12 ★ FINANCIAL TIMES Friday26 July 2019

COMPANIES

E

lon Muskhas carved out a highly successful

niche as everyone’s favourite techno visionary.

The visions he conjures are always over the

horizon, whether human settlements on Mars

or fleets of fully self-driving cars that operate as

taxis on the side, making their owners a living.

Such promises serve an important purpose, burnishing

his personal brand and bringing a lustre to his companies.

But it is starting to look as though Mr Musk will actually

need to deliver on some of these visions — and sooner

rather than later.

The 14 per cent slice taken out ofTesla’s share price yes-

terday morning is a sign of the disappointment in store if

the stock market decides that the company is just another

carmaker and not the harbinger of a new type of autono-

mous transport-as-a-service company.

After two years of struggles to ramp up the production

and global delivery of its Model 3, Tesla is caught between

two poles: is there enough demand for electric cars to meet

Mr Musk’s high growth targets? And can it make enough

profit both to sustain its heavy investment plans and jus-

tify a stock market valuation that is well ahead of the rest

of its industry? The two are connected. Tesla has been

bringing prices down to generate more demand, but that

has put pressure on profit margins and thrown Mr Musk’s

recent promises of financial sustainability into doubt.

This week’s quarterly earnings report was a demonstra-

tion of how uncomfortable life can be in this squeeze. The

good news is that, even without resorting to advertising,

orders for the Model 3 are still rolling in. But profit margins

aren’t expanding at the rate the optimists had hoped, even

leaving aside one-off factors that made the picture look

particularly bleak this quarter.

For Tesla investors who have suffered the whiplash from

two disappointing quarters, the message from Mr Musk

this week has hardly been reassuring. There is, he said,

more of the same ahead: the next 12 months, like the last,

will see Tesla claw back into profit by the end of the year,

before plunging again into a “tough” first half of 2020.

A clear pattern is establishing itself. Scaling up new pro-

duction lines takes time and strains finances.New model

launches soak up cash. In the

second half of next year, that

will be the Model Y, a small,

crossover sport utility

designed to hit a hot part of

the market.

At least the warnings of

imminent bankruptcy from

the Tesla bears have

receded. Right now, the com-

pany has a record $5bn of cash on hand. But that is partly

because it has trimmed capital spending and R&D. Those

costs will rise again as new models approach, and Mr Musk

conceded that Tesla was likely to slip back into negative

cash flow territory in launch periods.

This is not a formula that will help Tesla break out to

become more than just a low-margin, midsized carmaker

— and one that faces increasing competition as others

flood the electric car market with new vehicles. Hence the

need for robotaxis to ride to the rescue.

Persuading the world that his cars will soon be zipping

around city streets on their own is essential to Mr Musk’s

plans. Tesla buyerspay $7,000 for the company’s self-driv-

ing software, and almost all of that falls straight to the bot-

tom line. According to Mr Musk, if enough people can be

persuaded to payfor the software, Tesla will more than

reach its short-term 25 per cent gross profit margin target.

If customers no longer believe the autonomous future is

imminent, this will be difficult. Mr Musk has promised

Teslas will have full autonomous capabilities by the end of

this year, and that the company will be in a position to

launch a driverless taxi service in the second half of 2020.

His confidence stands in marked contrast to the mood

among others trying to launch driverless cars. General

Motors’ Cruise this week became the latest to pull back

from an overly ambitious timetable, delaying its promised

launch of driverless taxis beyond the end of this year.

It isn’t just that the technology isn’t ready. Amid the

backlash against the tech industry, groups such as Cruise

are laying more emphasis on building broad social support

for their disruptive technologies before unleashing them.

With driverless cars, that will not be quick or easy.

None of this has dented Mr Musk’s confidence, nor the

overriding importance of full self-driving cars to his busi-

ness plans. Earlier this year, he said Tesla would never

make a sustained profit until the era of robotaxis had

arrived. His shareholders can’t say they weren’t warned.

