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Musk's warning could be auto industry's 'canary in the coal mine' moment

Stock Markets Jun 04, 2022 04:01PM ET
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3/3 © Reuters. FILE PHOTO: Tesla Motors Inc CEO Elon Musk talks about Tesla's new battery swapping program in Hawthorne, California June 20, 2013. REUTERS/Lucy Nicholson 2/3
 
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By Ben Klayman and Joseph White

(Reuters) - Tesla (NASDAQ:TSLA) CEO Elon Musk's "super bad feeling" about the economy could be the auto industry's "canary in the coal mine" moment, signaling a recession for an industry whose bosses have shown no signs of concern.

Musk said the electric carmaker needed to cut about 10% of its workforce in an email to executives seen by Reuters. He later told staff that white-collar ranks were bloated and he would keep hiring workers to make cars and batteries.

Musk's warning is the first loud and public dissent in a united stance by the auto industry that underlying demand for cars and trucks remains strong despite two years of global pandemic. One executive this week called demand "sky high."

"Tesla's not your average canary in the coal mine. It's more like a whale in the lithium mine," Morgan Stanley (NYSE:MS) analyst Adam Jonas said in a research note, referring to the metal used in EV batteries.

"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. Tesla stock fell 9%.

The auto sector was hit two years ago by the onset of the COVID-19 pandemic, which forced the closure of factories. That shutdown subsequently played a role in the semiconductor chip shortage that further hobbled vehicle production.

Now supply-chain snarls, exacerbated by Russia's invasion of Ukraine, have dragged down sales. U.S. new-car sales in May finished at a weak annualized rate of 12.68 million, according to Wards Intelligence. That's a far cry from the glory days of 17 million a year pre-COVID.

Those issues mostly affect supply, however, while inflation is a threat to demand.

"Risk of recession is high, so what he is saying certainly isn't extreme," Jeff Schuster, president of global forecasting at LMC Automotive, said of Musk.

Ride-hailing companies Uber Technologies (NYSE:UBER) Inc and Lyft Inc (NASDAQ:LYFT) said last month they would scale back hiring and curtail spending, while online used-car retailer Carvana said it would cut 12% of its workforce.

Other companies are watching closely.

"We are not as pessimistic as Elon Musk, but are being cautious about our hiring and expenditures," said John Dunn, Americas CEO for Clean Energy Systems, a Plastic Omnium unit that makes fuel and emissions-reduction systems.

Industry officials worry about a possible recession.

"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 & analytics.

'PRONE TO ACTION'

Josh Sandbulte, the chief investment officer for Greenhaven Associates, a money management firm that is a large investor in General Motors Co (NYSE:GM) stock, has been in New York City this week attending an Alliance Bernstein conference. He said financial CEOs there have been far more gloomy in their outlooks than other business leaders.

While Musk's email sounds far more pessimistic than other manufacturing leaders, Sandbulte said he has learned not to dismiss the Tesla CEO because "he has zagged when 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," Sandbulte said. "At some point, we'll get the answer who is correct."

Publicly, many other automakers still say underlying demand remains strong. Ford Motor (NYSE:F) Co on Thursday, while reporting monthly U.S. sales, said its inventories continue to turn at record rates.

"Consumer demand is sky high right now. Manufacturers do not have the inventory," Nissan (OTC:NSANY) Motor Co's U.S. marketing chief Allyson Witherspoon said Wednesday at the Reuters Automotive Retail conference in Las Vegas.

And industry officials also point out Tesla has its own issues, including possibly hiring too fast compared 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 Tesla's revenue per employee of $853,000 is not much higher than the much larger Ford's $757,000.

In addition, Tesla's U.S. sales are heavily concentrated in California, and especially in the San Francisco Bay area that is home to Silicon Valley companies.

High-tech workers with stock-based wealth are a critical customer base for Tesla. But now, some big 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 firm focused on transportation.

"An economic downturn is becoming increasingly likely," he said. "Elon and everyone else knows it. The difference being that as an entrepreneur he's just naturally more prone to action and voicing the truth, even if unpopular."

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

Musk's warning could be auto industry's 'canary in the coal mine' moment
 

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Comments (15)
Medlife Publishing
Medlife Publishing Jun 05, 2022 8:12PM ET
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Why all the spam recently?
Sugianto Polisi
Sugianto Polisi Jun 04, 2022 5:45PM ET
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SUGIANTO.. JLSUMBER.166
Nuno Farinha
Nuno Farinha Jun 04, 2022 4:34PM ET
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In management sometimes we must find a problem when we've a decision to be made.
Todd Gray
Todd Gray Jun 03, 2022 11:05PM ET
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white collars been bloated for decades. and, what they produce is more dysfunctional than ever.
Michael Roal Casa
Michael Roal Casa Jun 03, 2022 9:02PM ET
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sure lets all trust him. Musk has covered up safety issues with his cars for years. He has lied about his financing to obtain Twitter. He is being investigated by SEC for market manipulation. He is turning out to be a great Repugnican, deceitful, greedy and not of the people or for the people.
Todd Gray
Todd Gray Jun 03, 2022 9:02PM ET
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do you think the Democrats giving the people a few thousand bucks in stimulus make them your friend. in case you haven't noticed, all this inflation is them taking it right back. make no mistake about that.
Benjamin USA
Benjamin USA Jun 03, 2022 9:02PM ET
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Jun 03, 2022 9:02PM ET
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buying votes won't safe you in Nov....
Randall Guinn
Randall Guinn Jun 03, 2022 9:02PM ET
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I love the way liberals now question everything Elon says now that hes standing up for free speech with twitter, their propaganda machine.
Efra Rod
xRod Jun 03, 2022 9:02PM ET
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that is ridiculous. Inflation started with the excessive print of money to stimulate economy, after the market crash back in 2020.
Sudhin Ku
Sudhin Ku Jun 03, 2022 8:27PM ET
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There is big competition on way for Tesla cars in EV market, not sure if Tesla can keep up with Market in long run
ZS Beck
ZS Beck Jun 03, 2022 8:27PM ET
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I agree... The stock is overpriced, and other EVs are coming.
Sudhin Ku
Sudhin Ku Jun 03, 2022 7:57PM ET
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Except Tesla no one is firing, demand will stay healthy for years to come, may be mild recession next year but there is no storm, because indicators are showing high inflation, but none of indicators reflect recession yet,it's more people feeling, which is again caused by media, where as all the investment banks are still investing grabbing all the down slides
Sudhin Ku
Sudhin Ku Jun 03, 2022 7:48PM ET
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Electric cars are picking up, but it's still small market globally, would take decades to pick up electric vehicles on road, probably we would have few small recessions in between nothing major , economy is strong business cycles are great it can with stand , financial systems are more robust, nothing is coming yet, may be mild recession next year
Sunil Sugnani
Sunil Sugnani Jun 03, 2022 7:28PM ET
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Musk is forgetting that the people buying his cars are the white-collar people. Imagine if everyone starts firing these white-collar employees, who will then buy Tesla cars??
Al Ose
Al Ose Jun 03, 2022 6:53PM ET
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Canary? How about Big Bird?
 
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