I had intended to finish writing about the latest 10-Q, but some distractions came my way. So, we’ll get to the Q, soon, but not now.
Pungoteague Dave Incenses the Faithful
Predictably, some commenters attacked Niedermeyer as a purveyor of “fake news” and attacked The Wall Street Journal as bearing deep animus toward Tesla (NASDAQ:TSLA). However, after the Niedermeyer and Higgins reports, other journalists followed suit, detailing more production problems.
And, while assuring they are close to resolution, Tesla finally acknowledged those problems.
Are they close to resolution, though? We have this additional report yesterday from an informative poster at the Tesla owner forum, Pungoteague-Dave, who details his encounter with the employee of a Model 3 parts supplier:
I asked, "Do you make the same parts for the new Model 3?" He said, "Yes, but not yet in volume." I asked, "What do you know about the ongoing Model 3 delays? I have one on order." He replied (paraphrasing from conversation recall - but close), "It's a big mess. I have to be careful about what I say, but was on a conference call the other day to discuss production issues. Tesla's production lines aren't working and the issue is body welding."
He went on to say that Tesla has no one who can run the new robotic welders - they are finding it impossible to regulate and apply the right amount of heat to do high-speed welding. He said that while Tesla may have the right robots, making them production ready is a highly specialized skill set and they don't have it. His company was told to reduce production for the foreseeable future, until further notice, and produce to order, not in high volume.
He said that he worries about Tesla's ability to get it together - that the original MS and MX production lines, for which he also makes all of these key parts, was much more plug-and-play, essentially retooling existing lines from the old Toyota/GM joint venture, but that for the Model 3, everything is new, and that Tesla has been naive about what it would take to get it up to speed. He sounded quite pessimistic about whether the Model 3 production can ramp fast enough to generate cash flow.
Read the whole thing, including, in the comments, how readily the poster is attacked by some for sharing the information. When tes-s (another reliably informative poster) comes to Dave’s defense, he is attacked as well.
Why It Will Get Worse
CoverDrive, who saw the posts, emailed me with this comment:
Tesla's Model 3 woes definitely run deep. I would never have predicted that Tesla would have trouble spot-welding steel. Or with its battery pack assembly.
And until Tesla gets these fundamental things set up correctly, it won't even know the full extent of its problems.
Why won’t Tesla then know the full extent of its problems? Because it decided to skip the traditional, and critical, production parts approval process (PPAP). So, undoubtedly, more problems with parts will come to light.
What comes after all those problems finally are solved? Just my opinion, but here's what will follow for the Model 3:
- A weakening in demand once reviews reveal how dangerous the driver interface is;
- A further weakening in demand as tax credits either are revoked or phased down;
- Yet more demand erosion as potential buyers realize that, in any desirable configuration, the car will cost $45,000 or more;
- And yet another demand falloff as impressive competition begins to arrive;
- The inevitable realization that, like the Model S and Model X before it, the Model 3 is a money loser; and
- An effort to shift to a new narrative; perhaps the Model Y and Tesla pickup trucks.
Why Tesla Won’t Invest More in Model 3 Production Equipment
I’ve written at length about the biggest piece of Q3 news: Tesla will need to raise more capital if it is ever to go beyond a Model 3 weekly production rate of 5,000.
Seeking Alpha cparmerlee had an insightful comment. She thinks my premise - that Tesla actually intends to reach a weekly production level of 10,000 - is mistaken:
Tesla never had any plan for 500,000. It was always hogwash. It was inevitable that they would eventually walk that back, especially after they started talking about building in Shanghai.
I doubt they can sustain sales of 250,000 a year globally, and they surely can't sell 250K Fremont cars plus 250K Shanghai cars each year. To get numbers like that, they would have to do a crossover, a real SUV, and a pick-up.
When I read her comment, I realized she is very likely right. It’s unlikely Tesla will ever deliver more than a combined total of 250,000 Model 3 and Model S cars in any year. The demand simply won’t be there.
The Real News from China
As for Shanghai, it’s a nice story, but, as Bertel Schmitt details, it’s just a story, despite several reckless press accounts to the contrary. Here are some essential facts about China that emerge from the reporting of Schmitt and our own Simon Mac (in a blog post that has content worthy of an article):
- Unlike several large American and European OEM’s, Tesla has no Chinese joint venture partner;
- Moreover, Tesla has no special deal that would enable it to escape the 25% import tariff;
- Tesla is unlikely either to attract a Chinese partner, or relief from the Chinese import tariff;
- Tesla’s Chinese Supercharging network was just rendered obsolete by that country’s new charging standard;
- Tesla cars already delivered in China will need to be modified in order to accept the standard charging plug;
- New Tesla cars delivered in China will need some redesign, involving sheet metal and wiring changes, to accept the standard charging plug.
Meanwhile, there is evidence of dramatic price-slashing in China. This report comes from Seeking Alpha Contributor Tokyo Picker (whose excellent inaugural article can be found here), after visiting Tesla’s Hong Kong showroom:
Tesla HK has a “substantial” inventory of new Model X (none of which is shown on the Tesla HK website). The salesman said the exact number is “classified,” but it is sufficient that any exterior color is immediately available, though not every interior trim.
