Elon Musk Has Forgotten Tesla’s Market

Elon Musk has never shied away from controversy. Over the past decade, the brash Tesla (NASDAQ:TSLA) CEO has frequently clashed with federal regulators, competitors, and Wall Street analysts, among others.

Musk’s latest controversy may be the most dangerous for Tesla’s long-term health, though. By repeatedly downplaying the public health threat from COVID-19 and unilaterally reopening Tesla’s Fremont factory prior to getting authorization from Alameda County officials, Musk has risked alienating wealthy coastal liberals, Tesla’s main target market. With electrical vehicle (EV) market competition growing every year, this could easily backfire and disrupt the company’s growth plan.

Clashing with authorities, again

Elon Musk has been criticizing the public health response to the novel coronavirus for months. In his public comments, he repeatedly underestimated how widespread and deadly COVID-19 would be. Not surprisingly, he vigorously opposed the closure of Tesla’s main factory as the Bay Area (and subsequently, all of California) banned non-essential activities.

While Tesla eventually acknowledged reality and closed the Fremont factory on March 23, Musk didn’t mellow out. During Tesla’s earnings call in late April, he called stay-at-home orders an unconstitutional infringement on people’s freedoms. (The Supreme Court has ruled that actions to halt the spread of a pandemic can temporarily supersede individual rights without violating the Constitution.)

Then, in response to a benign follow-up question about pushing the government to invest in EV infrastructure as part of the economic recovery, Musk elaborated:

So, this is the time to think about the future, and also to ask, is it right to infringe upon people’s rights, as what is happening right now. I think the people are going to be very angry about this and are very angry, because somebody should really — if somebody wants to stay in their house, that’s great. They should be allowed to stay in their house, and they should not be compelled to leave. But to say that they cannot leave their house, and they will be arrested if they do, this is fascist. This is not democratic. This is not freedom. Give people back their goddamn freedom.

Earlier this month, Musk backed up his words with action. Tesla began to reopen the Fremont factory on May 11 in violation of a regional shelter-in-place order, and Musk essentially dared local authorities to arrest him — even though Tesla and the county were already close to reaching an agreement to allow the factory to reopen on May 18.

Why this time could be different

Elon Musk has periodically landed himself in hot water before. For example, his premature announcement of “funding secured” to take Tesla private sparked an SEC securities fraud investigation, while his tweets calling a British diver “pedo guy” led to a defamation lawsuit.

Despite these incidents, Musk has consistently managed to avoid alienating two key constituencies: Tesla buyers and investors. Indeed, over the past decade, Tesla has gone from a start-up building fewer than 1,000 cars a year to a sizable automaker selling hundreds of thousands of cars annually. Meanwhile, Tesla’s market cap has exploded from around $2 billion following its 2010 IPO to roughly $150 billion, making it the most valuable U.S. automaker by a wide margin.

TSLA Market Cap Chart

However, there are some important differences this time around. Most potential Tesla customers probably didn’t care much about whether or not Musk had “funding secured” to take the company private. His erratic tweeting also isn’t the kind of thing that would spark outrage among people looking for a “green” car that’s fun to drive.

Railing against stay-at-home orders and comparing them to fascism is far more likely to cost Tesla customers in the long run. There are certainly some libertarian (or even conservative) environmentalists among Tesla’s customer base, but that’s not the company’s main target market. (It doesn’t help Musk’s case that the restrictions have proven to be very effective; whereas many densely populated urban areas in the U.S. have experienced big outbreaks, quick action helped the San Francisco Bay region avoid one.)

Instead, Tesla owes much of its success to wealthy, highly educated liberals (especially tech workers) in coastal states, most notably California. The Golden State has accounted for nearly half of U.S. EV sales in recent years, with other “blue” states like New York, Washington, New Jersey, and Massachusetts also over-indexing. During the first nine months of 2019, 48,483 Model 3s were registered in California, accounting for 23% of Tesla’s global Model 3 deliveries.

Support for stay-at-home restrictions was overwhelming at the peak of the pandemic in the U.S., but especially among Democrats and Democrat-leaning independents. In April, most polls showed that a majority of Republicans and 80% or more of Democrats supported stay-at-home orders.

More recently, a growing (but not overwhelming) number of Republicans have advocated reopening the economy. However, a Pew Research poll earlier this month found that 87% of Democrats and Democrat-leaning independents were still more worried about state and local governments reopening too quickly than that they would reopen too slowly.

In short, Elon Musk is far out of sync with public opinion on what could be a life-or-death issue among the people who are most likely to be Tesla customers — Democrats in urban areas. Indeed, COVID-19 has disproportionately impacted heavily Democratic areas. (The average death rate from COVID-19 in counties that voted for Clinton in 2016 is three times the death rate in counties that voted for Trump.) This poses a significant risk that Musk’s words and deeds related to COVID-19 will drive away customers.

Some have speculated that Musk’s recent confrontations with authorities could expand Tesla’s customer base by increasing the company’s appeal to conservatives. I’m not convinced. In recent years, if you wanted to show off your “green” credentials, there was no better way to do so than to buy a Tesla. There are much cheaper ways to show one’s support for individualism and freedom.

Extremely poor timing

Musk didn’t pick a good time to risk alienating a large swath of Tesla’s target customers. For one thing, the economic impact of COVID-19 could reduce the demand for $50,000 cars. Indeed, Tesla recently cut the prices of several models by up to 6% in North America, a move that Reuters attributed to soft demand.

More importantly, Tesla is at the beginning of a multiyear process of dramatically scaling up its production. To live up to its $150 billion market cap, Tesla will need to go from selling hundreds of thousands of cars annually today to millions of cars annually within a few years. That means it will need to acquire new customers faster than ever. Musk’s recent behavior has jeopardized Tesla’s ability to do so.

If EV buyers didn’t have any good alternatives to Tesla, perhaps Musk could get away with offending many of his potential customers. However, consumers already have a lot more choices than they had just two to three years ago, and the number of EVs on the market will grow every year for the foreseeable future. Crucially, many established automakers now recognize that EVs are the future and are investing accordingly, rather than just building hybrids or EVs as compliance cars.

Perhaps public health experts’ warnings that the COVID-19 pandemic could get worse before it gets better will prove overly pessimistic. In that case, Tesla might not face much blowback for Musk’s comments regarding the stay-at-home orders and his decision to reopen the Fremont factory before getting approval to do so.

That said, with Tesla shares trading near a record high, investors appear to be underestimating the alternative possibility — that wealthy liberal car buyers may shun Tesla in the years ahead in favor of EVs from other manufacturers that followed public health officials’ orders. Any disruption to the company’s growth plan could be disastrous for Tesla stock.