Will The Tesla Semi Ever Enter Production?

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About: Tesla, Inc. (TSLA)
by: John Engle
Summary

The media and bullish analysts have been talking up the potential of Tesla's Semi since it was unveiled in late 2017.

Semi orders have been picking up, with major corporate names placing preorders.

Current estimates on Semi deliveries appear wildly overoptimistic.

Failure to deliver may harm Tesla in the eyes of corporate clients that are less forgiving than devoted consumers have been.

Given Model 3 production woes, mounting cash concerns, the absence of a semi production facility, and the threat of accelerating competition, Tesla may never actually deliver a single truck.

And on the pedestal these words appear:

'My name is Ozymandias, king of kings;

Look on my works, ye Mighty, and despair!'

Nothing beside remains. Round the decay

Of that colossal wreck, boundless and bare

The lone and level sands stretch far away

- Percy Bysshe Shelley

Facing mounting pressure due to its seemingly never-ending Model 3 woes, Tesla Motors (NASDAQ:TSLA) turned, in late 2017, to a tried-and-true strategy of the Elon Musk playbook: to distract from the current problem, roll out something new and shiny with the promise that it will be the next big thing (and will definitely not face the same problems and broken promises of the last thing).

Musk has done this so many times, one would think investors would get wise to it. Yet, the presentation of the first Tesla Semi Truck worked just like past bait-and-switches. Fawning media attention and crowing bull analysts gamely pumped up the news with their usual aplomb. A rash of high-profile corporate preorders helped turn the flashy reveal into something with the look of substance.

But is there really anything to the Tesla Semi beyond smoke and mirrors? So far, all we have is one bespoke truck and some big promises about mass production in the near future. Once we clear away all the celebratory fluff, we are left with a truck that may well never enter mass production or even reach the point of sale at all.

Mounting financial pressure, limited real demand, potential competition, and technological inadequacy combine to lead us to this conclusion: Tesla will probably never deliver a mass production big rig. For a company already facing desperate cash problems and with no clear path to profitability, the Tesla Semi represents one more reason for investors to steer well clear of the company.

Is There Really Demand for a Tesla Semi?

Early preorders by big-name companies can give the impression that the Tesla Semi will be in hot demand. PepsiCo, Anheuser-Busch, Sysco, and UPS have collectively placed orders for 315, with numerous other companies placing orders as well. With only a single bespoke-built model to judge from, those orders sound like a big vote of confidence and a sign of demand waiting to be tapped. But is it really?

Big rig trucking is an extremely conservative business, and understandably so. These are vehicles that need to travel tremendous distances reliably, and for many years. Repairs have to be simple and easy, with easily navigable maintenance and fueling infrastructure. The preference for simplicity is a major reason diesel is the fuel of choice for Semi truck engines. They are simpler and less prone to fault than are gasoline engines. An EV Semi presents far more serious problems than a gasoline engine.

Tesla has thus far presented a single edition of its Semi, and while it has offered some moderately impressive performance stats, it is a largely unproven technology. Truckers have been offered technological modifications many times in recent years, but few have found widespread adoption, even those that would improve efficiency and lower long-term costs. When dealing with freight and the margins involved in the transportation business, truckers and trucking companies cannot afford unexpected or persistent expenses - or delays. That is hardly a recipe for adopting an unproven EV from an upstart manufacturer with a long history of production issues and turnaround problems.

The hundreds of preorders, which represent an experimental dipping of toes into the EV trucking waters, are likely never going to go much further than experimentation. In fact, some of the preorders may well have been made simply to bask in Tesla’s reflected PR glow. There can be no doubt that the companies that have made preorders have won a fair amount of press attention and been lauded for their forward-thinking attitudes. Many of them may not expect to ever see a Tesla Semi delivered to them; the preorder expense for most of them is probably worth the good publicity. However, even that cost is not likely to be permanent, since Tesla has promised to refund deposits.

