The 3 Tesla Secrets

| About: Tesla Motors (TSLA)

Tesla (NASDAQ:TSLA) announced that they will make a profit, non-GAAP and GAAP in the first quarter which caused the stock to jump upwards, followed by announcing that they had put in place an innovative financing / leasing facility for their customers, which caused their stock to descend. At least owning (or shorting) Tesla is more exciting than watching grass (or dividends) grow. Hopefully Tesla investors got a good rest over the weekend. Tesla Chairman Elon Musk spoke with Betty Liu at Bloomberg News Tuesday (4/2) and there is more Tesla news to come. Mr. Musk promised to titillate the market with at least three more announcements going forward at one to two week intervals. That should give Tesla investors both 'long' and 'short' enough news to hold our interest through this coming June. He even gloated over the SEC having approved his use of Twitter so we now know where to look to see these announcements first.

So, what exactly are the three secrets Tesla is so anxiously waiting to tell us about? I mean, Elon Musk has already described them, so we should be able to figure out exactly what is on the way. Here is what we already know:

  • SuperCharger Announcement: Tesla has made more progress than most people realize and this announcement will be "very exciting".
  • Re-Engineering Tesla Service: This announcement will also be "very exciting". They must change their service approach so Tesla will "have the best service".
  • Something Under a Nose: This announcement differs from the others because this one is "pretty cool", and it may be even less of a secret because it is under every Tesla owner's nose.

Obviously everything important about these announcements is well known and the complacent (and the well-hedged) can now go home and quietly await what ever the results may be. Those afflicted with obsessive interest, or having actual financial exposure to Tesla's prospects are invited to read on.

Production Rates Are Wrong

Looking at Tesla, one big thing stands out. All the 'intelligence' on this company points toward manufacturing rates for 3Q13 and 4Q13 that simply do not make sense. Tesla announced in their recent 10K that Model X will be delayed until late 2014, so there won't be any Model X cars in 3Q or 4Q. At the same time Tesla stated they expect increased demand for Model S, presumably filling in for the volume they had expected for Model X. Subsequently, we found out that orders for 'frunk liners' have been increased to 650 per week beginning in 3Q.

George Blankenship reported in March that Tesla was delivering 500 cars a week, which is consistent with one-shift operation at Fremont and the 4:40 tac-time shown in the National Geographic video presentation about Tesla's factory. Five hundred cars a week is consistent with Tesla achieving their stated goal of delivering 20,000 cars in 2013. (They are a bit behind plan this quarter, but at 500 cars a week, even allowing for holidays and such, they should make 20,000+ deliveries.) But it isn't consistent with 650 frunk liners a week.

The problem is that Model S frunk liners won't fit the Model X, and besides, Tesla isn't going to be building Model X this year. Six hundred fifty units a week is too much to do on one shift, but it isn't enough to utilize the Fremont line on two shifts. Clearly Tesla plans to make at least 650 units a week of Model S and that will take more than one shift, but less than two shifts. Could they be planning to make something else on their Fremont line in addition to the Model S, something that doesn't use the current Model S frunk liner?

Competition, Low Hanging Fruit, and A New Frunk Liner

Tesla's greatest strength lies in being the first electric car company whose cars out perform comparable ICE cars. Not only has the S85P's quiet acceleration set it on par, or beyond similar BMW, Audi, Mercedes [Daimler(OTCPK:DDAIF)] and Porsche(OTCPK:POAHF) sports sedans, Tesla has actually sold a lot of their premium performance version. But ICE cars are getting better and what is more, Audi, Mercedes and VW(OTCPK:VLKAY) all are looking to offer high performance (if not long range) premium EVs. Clearly, it is time for Tesla to raise the bar on their competition, but introducing a new model without disrupting the production ramp-up at Fremont limits what Tesla can realistically do.

Fortuitously Tesla may have a solution already in their parts-bin. The delayed Model X is to be built on the Model S platform and parts for the all-wheel-drive version are already in production - the S85 rear wheel drive inverter/motor and the Toyota(NYSE:TM) RAV-4 EV front wheel drive inverter/motor. The Model S platform was designed to accept this configuration from the beginning with little modification - and no changes to the body, frame, battery pack, interior or suspension.