[email protected]

INSIDE BUSINESS

TECHNOLOGY

Richard

Waters

Musk must deliver on

his dreams or risk

missing the robotaxi

Bringing prices

down to generate

more demand

has put pressure

on profit margins

NEIL HUME, ROBERT SMITH

AND ARASH MASSOUDI

Anil Agarwal, the Indian metals

tycoon, is unwinding the complex bet

that made him the biggest shareholder

inAnglo American, ending speculation

that he would launch a bid for one of

the most revered names in mining.

Mr Agarwal is reckoned to have made

about $500m before costs from the

20 per cent stake, people familiar with

the matter said. But those costs are sub-

stantial: he had to pay fees to JPMorgan

and fund the interest payments on the

bonds used to finance the bet.

Those coupon costs alone will have

totalled about $300m since he first put

on the two legs of the trade.

The bonds were issued in March and

September 2017 and gave Volcan, Mr

Agarwal’s family trust, the 20 per cent

stake in Anglo, fuelling speculation that

he was plotting a bid.

The self-made billionaire insisted the

stake was just an investment in a “great

company with excellent assets”. But the

way the deal was structured by bankers

atJPMorgan— it was funded using man-

datory convertible bonds — spoke to a

broader strategic motive.

Often using debt, Mr Agarwal has

amassed a fortune by acquiring

bombed-out mining assets frequently

from the Indian government and trans-

forming their operations.

His dream is to build an Indian ver-

sion ofBHP, the world’s biggest natural

resources group. In 2016, he had tried to

merge his Hindustan Zinc with Anglo,

which was then struggling to service a

large debt load.

Since the first bond was completed,

shares in Anglo have risen more than 80

per cent and the company is now valued

at almost $40bn.

They were due to mature next year

but Mr Agarwal has decided to exercise

a call option and take profits.Because of

the way these embedded derivatives are

structured, the businessman would not

have made any more on the trade even if

Anglo’s share price rose further.

Anglo, which announced a $1bn share

buyback alongside half-year results yes-

terday, declined to comment. Under

Mark Cutifani, chief executive, Anglo

has gone from sector laggard to a com-

pany that can go head-to-head with the

likes of BHP, Glencore and Rio Tinto.

Industrials

Agarwal sells stake in Anglo American

MARK VANDEVELDE— NEW YORK

Tom Barrack, thereal estate investor

and ally of US President Donald

Trump, has struck a deal in which he

will step down as chief executive ofCol-

ony Capital, months after assuming the

roleafter a troubled merger with a rival

fund manager.

Colony will pay $325m to buyDigital

Bridge, which manages a portfolio of

342,000 mobile phone towers and 39

data centres, and which already has a

$4bn joint venture with Mr Barrack’s

company.

Marc Ganzi, who co-founded Digital

Bridge in 2013, will become chief execu-

tive of Colony in 2021, the company

said, taking over a role that Mr Barrack

assumed last year after ousting Richard

Saltzmanfollowing Colony’s merger

with rival fund management group

Northstar. Mr Barrack will return to his

position as executive chairman.

Colony shares have fallen by about

two-thirds since the deal was completed

in early 2017, at a price that analysts say

overvalued Northstar’s real estate port-

folio.Mr Barrack has since had totackle

two campaigns by activist investors.

Under pressure from Senvest Man-

agement, a New York hedge fund, Col-

ony last yearslashedthe management

fees it collects from Northstar Realty

Europe, a publicly traded real estate

investment trust. Then,in February,a

firm named Blackwells Capital prodded

Colony into appointing three new direc-

tors to its board and examining a sale of

non-core assets.

Colony has recently explored a sale of

Colony Industrial, its warehouse portfo-

lio,said people briefed on the talks. It is

unclear whether a deal will materialise,

or when, one of them added.

Colony said the deal announcedyes-

terday would helpit position itself as a

provider of “investment management

products in which the digital and real

estate frontiers intersect”.

One shareholder, speakinganony-

mously, welcomed the move as a sign

that Colony was repositioning itself as

an investment manager that earns fees

for overseeing outside investors’ capital,

rather than a direct owner of specialist

real estate assets, many of which have

underperformed. “One could view this

as a signal that soon the real estate assets

will be sold,” the person added.