As a walk-in unknown customer, I was offered a HK$300,000 (US$38,500) discount on any inventory Model X.
There was no inventory of Model S and the wait for a new Model S is three months. However, the three months includes the 4-6 week shipping time from California.
A pre-owned RWD 2015 P85 with 12,500 miles on the clock was available in the showroom. Listed on the website at HK$588,000 (US$75,400), I was immediately offered a discount to HK$500,000 (US$64,100). According to the salesman, it sold new in 2015 (during the HK tax exemption period) for HK$1 million (US$129,000).
There are about 50 pre-owned Model S on the Tesla HK website for prices, before discount, ranging between HK$487,000 (US$62,500) and HK$888,000 (US$113,800). Due to the 80 - 100% tax applicable in HK, it is likely that the Model 3, when it arrives in 2019, will price at around HK$620-780,000.
How did Tesla end up with such a large Model X inventory in Hong Kong? It seems more evidence that some of the deliveries reported this year were achieved by means of sales to intermediaries in an effort to stay ahead of the tax law changes.
More Analysts Catch Up with CoverDrive’s Forecasts
Meanwhile, as foretold here many times, Tesla’s analysts have begun slashing their EPS forecasts, both for the current quarter and for 2018.
Here’s the latest:
(From Yahoo Finance)
The average 2018 forecast is about $600 million in losses. For 2018, that’s about one half billion dollars more in losses than the average forecast three months ago.
I have no doubt the average forecast will be slashed further - much further - before 2018 ends.
What about Q4? CoverDrive is still ruminating on the data, but is tentatively toting up a $500 million loss after considering ZEV credit revenue and Nevada transferable tax credit revenue. The analysts are now on the same page, with an average Q4 loss forecast of about the same amount.
When, however, any of this matters to the share price is another matter altogether. As I have so often said before, Tesla is as much about religion as it is about finance.
Tesla’s semi truck reveal is set for Thursday evening. Elon Musk promises, by way of Twitter: “This will blow your mind clear out of your skull and into an alternate dimension."
Bill Maurer has a great piece up. The title, “It’s Distraction Time,” sums up things nicely.
The entire Tesla semi discussion seems so completely unreal. Tesla can’t even build the Model 3 in volume. Its Solar Tiles, announced a year ago, are obviously untested and unready. It lacks money to develop the Model Y, never mind the Tesla semi or the Tesla pickup truck.
I can only conclude that, taken together with other signs, the semi reveal is a prelude to another capital raise. Tesla would no doubt prefer to wait until after it achieves volume Model 3 production, but it risks reaching Q1 without having resolved the production issues.
And Tesla’s underwriters probably would prefer not to have to raise money on the strength of three unaudited quarters of financial statements, and well into a fourth quarter with no results posted at all. But the modesty and prudence formerly seen among Wall Street investment bankers disappeared several years ago in this Age of Unicorns.
Tesla’s Undoubted Successes: Tapping Capital Markets and Enriching Insiders
Andreas Hopf has published another of his beautifully written disquisitions on Tesla. On the off chance you haven’t read it, I cannot commend it highly enough. Reflect, as you do, that English is not his native tongue.
Judged as an automobile company (or battery storage company, or solar generation company, or autonomous driving company), Tesla has, as Hopf hammers home, a structurally unprofitable model that dooms it to failure.
However (and I don’t believe Hopf would disagree), judged as a different kind of company, Tesla has been a big success. Tesla has successfully attracted serial equity infusions, at what have generally (though not invariably) been ever higher share prices.
Tesla also brilliantly captured the most favorable junk bond interest rates yet seen with its recent $1.8 billion debt issuance. Almost immediately after Tesla concluded its deal, what had been a red-hot bond market began turning, as The Wall Street Journal reported, “more frosty,” with investors demanding higher spreads.
So it is that Tesla’s bonds, issued at a yield of 5.3% in an offering that was upsized to capitalize on strong demand, have seen their prices drop, most recently to 94 cents on the dollar.
Finally, Tesla has been a spectacular success at enriching its insiders, who have banked hundreds of millions of dollars selling Tesla stock. This enrichment continues. Kimbal Musk sells shares each month like clockwork as they vest, as a review of his Form 4s will demonstrate. In just the first ten months of 2017, Kimbal trousered $8.26 million in proceeds from stock sales (net of his option exercise price).
And Kimbal the chef is small potatoes. Lyndon and Peter Rive, who no longer are obliged to report their stock sales, both have trousered far more than Kimbal over past several years. Other insiders who regularly sell shares, and have collectively trousered hundreds of millions of dollars, include directors Stephen Jurvetson, Antonio Gracias, and Robyn Denholm, and a host of officers and former officers.
And, let’s not forget, Elon Musk, whose largesse has come partly from selling stock and mostly from pledging the stock to support personal loans.
So, credit where it is due. On these terms, Tesla is the great business success of our age.
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 am short TSLA via long-dated options