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Did Tesla Lose its Most Important Champion?

Tesla’s actions this quarter look different than they have in the past—desperate. I believe the reason may be that they’ve lost ons of their most important champions: Mr. Yoshio Ito, Executive VP & CEO, Automotive & Industrial System Capacity.

Mr. Ito resigned from Panasonic on March 1, and that may have been an irrecoverable loss for Tesla.

To understand why, let’s look at what goes into Business-to-Business (B2B) sales.

(And make no mistake, even though Tesla was officially the customer, the size of capital investment and risk Panasonic took on to make this partnership happen meant that Panasonic was sold on it.)

Selling into Companies

Companies don’t make decisions. Companies aren’t hive minds. Companies are made of individuals. Individuals who are charged with looking out for the company, but really they’re pursuing their own interests in ways that benefit the company.

It’s a convenient shorthand to say “Disney wants this…” or “Panasonic doesn’t want that…” But it’s just shorthand. Disney and Panasonic aren’t capable of wanting anything. The “desires” we’re describing are the outcomes of a political process going on behind closed doors.

This is one of the principal difficulties of B2B sales. You don’t just make a pitch and sign a contract. You have to find someone with influence and sell them on being your champion inside the company. Then they sell on your behalf through countless internal meetings where you’re not invited.

As part of this process, they’re on the hook for the results.

Why does anyone do this? Because striking the right deal can significantly boost a champion’s career.

While “Panasonic has been okay letting Tesla slide on its commitments” is true enough, it leaves out a critical insight.

Panasonic has not been okay with it. A specific person has been okay with it.

The “Grace Period”

Another important thing to know about companies is that, while it can be suicide to own up to your own mistakes, there are no consequences to you for cleaning up someone else’s mess. It’s actually a credit to you—as long as the context is set appropriately.

The best context for cleaning up a mess is “coming in to fix what someone else did”. During this time, you can take major write downs, lay people off, whatever. All the painful actions being passed off as cleanup.

BUT this period only lasts 3–6 months.

After that, the mess may have been inherited—but because you didn’t clean it up in a timely manner—it’s yours.

A $TSLAQ Narrative Emerges

If we look at the timing of events, we can see what might be going on with Tesla and Musk:

Looking at the timeline, here’s what I think has happened.

WARNING: This is all speculative. I’ll of course draft it to sound as compelling as I can, but I don’t know anything more than what’s in the public filings and articles. I’m not a journalist. I don’t have “sources”. I’m just a trader trying to make sense of what I see.

My guess is that, even if Mr. Ito wasn’t the original proponent of the partnership with Tesla, he saw its success between 2014 and 2018 and became a major champion of it. (Edit: Actually, Ito was the initial proponent of the deal and benefitted greatly from it. See the “Edits” section at the end of this post.)

He may have been using it to gun for a promotion. At his level, he’d need something big to stand out from his peers.

As of Q3 of 2018, he’s bought Tesla’s story of “infinite demand and production hell” hook, line and sinker. So when Musk says that they need more batteries—and a little time to get production sorted out—Ito believes him. Tesla’s Model 3 is one of the only things showing the promise of real growth in the US automotive space. Ito wants to ride that horse.

Things then turn bad on Tesla and Mr. Ito. Whatever Ito’s initial involvement, his name is on all the press releases about expanding Gigafactory supply. The mess is now his, and it threatens his career.

Musk uses Mr. Ito’s fears of career risk against him and negotiates some sweetheart concessions from Panasonic, promising all along that the extra leeway will let Tesla turn things around. Ito has no choice but to agree and hope Musk can pull it off.

In Q1 2019, other members of the Panasonic leadership decide they’ve had enough. Mr. Ito has clearly failed to take care of Panasonic’s interests, and he’s forced out of the company. Note that Mr. Ito resigned, not retired. In Japanese culture and at this rarified level, that likely indicates a serious fall from grace.

The announcement was made 3/1, which means the decision was made sometime before that—maybe 1 or 2 weeks before.

Whoever’s now in charge—the cleanup crew—knows they have a 3–6 month period where they can take otherwise unacceptable write-downs.

They inform Musk that there’s a new sheriff in town. Panasonic will not tolerate continued non-performance on Tesla’s commitments. They expect to be paid on time and in full for the concessions negotiated the previous year—and they expect Tesla to meet their minimum purchase requirements—or else Panasonic is going to execute on their remedies for default specified in their contract: repossess Gigafactory 1 (which will shatter Tesla’s narrative, force bankruptcy, and wipe Musk out).

Musk was running the quarter like the ones before, expecting that his partners would let him slide on this commitments because they had as much to lose as he did. This new party is not in the same boat.

Sometime in February, with only 4–6 weeks left in the quarter, Musk realizes:

Musk, stressed for quite some time, panics. He takes immediate actions that he thinks will generate the needed cash: announcing the $35k Model 3, laying off sales staff, cutting compensation, trying to get out of leases, etc..

All of this is rushed and haphazard because there is no time. Until just 1 or 2 weeks before, Musk’s plan was to repeat the default/negotiate tactic that had always worked. Now, with less than half the quarter remaining, he’s got someone threatening to actually hold his feet to the fire.

Looking Forward

If the above speculative story is true, it still doesn’t mean that Tesla goes bankrupt next week. It’s possible all these moves worked, and Tesla has managed to both come up with the cash and buy enough batteries.

However, Musk is now living in a video game. Every time he beats a level (survives a quarter), his reward is another, harder level. Tesla likely has to repeat the entire process, but now:

  • Cash balances are drained
  • Prices have been slashed, pulling demand forward and reducing contribution of each additional unit
  • Competition is entering the market
  • Purchase commitments are higher in Q2 than Q1
  • Institutions are quietly exiting the party, as opposed to increasing their commitment

It’s not looking good.

Disclosure: Perseid Capital is short Tesla via puts.

Edits

3/29/19

@Polixenes13 points me to his wonderfully detailed thread where he identified just how important Ito’s departure might be—back on the day it was announced.

Politeness’ thread documents Yoshio Ito’s involvement through the whole process:

  • Signing the original Gigafactory agreement on behalf of Panasonic in July of 2014
    • At the time, he held the title of “Senior Managing Director, Member of the Board President, Automotive & Industrial Systems Company Panasonic Corporation”
  • Signing the General Terms and Conditions (the detailed agreement) in September of 2014

So we have confirmation that this has been Ito’s mess from the start—not one he hitched himself to just recently. Plus, we can see that it had been quite successful for him, as he resigned holding the title "Executive Vice President & CEO, Automotive & Industrial System Capacity.

In my mind, this gives some weight to the thrust of the speculative narrative. The benign “the guy who put Panasonic in bed with Tesla—just as thing were going horribly wrong—retired because of old age” explanation is far too coincidental, given the timing of it all.