This article focuses mainly on the hearing held by the City of Fremont Planning Board on October 27 (rescheduled from October 13 due to a lack of quorum) and the subsequent hearing by the Fremont City Council on December 6 to approve the Master plan for the addition of 11 structures to the Tesla site totaling about 4.6 million sf. Both of these hearings were recorded and are on the City of Fremont website. The Planning Board meeting is here (with the Tesla portion being between 10:40 and 58:40.), while The City Council meeting is here (with the Tesla portion being between 1:40:20 and 2:15:50).
At both meetings, Daniel Witt, Tesla's Manager of Business Development and Policy, testified and responded to questions. The full Master Plan is on the City of Fremont website as well. It is contained in the October 13 Planning Board Agenda packet, the original date the plan was supposed to be presented and approved. It is here.
SUMMARY OF MEETINGS:
Although I will be summarizing below what I believe to be the relevant investment information I gleaned from the documents filed and from listening to the proceedings, I encourage anyone with some free time to listen to the proceedings as well. They provide a refreshing change of pace from much of the repetitive back and forth that seems to happen in many Tesla articles on SA.
For example, it is clear from comments that the mayor of Fremont and City council members made, that they consider Tesla to be an extremely important entity for the city, partly from an employment perspective (1000 of the 6000 or so employees are Fremont residents) to simply a matter of pride for being known as the location of Tesla's operations.
There was also considerable discussion regarding employment and quality of life issues, ranging from affordable housing and transportation concerns (some employees who live a distance away actually camp out in the parking lot in their RVs during the week) to impassioned pleas at both meetings from the head of the carpenters' union, who wanted some assurances that Tesla would use union employees for the proposed factory expansion. There was also a great deal of discussion encouraging Tesla to coordinate with the local schools with respect to apprenticeship programs, etc.
HISTORY OF THE FORMER NUMMI PROPERTY:
Tesla did not acquire the entire former NUMMI property in 2010. Although it appears Tesla acquired all of the NUMMI factory buildings, they only acquired about 250 acres of the 411-acre site. In 2010, Union Pacific purchased the remainder of the site, totaling 160 acres, planning to make it a rail hub, a situation that did not sit well with the City of Fremont, as this San Jose Mercury News article at the time indicated.
Union Pacific then sold 22 acres to Thermo Fisher Scientific in 2012, as indicated here, on which Thermo-Fisher built a laboratory facility. Union Pacific then sold 35 acres to Tesla for its test track. They sold the remaining 100 or so acres to Lennar in 2015 on which Lennar has begun a mixed use housing/commercial complex.
Above: Lennar property with grading underway in early January as viewed from South Grimmer Blvd., the border of the former NUMMI property. The Fremont factory is visible in the background.
To further complicate matters, Tesla has acquired, or at least has an option to acquire the 28 acres closest to the Tesla property from Lennar, which is zoned industrial. This means that Tesla now owns (or at least controls) about 315 acres (more or less) of the original 411 acre site. These multiple property transactions may explain some of the confusion regarding construction in the vicinity of the Tesla property, which has incorrectly been attributed to Tesla.
CURRENT STATUS AND PLANS:
An aerial view of the current Tesla property and adjacent parcels is below.
The proposed new buildings on the Tesla property are in red, while the proposed building on the property Tesla is acquiring from Lennar is the reddish brown block toward the upper left.
The land directly to the left of the Tesla factory is the Lennar property, basically between the dotted yellow and dotted blue lines. (These lines represent proposed pedestrian/bike and shuttle bus routes to the new Warm Springs BART station.) The Lennar property includes the parking lot just to the left of the yellow dotted line, which is being used by Tesla. Although Lennar is currently grading much of its property, they are not yet doing anything with this portion and Tesla is still using it for parking as of early January.
The Thermo-Fisher parcel is on the lower right surrounded by Tesla on three sides. The current Thermo-Fisher facility is also obvious to even a casual observer driving on the Nimitz Freeway (880).
The document jointly prepared by Tesla and the City of Fremont incorrectly stated that all 4.6 million s.f. of additional proposed space would be completed prior to the Model 3 (M3) launch, and it was subsequently reported this way in some news articles. Testimony indicates it is actually a 20-year plan, and for any work to begin, even with the Master Plan now approved, the submission and approval of plans and issuance of construction permits is still required. It does not appear any of these buildings are required for the M3 launch, however, so it's a non-issue for now.
Tesla expects that 3000 or so employees will be added to the current 6000 or so employees at the factory by the time the Master Plan is completed. Of these, they expect a bit more than half, (or 1500) to be added for the M3 launch. Not all of the current employees are assembly line workers, so I caution anyone who tries to calculate productivity/worker by dividing the number of cars manufactured by the number of employees.
WHEN WILL THE FIRST M3 ROLL OFF THE LINE?
This was basically the question that Council member, Suzanne Lee Chan asked of Mr. Witt during the hearing. Here's how he responded (at about 1:56:40):
"We're solidly looking at the second half of next year (2017). Elon has given a target date for the July time frame. Obviously, we're going to try and stick with that as closely as possible. Frankly, that is a massive effort both on our part as well as working with the city in order to ensure that all the equipment can be installed and everything is up and running in advance of when that first car is truly delivered to the customer."
Mr. Witt seems to be saying at least some of the equipment for the M3 line hasn't been installed yet. My understanding is that once a line is installed, it usually takes a minimum of 6-9 months to get it running correctly and produce vehicles, which are then tested before there is a launch. This, along with the hedging in his comments about the time frame, suggests the first deliveries will not occur until very late in the year at the earliest. I'm sure various interpretations of this comment are possible, however.
[I also have to commend Mr. Witt for how well his verbal comments come across when transcribed. For those of us who read transcripts of earnings conference calls, it is amazing how many comments come across as disjointed when transcribed into written form, not just for Tesla, but for other companies as well.]
Automobile manufacturing is not my field of expertise. However, I believe that some of the issues I have highlighted here may seriously impact Tesla's ability to begin delivering the Model 3 in quantity this year or to ultimately be able to produce more cars in Fremont per year than the 400,000 or so NUMMI reached at its peak, contrary to some expectations. To summarize, the main issues are:
- The current Tesla property is materially smaller than the former NUMMI property and there is a building boom going on nearby increasing congestion in the area.
- There are only general plans and approvals to significantly expand the physical size of the plant without there being any specific time frame. The potential additions are actually many separate buildings mainly intended for storage/warehouse capabilities and are in a configuration that may not facilitate the addition of another manufacturing line at the plant (post M3).
- It appears that the Model 3 assembly line may not have yet been completely "assembled."
These are all facts that I do not believe are commonly recognized by the investment community.
As a side note, in one of my prior articles, "Honey Did We Shrink the Fremont Factory?" I had raised the issue of the apparent discrepancy between Tesla's financials and the detailed plans contained in the Master Plan submitted to the City of Fremont regarding the current square footage of Tesla's Fremont factory. Tesla's SEC submissions indicate 5.4 million s.f., while their detailed submission to the City of Fremont shows only 4.6 million s.f. So far, I have not seen any logical explanation as to the discrepancy. If the SEC submissions are inaccurate, I hope the figure will be updated in the 2016 10-K.
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.
Additional disclosure: I have a small short position mainly by writing OTM calls.