Analysis: Musk’s warning could be the auto industry’s ‘canary in the coal mine’ moment

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June 3 (Reuters) – The Tesla CEO’s (TSLA.O) ‘super bad feeling’ about the economy could be the auto industry’s ‘canary in the coal mine’ moment, signaling a recession for a industry whose bosses have shown no signs of caring.

Musk said the electric car maker needed to cut its workforce by about 10% in an email to executives seen by Reuters. Later, he told the staff that the white-collar ranks were swollen and that he would continue to hire workers to make cars and batteries. Read more

Musk’s warning is the first strong, public dissent in a unified auto industry position that underlying demand for cars and trucks remains strong despite two years of a global pandemic. One executive this week called the demand “very high”.

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

“If the world’s largest electric vehicle company warns about jobs and the economy, investors should reconsider their expectations for margins and revenue growth,” he added. Tesla stock fell 9%.

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

Now supply chain issues, exacerbated by Russia’s invasion of Ukraine, have led to lower sales. US new car sales in May ended at an annualized low of 12.68 million, according to Wards Intelligence. This is a far cry from the glory days of 17 million a year before COVID.

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

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

Ride-sharing companies Uber Technologies Inc (UBER.N) and Lyft Inc (LYFT.O) said last month they would cut hiring and spending, while online used-car retailer Carvana (CVNA. N) said it would cut 12% of its workforce. Read more

Other companies are watching closely.

“We are not as pessimistic as Elon Musk, but we are cautious about our hiring and our spending,” said John Dunn, Americas CEO of Clean Energy Systems, a unit of Plastic Omnium (PLOF.PA) which manufactures fuel and emissions reduction systems.

Industry officials are worried about a possible recession.

“The auto industry is hurtling towards the safe harbor of pent-up demand that could drive sales for years to come, while looming economic storm clouds gather and could destroy much of this request,” said Tyson Jominy, vice president of JD Power. automotive data and analytics.

“SENSITIVE TO ACTION”

Josh Sandbulte, the chief investment officer of Greenhaven Associates, a fund management firm that is a big investor in the shares of General Motors Co (GM.N), traveled to New York this week to attend a conference of Bernstein Alliance. He said financial CEOs there were much more gloomy in their outlook than other business leaders.

While Musk’s email sounds much more pessimistic than that of other industry leaders, Sandbulte said he learned not to fire the CEO of Tesla because “he zigzagged when other people were zigzagging and he was right”.

“We are in a time of confusion, and frankly the financial world and the world of corporate executives are at odds,” Sandbulte said. “At some point we will have the answer that is correct.”

Publicly, many other automakers are still saying that underlying demand remains strong. Ford Motor Co (FN) on Thursday, while reporting its monthly U.S. sales, said its inventories continued to turn at record rates.

“Consumer demand is very high right now. Manufacturers don’t have the inventory,” Allyson Witherspoon, Nissan Motor Co’s U.S. marketing chief (7201.T), told the Reuters Automotive Retail Conference on Wednesday. in Las Vegas.

And industry officials also point out that Tesla has its own issues, including perhaps hiring too quickly relative to its 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 employee of $853,000 isn’t much higher than the 757,000 $ from Ford, much bigger.

Additionally, Tesla’s U.S. sales are heavily concentrated in California, and particularly in the San Francisco Bay Area which is home to Silicon Valley companies.

Tech workers with stock-based wealth are a key customer base for Tesla. But now some big tech companies are downsizing and smaller startups are having a harder time getting funding.

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

“An economic downturn is becoming more and more likely,” he said. “Elon and everyone else know that. The difference being that as an entrepreneur he’s naturally more inclined to take action and tell the truth, even if he’s unpopular.”

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

Our standards: The Thomson Reuters Trust Principles.

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