With the all-wheel-drive system, peak torque increases by 50%, and because all wheels are driven, this torque can be effectively turned into acceleration without smoking the tires. And the only significant new component is a different - frunk liner. (The front wheel drive goes in that recess at the back of the frunk...)

Model S Performance and AWD Versions (click to enlarge)Drivetrane Output of Model S Performance and AWD Configurations

Adding the front wheel power unit to Model S increases available torque and because all wheels are driven, this extra torque increases acceleration without wheel-spin.

To understand how a Model S85 AWD would compare with the existing Model S85 Performance and with competitors, I built a simulator with the following assumptions: 1) front drive modification adds 200 pounds of weight, 2) maximum tire friction coefficient is 1.1 (summer tires, no wheel-spin), 3) Battery pulse discharge is limited to 5C (combined inverter+motor efficiency 80%).

Performance Comparison

Car 0-60
1/4 mi.
S85 Performance 4.2 9.2 12.6/116 4700
BMW M5 3.7 8.4 11.9/120 4384
S85 AWD 3.2 7.8 11.6/120 4900

Adding the front motor/inverter to Model S extinguishes any BMW performance challenge. This also makes Model S85 AWD a lot quicker than the €416,500 Mercedes-Benz SLS AMG Electric Drive.

Fifty Thousand Cars, Under One's Nose

The significance of an all-wheel-drive Model S is several fold. First off, it answers the 'frunk liner quandary' which has been keeping me up nights because it allows Tesla to utilize the 650 standard frunk liners per week that they have on order and fully utilize a second shift. The second thing an all-wheel-drive Model S does is keep Tesla at the forefront of performance electric cars and dominating the market segment that has built the company. Finally, adding all-wheel-drive to Model S expands the model range at Fremont with minimal disruption and gives Tesla a path to full rate, 2-shift production (50,000 units a year, ~1/3 AWD) before they even begin making Model X. The S85 AWD would surely sell for a premium. Tesla could be looking, 4Q and on, at 50,000 units a year at $100,000+ ASP, and sales of $2billion in 2013 and $5billion in 2014, before considering Model X. Little if any additional CapEx would be needed, Should Tesla announce the S85 AWD, their stock might even go up, again. And when a Tesla owner opens their furnk, where this solution fits, is right under their nose.

One More Thing

Drivetrains are an important part of Tesla's business with the Mercedes A-Class and B-class, and Toyota's RAV-4 EV all using Tesla gear. Perhaps one of Tesla's partners might use the all-wheel-drive system, too. I even have a plausible candidate.

Toyota division, Lexus has delivered their 500th and last, all carbon fiber LF-A supercar. The LF-A is a $400k halo-car and performance / technology showcase for Lexus. After several years on the market the LF-A has some performance peers. Putting the S85 AWD drivetrain into the LF-A chassis would fix that. [assuming high performance, race quality tires (u=1.4)].

Lexus LF-A Supercar Performance Comparison

Car 0-60
1/4 mi.
Lexus LF-A 3.7 7.8 11.6/123 3263
Audi R8 V10+ 3.4 7.6 11.4/124 3454
Nissan GT-R 2.7 6.8 10.8/124 3819
LF-A electric AWD 2.5 6.1 10.7/127 3800

Tesla's AWD electric drivetrain would make an electric Lexus LF-A superior to other supercars. Toyota has already deployed parts and service training to support Tesla drivetrain components used in the RAV-4 EV, making it practical for Lexus / Toyota dealers to support an LF-A with Tesla electric drive.

While seeing Tesla's all-wheel-drive gear in a Lexus supercar is a more speculative proposition than seeing it in a Model S, the significance of getting a full-performance, full-range Tesla drivetrain into one of their partner's cars would be huge. And between Toyota, Lexus and Mercedes, there are a lot of candidate models where this could be done. It doesn't have to be the Lexus LF-A.

Getting one of their partners to use full-on Tesla technology implies partner cars using SuperChargers, and could supercharge Tesla's growth, earnings and share price. The other thing it could do is enable sharing of service facilities. And if Tesla owners can get service at any Lexus dealer then Tesla, just like Lexus, will have the best service.

Disclosure: I am long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.