according to Barry Engle, a former Ford and GM executive who founded the transportation-focused investment firm Qell.
“An economic downturn is becoming increasingly likely,” he stated. “Elon and everyone else knows it. The difference is that as an entrepreneur he’s just naturally more prone to action and voicing the truth, even if unpopular.”