What happened
If you've been investing in the stock market long enough, you may recall this clever quote from former General Electric chairman Jack Welch:
When you're No. 4 or 5 in a market, when No. 1 sneezes, you get pneumonia. When you're No. 1, you control your destiny. The No. 4s keep merging; they have difficult times.
The point being that if the No. 1 in an industry is experiencing difficulties, anyone other than No. 1 should probably buckle up -- because things are about to get really rough.
This quote feels particularly relevant after early reports today indicated that the No. 1 electric vehicle manufacturer in the world just sneezed. Tesla (TSLA 1.98%) is down about 9% as of 2 p.m. ET Friday -- and now shares of EV runners-up Rivian Automotive (RIVN 1.80%), Lucid Group (LCID 7.12%), and Nikola (NKLA +0.00%) are down 5.7%, 6.7%, and 7.6%, respectively.
Image source: Getty Images.
So what
Reuters reported early Friday that Tesla CEO Elon Musk emailed company staff Thursday announcing a hiring freeze and a 10% workforce reduction. Reports of a second email from Musk on Friday specified that was a cut in Tesla's "salaried headcount" -- i.e. office workers and managers, but not "anyone actually building cars, battery packs or installing solar."
Musk reportedly said he has a "super bad feeling" about the economy right now, which explains his move proactively right-sizing Tesla to ensure it survives the recession he fears is on its way. The carmaker's warning also echoes rumblings from the banking sector this week. JPMorgan Chase CEO Jamie Dimon warned at a recent banking conference that an economic "hurricane is right out there down the road coming our way."
Now what
This all sounds rather bad for electric car companies -- and it sounded even worse before it became clear that Musk was talking only about laying off office staff, and not line workers. If Tesla was in trouble despite having achieved scale and maintained profitability for more than two straight years, then companies like Rivian, Lucid, and Nikola -- which are all still losing money and burning cash as they try to scale up their production -- could be in really dire straits.
After all, Nikola is currently burning more than $560 million per year as it attempts to grow production to 500 trucks this year. Lucid is burning cash more than three times as fast -- $1.8 billion per year -- as it attempts to ramp up production. And Rivian's cash flow statement reads like a veritable cash bonfire, with more than $5 billion in cash burnt over the past 12 months, according to data from S&P Global Market Intelligence.
But here's the thing: The more details that come to light, the less it sounds like Tesla is in trouble. Some managers may lose their jobs, true. But if Tesla is not laying off factory workers -- and if indeed, as Musk says, "hourly headcount will increase" -- then it sounds to me like demand remains intact, and so too, Tesla's desire to ramp production to 1.5 million EVs this year to meet that demand.
On that note, I think that Rivian, Lucid, and Nikola shareholders can breathe a sigh of relief -- because if it turns out Tesla isn't sneezing, then other car companies may just avoid catching pneumonia.
