What's Up with Tesla's "Return to Office" Mandate?

Good Morning,

My name is Jack Raines, and this is the first of a series of Saturday pieces on Exec Sum. With markets closed and deal flow slow over the weekend, we wanted to send some fresh content your way.

Instead of curated news, headlines, funding announcements, and memes, I'll be writing my thoughts about something that happened this week in finance or business. Maybe you'll love it, maybe you'll hate it, or maybe you'll think "wtf is this?" No matter what, I promise to keep it interesting.

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Earlier this week, Sam Nissim shared a leaked email from Tesla CEO Elon Musk to his executive staff regarding mandatory return to office requirements. Musk followed up the next day with more details on his directive. Below are the two emails from Tesla's head honcho.

TL;DR: Get back in the office, or go work somewhere else.

Why the sudden ultimatum, Mr. Musk?

Well, there are a couple of reasons. First, while many tech jobs can be done efficiently with remote workforces, Tesla is not a pure tech or software company.

Self-driving technology, software updates, and plug-in charging (vs. old-fashioned gasoline) all seem "tech-y," but at the end of the day, Tesla is a hardware company that happens to use a lot of technology. They don't make money from software, cloud storage or cybersecurity. They make money from selling cars. You can't build cars in Zoom meetings (unless you're in the metaverse, of course.)

When your main products are physical automobiles, you need your workers at the location where those automobiles are built. Having managers onsite full-time would certainly improve morale, efficiency, and productivity.

However, improved labor efficiencies aren't the primary goal here. They are the cover story. The red herring. A byproduct of Musk's real objective.

Elon wants to control the narrative.

Memes of Production

All companies rely on two functions to survive: building and selling. You need to create good products, and you need to convince customers to buy them. Musk is a rare breed, because he is an expert in both fields.

We usually focus on his prowess as a builder. After all, with PayPal, SpaceX, Tesla, The Boring Company, and Neuralink, why wouldn't we? However, his ability to sell is overlooked. Musk, like Steve Jobs, is a master storyteller. 

Musk is the king of Twitter, social media, and optics. Tesla doesn't rely on traditional advertising to drive sales because Musk's Twitter presence is a masterclass marketing campaign. Not to mention he has 95,000,000 followers. Musk's tweets lower Tesla's cost of capital, and he knows it.

See below from Tesla's 2021 10-K:

As a master storyteller, Musk knows just how important narratives are. Narratives drive public perceptions of companies and people. Narratives cause stocks to trade at premiums and discounts.

Imagine that a company issues new stock to raise capital. With a good narrative, this is a frugal move to shore up a balance sheet. With a poor narrative, this is a red flag that the company is struggling financially.

Good narrative = high stock price = financial flexibility.

Poor narrative = low stock price = financial difficulties.

Narratives amplify momentum. He who controls the narrative controls the world.

Back to Musk's return to office decree.

Elon claimed that remote workers can "pretend to work" somewhere else.

However, considering that Tesla's production exploded during a two-year pandemic, his "pretend to work" comment seems a bit disingenuous.

After all, I don't think an employee base "pretending to work" could grow quarterly revenue by 175% since the last pre-Covid quarter. Plenty of companies would kill for employees that "pretended to work" this efficiently.

So why the sudden change? Because Musk doesn't really want all of his employees to return to the office. He wants some of his employees to quit because they refuse to return to the office. Stick with me.

Here's the reality of the world right now:

• Interest rates are rising

• Economic growth is slowing

• Supply chain issues are rampant

• China is dealing with massive Covid outbreaks

• Cash is tight

• Widespread corporate layoffs are accelerating

When inflation is roaring, interest rates are rising, and cash is tight, fewer people are buying cars. When fewer people buy cars, car companies make less money. When car companies make less money, they need to cut expenses to remain profitable.

This is where, normally, we see company layoffs. But severance packages are expensive, and layoffs create bad headlines. Bad headlines create bad narratives, bad narratives change momentum, and shifting momentum can tank stock prices.

But what if employees aren't laid off? What if they quit because they "object to workplace culture?" That certainly sounds better. Netflix thought so, too.

Earlier this year, many Netflix employees were upset by the company's decision to air Dave Chappelle's recent standup special, as they found his content offensive.

Netflix also just had a pretty terrible quarter, from Wall Street's perspective. Subscribers shrank, revenue growth stalled, and the company's stock price got obliterated. For Netflix, the era of hyper-growth is over.

Netflix now has to focus on its profitability, which means it needs to cut costs. What is the easiest way to do that? Reduce headcount. How do you reduce headcount without having to lay off workers?

Ask employees who took issue with the company's content to leave.

Musk's goal is to reframe a headcount reduction by shifting the responsibility (and costs) to employees who don't want to return to the office.

Tesla's "pretend workers" are Netflix's "woke employees." Musk knows just how much his company's valuation rides on perception and narratives. Let's also not forget that the stock has a cult-ish retail shareholder base that also latched on to Musk's irreverent personality, embrace of Dogecoin, and the meme stock "YOLO" phenomenon.

For years, the stock never traded above 5x Price/Sales. Now? It's sitting at 14x.

Replace "hyper-growth," and "leading the charge in electrification" with "job cuts" and "slowing growth," and what do you think will happen to the stock? Thanks to yesterday's Reuters piece, we might find out soon.

Musk's narrative is starting to crack. I'm no fortune teller, but broken stories rarely end well.

- Jack

P.S. If you're really looking to follow a heated thread around this topic, check out Litquidity's tweet below. While meant as a classic tongue-in-cheek sh*tpost, this tweet has become a de-facto rorschach test to identify users political inclinations:

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