- Tesla's titanium underbody should be a minor cost and is a major publicity win for Tesla.
- GM's ongoing recall woes could have a long term detrimental impact on the company.
- The close proximity of these events are a long-term negative for the auto dealer lobby and positive for the direct sales model.
- Tesla should beat this quarter's guidance based on available sales data. Have Model S deliveries in the US really peaked?
The Tesla Non-Recall
There have been dire predictions on how Tesla's (NASDAQ:TSLA) new titanium underbody addition will "crush" Tesla's Q1 earnings, however, I believe that it will mostly be a non-event as far as earnings go.
The cost estimates for the Titanium vary wildly from $10 - $200 but to be conservative, let's assume that it will cost Tesla $250 per car to make the part and deliver it to the service centers. Since Tesla owns and operates its own service centers, the labor cost should be next to nothing for adding the item to existing cars. The service centers are run by salaried employees after all, and the replacement is mostly expected to be done at the same time as other scheduled service operations. This is a strong case for manufacturer operated service centers. In addition to faster diagnosis and accurate data available to the manufacturer, the cost of recalls is much lower.
At $250 per car, the cost to Tesla to retrofit 30,000 cars is about $7.5 million. However, I expect it to cost much less. Additionally, the car has been deemed safe with or without the bottom plate so there is no urgency to get it added on.
The GM Recalls
In contrast, let's look at GM's (NYSE:GM) recall - 2.6 million cars with a problem known for at least 13 years. No effort was made to solve the problem when it was discovered and GM continued using the faulty part even after the discovery. Also, it might be possible that a non-faulty part was used in some models but it carried the same part number as the faulty part! GM now provides a free loaner to people affected by the recall. Also, since GM recalls have to be done through independently owned dealers, each car will cost them far more to fix than Tesla thanks to the outsourced labor. Unlike Elon Musk, GM's CEO Mary Barra is mostly claiming ignorance. The handling of the entire incident was done poorly. In total, including other recalls like the 1.3 million car power steering one, GM has recalled more than 6 million cars this year and estimates of costs run as high as $750 million. Also, these are GM's estimates. Those probably don't account for any payouts that GM would have to make if it "does the right thing" and assumes old GM liabilities.
If GM had dealt with issues when they were supposed to like Tesla, the recalls would have been much smaller and they would not have had a historic loss to the Dodge Ram in sales.
For a funny, but still accurate look at GM's woes, listen to Jon Stewart. The full effects of the recall have not yet been digested by the stock price and I would sell GM stock, if I owned any.
The Auto Dealer Argument
When Tesla sales in New Jersey were banned, auto dealer lobbyists who supported the ban claimed that us car buyers need protection from these evil manufacturers. How can they explain this GM recall? Where were they?
The markedly different handling of issues by Tesla and GM hitting the news in the same time frame can only boost Tesla's reputation and hurt the auto dealer lobby even more. There is no sane argument in the modern world for protecting the dealer sales model through legislation.
For more information about the New Jersey ordeal, read Tesla's legal filing here.
To anyone who thinks that US deliveries of the Model S have peaked, I present historical data from the most successful green car before the Model S - The Toyota Prius:
Japanese deliveries falling while global deliveries rose is eerily similar to the Model S now. Did Prius deliveries peak in Japan in 1998? Here is your answer:
I'm not saying that the Model S, a $70-$100,000 car, can sell in volumes like the Prius. All I'm saying is that there is no peak. At least not until supply outpaces demand.
The Befuddling Battery Factory and Tesla's Competition
While I'm befuddled by the peak talk, apparently the auto industry is befuddled by the battery factory, according to the WSJ. Neither Volkswagen nor Mercedes want to build a big battery factory. Neither the Nissan, nor the Toyota batteries are energy dense enough to compete with Tesla on a long range EV. And even if that kind of battery is in the works, significant expansion is required for battery production. But nobody has announced any such expansion. In fact, nobody has announced a long range EV at all. We are almost three years into the launch of the Model S and so far no other long range EV, affordable or otherwise, is in sight except the Model E.
The other thing that the competition needs is faster charging that is available to any forthcoming EV nationwide. But BMW doesn't think public charging is important. Nobody wants to solve the chicken and egg problem of long range EV charging except Tesla. While they are not implementing their own "standard" charging, German auto companies are criticizing Tesla for going it on their own.
I expect Tesla to beat guidance on Q1 deliveries based on the data we have now. My guess is that, in the US, Tesla will sell as many as the BMW X6 - about 4100. Tesla sold 2056 cars in Norway in Q1. Tesla sold 34 in Sweden and 239 in Germany. This is already over the 6400 guidance. Tesla also sold over 200 in Netherlands, a few in Estonia, Belgium, Switzerland and Austria. I expect at least 6500 deliveries, even if my US number is high.
Once again I reiterate my end of year $280 price target on Tesla and recommend buying low now.
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.