Musk’s warning could be the car industry’s ‘canary in the coal mine’ moment By Reuters

By Ben Klayman and Joseph White

(Reuters) – Tesla (NASDAQ 🙂 CEO Elon Musk’s “super bad feeling” about the economy may be the automotive industry’s “canary in the coal mine” moment, signaling a recession for an industry whose executives 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 ranks of officials were inflated and that he would continue to hire workers to manufacture cars and batteries.

Musk’s warning is the first loud and public dissent in a united position from the car industry that the underlying demand for cars and trucks remains strong despite a two-year global pandemic. A leader this week called demand “sky high”.

“Tesla is not your average canary in the coal mine. It’s more like a whale in the lithium mine,” Morgan Stanley (NYSE 🙂 said analyst Adam Jonas in a research note referring to the metal used in EV batteries.

“If the world’s largest electric car company warns of jobs and the economy, investors should reconsider their forecasts of margins and top-line growth,” he added. Tesla shares fell 9 percent.

The automotive sector was hit two years ago by the onset of the COVID-19 pandemic, which forced factories to close. This shutdown subsequently played a role in the lack of semiconductor chips, which further hampered vehicle production.

Now the supply chain snare, exacerbated by Russia’s invasion of Ukraine, has pulled sales down. U.S. new car sales in May ended with a weak annual rate of 12.68 million, according to Wards Intelligence. That is far from the heyday of 17 million a year before COVID.

However, these problems mostly affect supply, while inflation is a threat to demand.

“The risk of recession is high, so what he says is certainly not extreme,” Jeff Schuster, president of global forecasting at LMC Automotive, said of Musk.

Ride-haiing companies Uber Technologies (NYSE 🙂 Inc. and Lift Inc. (NASDAQ 🙂 said last month that they would downsize hiring and cut spending, while online used car dealer Carvana said it would cut 12% of its workforce.

Other companies are following closely.

“We’re not as pessimistic as Elon Musk, but we’re cautious about our hiring and expenses,” said John Dunn, America’s CEO of Clean Energy Systems, a Plastic Omnium unit that makes fuel and emission reduction systems.

Industry officials are worried about a possible recession.

“The automotive industry is rushing to the safe haven for pent-up demand, which could carry sales in the coming years, while the looming economic storm clouds are gathering, which could destroy much of that demand,” said Tyson Jominy, JD Power’s vice president of automotive data and analytics.

‘CONDITION OF ACTION’

Josh Sandbulte, Chief Investment Officer for Greenhaven Associates, a money management firm that is a major investor in General Motors Co (NYSE 🙂 shares, has been in New York City this week to attend an Alliance Bernstein conference. He said CFOs have been far more bleak in their outlook than other business leaders.

While Musk’s email sounds far more pessimistic than other production executives, Sandbulte said he has learned not to fire Tesla’s CEO because “he has zagged when other people zigzag and he’s right.”

“We are in a period of discombobulation, and honestly, the financial world and the business world do not agree,” Sandbulte said. “At some point, we’ll get the answer to who’s right.”

Publicly, many other automakers are still saying that underlying demand remains strong. Ford Motor (NYSE 🙂 Co said Thursday, while reporting monthly sales in the U.S., that its inventories continue to turn around at record speeds.

“Consumer demand is sky-high right now. Manufacturers do not have inventory,” Nissan (OTC 🙂 Motor Co US chief marketing officer Allyson Witherspoon said Wednesday at the Reuters Automotive Retail Conference in Las Vegas.

And industry officials also point out that Tesla has its own problems, including possibly hiring too fast for growth.

Tesla’s employment has doubled since the end of 2019, according to the company’s annual reports, and Morgan Stanley’s Jonas noted that Tesla’s revenue per. employed at $ 853,000 is not much higher than the much larger Ford $ 757,000.

In addition, Tesla’s sales in the United States are highly concentrated in California, and especially in the San Francisco Bay area, home to Silicon Valley companies.

High-tech workers with stock-based wealth are a critical customer base for Tesla. But now some large technology companies are cutting staff, and smaller startups are finding it harder to get funding.

All of that may be true, but Musk’s fears can not be ignored, said Barry Engle, a former Ford and GM director who founded Qell, an investment firm focused on transportation.

“An economic downturn is becoming more and more likely,” he said. “Elon and everyone else knows that. The difference is that he, as an entrepreneur, is just naturally more inclined to act and express the truth, even if it is unpopular.”

(Ben Klayman in Detroit and Joseph White in Las Vegas; edited by Peter Henderson and Nick Zieminski)