Tesla's Model 3: What If Nissan's LEAF Reservations Disaster Repeats Itself?

| About: Tesla Motors (TSLA)

Summary

Tesla's Model 3 isn't the first time an automaker got all excited about deposits and expansion to 500,000 EVs per year.

We saw the same story six years ago, when Nissan's inflated LEAF deposits led management to build two extra factories based on 500,000/year projections.

Little over a year later, it all evaporated into thin air. People asked for their deposits back.

This time, Tesla is showing a car that may not be available in volume to non-Tesla employees for over two years.

In the next two years, Tesla is a sitting target for competitive action, much more so than Nissan's 2010-2011 experience.

... the only constraint on sales for the next three years will be how many battery packs the factories could churn out.

[the electric car] would hit 500,000 units a year in three years. Mass production, he explained, would lower costs enough to make the car a sales success without subsidies sooner than once expected.

We're going to have to put some efforts into selling the car, but the kind of spontaneous demand is going to be driving the sales for the next three years … There is such a curiosity about the car and attention to the car.

He predicted that 10 percent of the world car market would be electric vehicles by 2020. 'There is no doubt in the minds of anyone in the industry that this is going to be a factor in the industry,' he said.

This followed a deposit frenzy, when enthusiastic supporters placed deposits on a car that would not be delivered for approximately another year. These deposits had driven the CEO to call for 500,000 electric cars per year to be produced, wondering only how it would be possible for the production to scale up from the one initial factory to two additional factories located on all three major continents.

It was a slam dunk. With all of these deposits, how could the plan possibly fail?

So this story is about what Elon Musk is saying about Tesla's (NASDAQ:TSLA) Model 3 during the last few days, right?

Actually, it is not.

For those of you whose memories are short, all the quotes above are actually from November 16, 2010, and refer to Nissan CEO Carlos Ghosn talking about the launch of the Nissan (OTCPK:NSANY) LEAF.

For those of us who have seen this movie before, there are many similarities here:

  • Automaker launches new revolutionary $35,000 electric car.
  • Automaker takes deposits and is so overwhelmed that it expands from one factory to three factories, thinking it must increase supply to 500,000 cars per year, within three years from now.

Nissan showed the LEAF to the world in September 2009 and started taking refundable deposits in April 2010. I know, for I was one of them. Many of my friends and neighbors did the same. A local enthusiasts club was formed. This revolutionary $35,000 electric car was going to take over the world. It was obvious, wasn't it?

So obvious, in fact, that I wrote this article in November 2010, which sounds like a total copy of a Tesla bull article from April 2016.

The Nissan LEAF started deliveries in December 2010. At some point in 2011, I got a call saying Nissan was almost ready to deliver my car and wanted to ensure I was going to take my deposit and convert it to an actual purchase.

A year had gone by. Other cars had been announced and my preferences had shifted, and I told Nissan "No, thanks." They sent my deposit back.

Meanwhile, the company's dreams of selling 500,000 cars per year evaporated. It has sold a cumulative 250,000 or so electric cars globally since inception at the end of 2010. While that's more than that for any other electric car, it clearly fell short of all of Nissan's November 2010 goals - based on all of those deposits - by an extremely wide margin.

Unit sales performed poorly.

US sales of Nissan LEAF

2010-2011: 9,674

2012: 9,819

2013: 22,610

2014: 30,200

2015: 17,269

Of course, the Nissan LEAF situation and the current Tesla Model 3 situation are not identical. Nissan never consistently reported how many deposits it had taken on a daily or weekly basis. In May 2010, it reported that 19,000 deposits had been received in short order. The trajectory of those deposits was clearly enough for the company to plan for two additional factories - to have one in Japan, one in the U.S. and one in Europe - and for 500,000 cars per year.

Still, the prospects for electric cars in 2016-2020 now looks brighter than it did in the previous five years. The Tesla Model 3 will have a range of greater than 215 miles (versus 73 miles for the first LEAF) and a long-distance charging network, to mention the two most important variables.

Well, there is one more thing: Even from day one, the LEAF was widely considered to be a most ugly car. The Tesla Model 3 is a beautiful $70,000 car that Tesla has priced at $35,000, so small wonder people are willing to sign up, electric car or not.

But the comparison has shifted in other ways too. Over five years hence, gasoline cars have become a lot more attractive than they were in 2010 - smoother, cleaner, more fuel-efficient and cultivated in every way. Five years ago, the LEAF was competing with cars that we laugh at today. There is no comparison between the 2010 model year Hyundai Elantra and the 2017 model year Hyundai Elantra, for example.

This time around, the Model 3 will compete against a long list of competent electric cars between 2017 and 2020. Every automaker will have several models, and price competition tends to ensure that profit margins, if any, are confined deep into the single-digit percentage territory.

One more consideration is the timing from deposit until delivery. Nissan's 2010-2011 experience was less than a full year. Tesla is over a full year from deposit to the first delivery, which it promises for the second half of 2017.

The longer the time from deposit to delivery, the larger the probability of people falling off the roster. Tesla's first buyers will be dominated by its own employees. Why? Because they are the ideal customers to help ring out the final quality testing, to which most automakers normally allocate a year.

The other automakers simply have not shown their cards, in terms of the products that will be introduced into the market around that time, near the second half of 2018. The closest thing we can get to on that front is the Audi eTron Quattro Concept, which was shown in September 2015.

Aside from the Chevrolet Bolt (NYSE:GM), which has already entered pre-production and will be in U.S. dealerships by December this year, there is obviously the Nissan LEAF 2.0, which is expected in U.S. dealerships in 2017, and many, many more models in 2018. Mercedes, Jaguar, Land Rover, BMW (BAMXY) and others will either be in mass production by the end of 2018 or will have shown final versions of cars that enter production in 2019.

Any one of those cars could trigger the exact same evaporation of the refundable deposits that hit Nissan in 2011, following the 2010 deposit bubble. Nissan received 22,500 deposits from U.S. customers as of June 2011, and having delivered "only" 2,094 of them, it got over twice as many cancellations (4,500). Add a decimal point to those numbers, and you have some indication of how history could repeat itself.

There is one more thing I have to cover, and that's the uncritical examination of the $35,000 price of the Tesla Model 3. To examine the lack of analytical rigor, you must ask the following hypothetical question: What if the price had said to be $30,000 instead of $35,000? Would you have questioned it from a profitability perspective?

What if the price was $25,000? Would you have questioned it then? How about $20,000?

My point is this: If you said you would question the soundness of any price below $35,000, what calculation allowed you to arrive at $35,000 being one where fully costed profitability can be achieved?

In other words, if you thought a $30,000 figure would be insane, what is your calculation that suggests $35,000 is perfectly fine? Why isn't it $40,000? Why not $50,000 or $60,000? Or $70,000?

I get the impression that Tesla enthusiasts take certain numbers as gospel. Examples that come to mind include the February 2012 promise to deliver the Model X by December 2013, or various statements regarding profitability and cash flow targets for 2015.

If the company could sell the car it showed last week profitably for $35,000, then imagine what an automaker that's got scale could sell profitably for $35,000. It doesn't add up.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in TSLA over the next 72 hours.

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.

Additional disclosure: At the time of submitting this article for publication, the author did not have any positions in any of the companies mentioned. However, positions can change at any time. The author regularly attends press conferences, product launch events, factory visits and equivalent, typically hosted in whole or in part by the respective automakers, including EVERY company mentioned in this article.

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