Financials

Barrack to bow out as chief of Colony Capital

KANA INAGAKI— TOKYO

CHRIS TIGHE— NEWCASTLE UPON TYNE

Nissanwill axe 12,500 jobs globally and

slim the number of models it produces

by 10 per cent in an expansion of its

restructuring measures after its quar-

terly profit fell 95 per cent.

Thedeeper jobs cuts, which would

represent 10 per cent of its global work-

force, come as Japan’s second-largest

carmaker struggles to stem a deteriora-

tion in profits and the fallout from the

arrest and ousting ofCarlos Ghosn, its

former chairman.

Hiroto Saikawa, chief executive, said

the company had already started cut-

ting output at eight sites, with an initial

6,400 job cuts expected to be completed

by the end of March.

According to a presentation given to

analysts, 2,420 jobs will be cut in the US

and Mexico, 2,540 in India and Indone-

sia, 880 in Japan and 470 in Spain.

As part of the company’s first phase

of headcount reduction, 90 jobs will

also be cut in the UK, where Nissan runs

the country’s largest car plant in

Sunderland.

Fresh questions have emerged about

the plant’s future as Boris Johnson

became theUK prime minister this

week with a declaration to take the

country out of the EU in 99 days.

But Mr Saikawa declined to give any

details on the remaining 6,100 jobs at

six other sites, which will be eliminated

over the next three years.

“It won’t be surprising if additional

jobs are reduced in the UK in the second

phase of the restructuring,” said Koji

Endo, head of equity research at SBI

Securities.

The Unite union said it understood

“there will be no future job losses at the

Sunderland plant as a result of this

announcement”.

Investment in the plant, the UK’s big-

gest single carmaking site,exceeds

£4bn with a further £100m spent to

prepare for the new Juke model.

The plant in north-east England is

already shedding jobs, announcing in

April last year it was seeking volunteers

for redundancy. This was because of the

downturn in demand for diesel vehicles.

The company also announced that

net profit fell 95 per cent to ¥6.4bn

($59m) from ¥115.8bna year earlier in

the April to June quarter. That was well

below analyst expectations of a profit of

¥66.7bn, according to S&P Global Mar-

ket Intelligence. Revenue declined

13 per cent to ¥2.3tn as sales fell in most

of Nissan’s core markets except China,

including a 3.7 per cent drop in the US

and a 16.3 per cent fall in Europe.

As part of plans to slim down its

range of cars, Mr Saikawa said that the

company’s budget Datsun brand for

emerging markets would be placed

under review.

Nissan’s newly formed nomination

committee is expected to accelerate its

search for Mr Saikawa’s successor fol-

lowing the sharp deterioration in finan-

cial conditions.

Mr Saikawa said he would preside

over the initial restructuring phase until

March, but its second phase would

probably be overseen by a new manage-

ment team.

See Lex

Automobiles

Nissan steps up pace of restructuring

Axe to fall on 12,500 jobs

while number of models

produced will drop 10%

Booking.com

considers itself

an intermediary

between

property owners

and guests

Ullstein Bild/Getty

95 %

Fall in quarterly

net profit from

a year earlier

16.3%

Drop in European

sales, against a 3.7%

decline in the US

TOM HANCOCK— SHANGHAI

A privately funded Chinese company

has put satellites into orbit for the first

time, marking a step forward for the

country’s nascent space start-ups.

Beijing-based iSpace’s Hyperbola-

rocket blasted off from a state facility in

northwestern China yesterday, sending

two satellites and payloads into orbit,

the company said.

“The launch mission was a complete

success, achieving a breakthrough for

the Chinese private launch vehicles,”

iSpace said.

Dozens of Chinese satellite companies

have been established since 2014 when

Beijing allowed private investment in

the sector to fuel innovation in space

technology. iSpace was founded in 2016

and has 120 staff.

Cai Jingqi, iSpace’s vice-president,

told state media yesterday that the

launch marked the “official start of

commercial operations”, and showed

the company had mastered the core

technology to build a carrier rocket.

