A possible Tesla prototype with minor production defects (I know, it's not defective. Lighten up, it's a joke)
If you can't dazzle them with brilliance, baffle them with bullshit.
- W.C. Fields
Before anything, let me say I'm sorry about this Tesla (NASDAQ:TSLA) article overload. It's just that the material keeps on coming. I don't choose what's interesting to write about. I only respond to interesting outside stimuli and Tesla has lots of it.
The purpose of this article is to delve into one of many pronouncements by Elon Musk. These pronouncements are made so as to dazzle the common man with his brilliance, with the implication that he knows what he's doing and that Tesla is thus on a move forward that will crush all other less-brilliant competitors.
This is relevant for the stock for two reasons:
- First, because a lot of the value in TSLA is simply based on the faith that Elon Musk is a genius with no equal, given that he even launches and lands rockets on barges.
- Second, because these pronouncements are made so as to create the idea that Tesla has an insurmountable lead in technology. Be it battery technology, self-driving technology, or more recently, manufacturing technology.
Tesla has neither, but it's very hard to convince the faithful that this is the truth. The battery tech is Panasonic's (OTCPK:PCRFY), the driving assistance tech is Mobileye's (NYSE:MBLY), and the production technology comes from Kuka (OTCPK:KUKAF) and others.
Notice that I didn't even mention self-driving technology. The Tesla faithful have taken to the fancy of believing that Tesla is not only a player in self-driving technology, but it actually leads it.
They believe in this out of faith, too, because no proof is put forward to justify it. They can rationalize away the fact that no Tesla autonomous vehicle is seen anywhere. They rationalize away the fact that a proper Google car processes 750 MB/second, and instead believe that a regular Model S with autopilot can somehow store or transmit back home the kind of data which could somehow be useful enough for the future development of self-driving cars.
Yet, there's a curious fact here which anyone lucid enough can verify. You see, the California Department of Motor Vehicles has taken to the practice of collecting "Autonomous Vehicle Disengagement Reports." That is, when testing autonomous vehicles, these will often fall back to human control. Each time they do, the event is stored by the automaker and then periodically the automakers doing the testing report the results back to the CDMV. Up to December 2015, the following entities had filed such reports:
- Bosch, LLC
- Delphi (NYSE:DLPH) Automotive Systems, LLC
- Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Auto, LLC
- Nissan (OTCPK:NSANY) North America, Inc.
- Mercedes-Benz Research & Development North America, Inc
- Volkswagen (OTCPK:VLKAY) Group of America, Inc.
- Tesla Motors, Inc.
Each of these reports carries some interesting data. For instance:
- Bosch, LLC. reports disconnects and miles traveled, in a summary per month.
- Delphi Automotive Systems, LLC. reports disconnects and miles traveled. Then it goes into detail into what caused the disconnects.
- Google Auto, LLC. reports disconnects and miles traveled. Then it goes into detail into what caused the disconnects.
- Nissan North America, Inc. reports disconnects and miles traveled. It also goes into detail into what caused the disconnects.
- Mercedes-Benz Research & Development North America, Inc. reports disconnects and miles traveled. Then it goes into detail into what caused the disconnects.
- Volkswagen Group of America, Inc. reports disconnects and miles traveled. Then it goes into detail into what caused the disconnects.
Are you picking up a pattern here? Let me state it out. Every automaker reports:
- Miles traveled
- Some detail into disconnects (except for Bosch).
Then it's time for Tesla. What does it report? It reports that it had zero disconnects since it got its testing permit.
Now I ask you, a reasonable living, breathing and thinking human being: What do you think a report with 0 disconnects and no reference to miles traveled means, in this context?
I'll give you the answer straight out: Tesla had no autonomous prototype running around, racking up miles and disconnects. This is the company the faithful believe is a player, or somehow leads, in autonomous driving.
A TSLA autonomous self-driving prototype, deftly making its way through a narrow winding road. Notice the lack of lane markings.
The Theme Of The Article Is, However, Different
What I stated above is just one example of how reality and perception can have a gulf between them when it comes to Tesla. But the true theme of this article is more on how that gulf is built.
The gulf is built by the prophet himself, when he turns to his faithful and baffles them with pronouncements such as this one, during the recent SolarCity (SCTY) merger conference call (highlight is mine):
Elon Musk: You'll see things moving in that direction. With Model 3 we're starting to get to version 0.5 of alien dreadnaught level, where alien dreadnaught level is like version 3. Where it's most obvious is in the cell production. Our engineering team has worked very closely with Panasonic to make dramatic improvements to the cell manufacturing efficiency. I think we're probably approaching 3x the efficiency of the best plant in the world. I think that's pretty good. Cells will be going through that thing like bullets from a machine gun. In fact, the exit rate of cells will be faster than bullets from a machine gun.
This pronouncement, of course, was made in the context of how Tesla was building the machine that builds the machine (never mind that Henry Ford already did some of this, when building Model Ts, which were themselves also machines). Perhaps Elon Musk meant the machine that builds the machine that builds the machine. That would be closer. Anyway, I digress. What's relevant here is that this pronouncement is made to show the massive manufacturing advancements TSLA is making, which will leave everybody else eating dust, just like with those self-driving cars.