Taking just a small peak beneath the surface of the Tesla Semi reveals that the likelihood of widespread adoption is severely overstated.

Conclusions

  • The purported demand for a mass production electric big rig is not there, and may never be.
  • PR, not serious investment, is likely driving preorder decisions.

What Will the Semi Really Cost?

The top line price is now $200,000 for the first generation of Tesla Semis, already an increase from the previously expected $150,000. The argument is that electric charging will eventually prove to be a cost saving for truck owners, but that is based on a promised charge pricing of $0.07 per kilowatt hour. Considering that Tesla currently faces charge costs of about $1 per kilowatt hour at its charging facilities, the promised Semi charging price will have to be heavily subsidized. That promises to be a steep cost for the company, but it also exposes Semi owners to significant pricing risks. The subsidies could end up being lifted over time, or the company might prove unable to afford them altogether. Under such circumstances, Tesla Semi owners could face expenses far beyond what they initially sign up for.

Incremental cost of component repair and replacement will also add up, especially battery replacement. Currently, Tesla owners have warranty for unlimited miles for the first eight years. Battery degradation thus presents a serious issue. Taking the Model S as a starting point, the battery of which loses 10% of its capacity after about a thousand charging cycles, we can surmise that Tesla Semi batteries will last less than six years. Replacement costs will be steep and severely cut the purported long-term cost advantages of adopting the Tesla Semi.

For a business like long-distance hauling, these costs and uncertainties will likely prove unacceptable.

Conclusions

  • Tesla's cost recovery estimations are grossly overstated.
  • Repair costs will balloon over time.
  • Subsidized charging costs create significant uncertainty.
  • Hauling companies will not abide Tesla's risks and question marks.

Can Hope Power Tesla When Technology Fails?

While flashy presentations, fawning media coverage, and substantial preorders have given a veneer of credibility to the notion that Tesla might be able to actually seize a piece of the big rig trucking market in the near future, the reality is that such hopes are little more than pipe dreams.

One glaring problem lies at the heart of the Tesla Semi: battery technology is not up to the task of delivering consistently the Semi’s promised 500-mile range. Nor can it deliver on Tesla’s promise of being able to add 400 miles of charge in 30 minutes, a feat that would require a charging system at least 10 times more powerful than the current Supercharger. Even the company’s most ardent boosters admit that battery technology is currently not able to deliver on these grandiose promises. The hope - and it is a big hope - is that Tesla will be able to deliver major improvements in battery storage and power technology in the next year.

With Semi mass production currently planned to begin late in 2019, Tesla is clearly banking on a breakthrough very soon. However, we can be fairly certain that that breakthrough has not happened - if it had, the company would have announced as much. The deafening silence of this aggressive self-promoter is proof enough that a breakthrough has yet to materialize.

Conclusions

  • Tesla is banking on a revolution in battery technology to meet its performance and charging promises for the Semi.
  • Hope, more than technology, is at the heart of the Semi story.
  • Investors should be wary of putting their faith in hope and empty promises.

Will the Competition Stand Idle?

The technology issues contribute to another serious problem: timing. While production is way off in the distance, and likely to be delayed further like every other Tesla project, companies still need to buy trucks. If there are any substantive moves toward electrification - a fairly big "if", given what we discussed in the previous section - then Tesla will not likely be alone. It is already facing a challenge from Thor Trucking, which intends to launch its own all-electric big rig in 2019, ahead of Tesla.

But the fight will not likely be left to the EV upstarts; if there is an economic incentive due to technological breakthrough or transformative shift in trucker demand profiles, then the big names of the auto industry will also get in on the action. New investment in EVs is set to exceed $90 billion over the next few years - a deluge of capital that will be able to capitalize on market and technology developments as they develop. Tesla, on the other hand, looks set to remain cash-strapped and financially troubled.

If there is a mainstay EV big rig in the future, the chances that it will bear the Tesla logo look mighty slim.