Chinese companies lag behind inter-

national rivals withElon Musk’sSpaceX

becoming the first private company to

launch a liquid-propellant rocket into

orbit in 2008, completing its first com-

mercial satellite delivery six years later.

Analysts said the rockets produced by

many of the Chinese start-ups remained

dependent on technology developed by

state-run companies.

The state-runChina Aerospace Sci-

ence and Technology Corporationisa

major provider of satellite launches for

private and foreign government clients

with 37 successful launches last year.

Attempts to launch payloads into

orbitthis year by two other private Chi-

nese companies,LandSpaceandOne-

Space, ended in failure.

Beijing hopes the development of pri-

vate start-ups will eventually help the

country’s military and state-run compa-

nies to develop more advanced technol-

ogies, a process known as “civil-military

fusion”.

“Private companies have more flexi-

ble and advanced mechanisms and it

will be a win-win situation,” Fu Zhimin,

chief engineer at China Aerospace Sci-

ence and Industry Corp, China’s top

space and defence contractor, told state

mediathis year.

Annual revenues from space-related

business — worth $350bn— could

nearly triple in size by 2040, according

to investment bank Morgan Stanley.

Technology

Chinese group

hails its first

successful

satellite launch

DONATO PAOLO MANCINI AND

MARTIN COULTER— LONDON

Italian authorities are investigating

whetherBooking.comis liable for at

least €150m in unpaid value added tax

on holiday rentals made through its

platforms, say two people familiar with

the matter.

The move underscores growing concern

among governments across the globe as

to how best to adapt to an increasingly

digital hospitality sector.

The investigation concerns VAT on

payments between individuals for

rental properties advertised by the

online travel agent. It does not concern

hotels booked through the website,

which are already registered to pay the

tax.

Booking.com considers itself an inter-

mediary between property owners and

guests, and treats reservations as direct

transactions between the two.

But according to those close to the

investigation, the lack of an automatic

system for VAT payment means the

duty often goes unpaid, resulting in a

significant shortfall over time.

Italian prosecutors are investigating

whether Booking.com should be liable

for paying the VAT owed on payments

made between 2013 and 2018. They

consider the €150m figure a “conserva-

tive estimate”, the people added, based

on an analysis of the company’s reve-

nues in Italy and police interviews with

individuals using its platform.

Last year, Italian authorities con-

tacted their counterparts in the Nether-

lands, where Booking.com is based,

issuing a European investigation order.

An EIO is a legal instrument enabling

officials in one EU member state to

request evidence from another.

The Dutch declined to proceed with

the case, according to one of the people

with direct knowledge of the probe. Ital-

ian authorities now intend to file a

revised EIO to push the case forward.

The Dutch prosecutor’s office declined

to comment, citing confidentiality.

Booking.com said it had not been

“notified of any issue” by Italian author-

ities. It added that the commission it

charges its accommodation partners,

such as those renting out their proper-

ties, is subject to VAT and “it is [their]

responsibility to report this directly to

local government” in the EU.

Lee Horowitz, co-head of internet

equity research at Evercore ISI, said reg-

ulation of the online hospitality indus-

try was fragmented, and tax agencies

were responding to a changing land-

scape. “[The tax issues] are certainly

seen as a headache,” he said, though he

cautioned that investors were probably

more worried about other metrics, such

as revenue and earnings before tax.

“Booking’s got much bigger fish to fry

in terms of other larger headwinds to

the overall travel industry,” he added.

Airbnb, the US company offering a

similar service, operates a system in

which it collects tax on behalf of the Ital-

ian governmentbefore passing the pay-

ments on. Despite this,it has faced pres-

sure from governments to ensure its

users pay the appropriate taxes.

In March, the UK’s HM Revenue &

Customs issued a“call for evidence”in

an attempt to improve VAT compliance

by individuals using ecommerce plat-

forms such as Booking.com, Amazon

and Uber to sell goods, let out spare

rooms or take part in the gig economy.

Technology

Booking.com faces Italian inquiry over unpaid VAT

            

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