So now we have the word from the prophet, on how the alien dreadnaught v0.5 will already be shooting battery cells faster than a machine gun. It's perhaps time to check what that actually means in terms of massive advancement. For a while here, let's forget that the part about shooting battery cells would be Panasonic's doing (since Panasonic will have a factory-within-factory, and battery cells "shoot out" of that factory).
- When the Gigafactory was announced back in 2013, its battery cell output objective was set at 35 GWh/year.
- This capacity would be produced over ~257 week days.
- So the Gigafactory would produce ~0.14 GWh/day.
- Taking into account 2 8-hour shifts, this day would have 16 hours.
- So the Gigafactory would produce ~0.0085 GWh/hour.
- In Wh, it would produce ~ 8,511,673.2 Wh/hour.
- Now, each 18650 battery cell TSLA uses today, has a capacity of ~11.4 Wh.
- But TSLA always said it was going to produce a new cell format, 20700, with perhaps a 33% increase in capacity, so 15.16 Wh.
- Thus, per hour, TSLA always said it was going to produce ~561,382 of these cells.
- There are 60 minutes to an hour, so TSLA's Gigafactory was going to shoot out battery cells at ~9,356.4 cells/minute.
This brings us to the machine gun. How fast does a machine gun fire on full auto? Actually, this stuff is spec'd. Take an M16, it has a rate of fire of 700-950 rounds/minute.
There is thus a problem here. The original Gigafactory was already spec'd to fire battery cells at 10x the rate of a machine gun. So why would the new and improved Gigafactory now only fire them "faster than a machine gun?" Is it that the Gigafactory shrank or something?
For sure, the prophet wouldn't leave out an order of magnitude difference, would he? Not unless he was trying to baffle with something obvious, of course.
An Aside, The Volumetric Efficiency Of A Chair
Elon didn't just rave about his battery machine gun. He also stated that no one would build a chair with the volumetric efficiency of the present-day factories.
Elon Musk has this thing where Tesla factories will be much more efficient in how they use the volume they have, which already seems like a good excuse never to complete the full Gigafactory building. Here's the proper quote:
It blows my mind that people don't realize just how much improvement potential is possible. This bit, we're talking about high school-level physics are necessary to figure this out. It's not mega complicated. Just go to the factory, do a volumetric entity calculation of what percentage volume inside this building is doing useful stuff versus is either air or not doing useful stuff, you're shocked at how tiny that percentage is. Like low single digits. What is the exit velocity of the products? How fast are things moving out the exit? What's the mass flow, whoa it's really low. The fastest car plants in the world the car exit velocity is basically grandma with a walker. It's real slow, it's 0.2 meters per second. It's really really slow. We can do waaay better than that. The fastest person can run faster than 10 meters per second, so why is car exit velocity on 0.2 meters per second? That's ridiculous. Why is the volumetric efficiency of a car factory - it's usually in the mid-to-low single digits, that's very low - why shouldn't it be at least a volumetric density of 30 or 40 percent? 30 percent seems very very achievable. Nobody would design a chair that had volumetric efficiency of 2 percent. It would look ridiculous. And yet we design factories that way.
Now, he puts the factories at mid-to-low single digits and then says no one would do a chair at a 2% volumetric efficiency. Well, here I have to give Elon the prize, but not by much.
You see, if you take a simple model of a chair, like this one:
And give it realistic dimensions (I went to the trouble of measuring a real dinner chair), like 83cm height, 40cm length, 39cm width, with all legs and back support having 3.5x3.5cm profiles and the seat having 2cm thickness, guess what the volumetric efficiency of that chair is?
It's 4.5% taking into account the rectangular cuboid it would occupy (for instance, if packed in a cardboard box). Sure, it's not 2%, but it's still "mid-to-low single digits." I think Elon Musk was thinking of a sofa or a lounge chair or something. Not a plain chair.
When Elon Musk makes technologically-brilliant statements, make sure they're not baffling statements, seeking to produce an unrealistic image in your mind.
One of the great problems about Tesla is that it doesn't seem to have any technological advantage. It doesn't have battery cell technology that others can't have (because suppliers will also sell to others). It doesn't have self-driving technology that others can't have (suppliers will also sell driving assistance tech to anybody who pays for it). And it doesn't have manufacturing advantages over others either (quite the contrary, at least for now, either in efficiency or quality).
When competition comes, this lack of sustainable advantages means Tesla will fight on level ground. Again, I'd recommend reading my article titled "What Does Tesla Have In Common With Commodore International?" to understand what this means. The article is as relevant today as it was when it was first published.
Tesla might have one advantage: Its brand. That's the one advantage which Elon doesn't actually seem to rave about, though. And it's the one advantage which can be destroyed by management actions such as rushing out unreliable cars like the Model X, instead of perfecting them before launch.
Finally, remember, TSLA is valued today not on what its financials look like right now, but on what is promised for the ever-distant future. When baffling statements are made on other subjects, you should always ask yourself if the same baffling attitude wasn't used when talking about the business model and its far-fetched margin objectives (this reminds me of Monitize).
Disclosure: I am/we are short 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.