Conclusions

  • If a breakthrough in battery technology does emerge, Tesla will not be the only company able to exploit it.
  • Better-capitalized auto giants are already exploring big rig options.
  • Incumbents have vast resources and have committed increasingly to EV development, leaving cash-strapped Tesla in serious trouble.

A New Circle of Production Hell?

The problem of production is also worth addressing, considering Tesla has already shown itself to be capable of one of the worst production rollouts in auto history. To recapitulate what I said in a recent article:

In Q4 2017, Tesla delivered just 1,550 Model 3 sedans, barely more than half the Wall Street consensus estimate. No one should be surprised that Tesla failed to meet its promised delivery numbers; after all, it has rarely lived up to its wild promises, consistently extending deadlines and under-delivering. CEO Elon Musk has certainly long been a fan of making big promises only to roll them back again and again. As recently as July 2017, he claimed Tesla would be able to produce 20,000 Model 3s in December. In November, Tesla revised that estimate to March 2018. In Q4 2017, it managed to produce just 2,917 during the entire fourth quarter and the long-promised 5,000-per-week production rate is now expected by the end of June 2018.

The chief problem has been persistent production bottlenecks that have required extensive attention, time, and money. The need to do significant amounts of post-production repairs and refits has further eaten into production speed and, ultimately, margins. Demand is not the problem presently. There are 400,000 Model 3 pre-orders after all.

The fundamental production issues make Tesla's claim that it can achieve a 25% profit margin look rather laughable.

The Model 3 rollout has been dogged by timeline expansions, production bottlenecks, and cost overruns beyond the hundreds of millions of dollars needed to build a production facility in the first place. The Tesla Semi will also need a production line to churn vehicles out, so we can expect hundreds of millions more spent on that process alone, if the company ever gets to that stage.

Tesla may also face trouble from clients in the event that it actually manages to get production rolling and looks like it might actually deliver completed trucks. While individual buyers are in love with the company’s story and relish being able to flaunt the Tesla brand, companies care about profits - well, companies other than Tesla itself, that is. If Tesla fails to deliver or delivers sub-standard products, it will face the wrath of customers not so willing to be forgiving.

Tesla has far less wiggle room and ability to make excuses when dealing with serious corporate clients. The consequences of upsetting those giants could prove to be substantial, both financially and reputationally.

Conclusions

  • Model 3 production hell has cost significant time and money already, and many problems persist.
  • A Tesla Semi will only come about after massive investment in plant and mass production-capable equipment, adding to the company's cost burdens.
  • If past is prologue, we should expect similar amateurish production of the Semi, with delays and cost overruns.
  • Crossing corporate clients with delays could prove very costly.

Investor's-Eye View

Looking at Tesla’s absurd promises and ludicrous valuation, it is hard not to think of the famous line from Macbeth: “It is a tale told by an idiot, full of sound and fury, signifying nothing.” Everything about the Tesla Semi is pure fantasy. This is a vehicle built by hand with no path to mass production on offer, from a company that has repeatedly demonstrated its production incompetence while burning through vast swathes of investors’ cash.

Perhaps one day Tesla will have managed to cobble together a production facility for its proposed Semi. But it will have to come at the cost of huge investment and likely in the face of competition, unconstrained by the upstart’s financial and operational woes. Worse still, to function properly, Tesla will need to build far more charging stations - adding even more costs to a deteriorating balance sheet. And the costs will not end with production: Tesla has promised a charging rate of $0.07 per kilowatt hour, which would mean continued massive subsidies from the company itself - even if it manages to curb its own costs marginally with solar roofs and other such silliness. Already, warning sirens about Tesla’s financial position and the danger the Semi could pose are being sounded in major circles.

Right now, the Tesla Semi looks like just one more very costly albatross hung around the neck of an already overburdened beast. Add to it the further pipe dreams of a pickup truck, and investors should be running for the hills.

Better to avoid the hubris of Elon Musk than to be crushed by its eventual collapse. Like the Tesla Semi, Tesla the company is unlikely to ever deliver on its promise of profits.

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.