Six months ago, the Tesla (TSLA) buzz was all about the Semi. This electric truck, which CEO Elon Musk unveiled to much fanfare in November 2017, was supposed to be a mind-blowing “beast.” Indeed, Musk promised that the Semi would redefine the trucking industry.
The glitzy reveal event had the desired effect, boosting Tesla’s share price and providing a welcome distraction from the painfully slow production ramp of the mass-market Model 3 sedan. Musk promised to begin production in 2019, a pledge that was swiftly followed by a raft of announcements from numerous big companies that had placed orders.
The Tesla Semi was lauded as a massively valuable game-changer by the company’s various boosters. With hundreds of preorders on the books, as well as promises that the Semi would be more cost-effective than current big rigs, it looked like Tesla might have a big winner on its hands.
Thus, it should perhaps come as a surprise that the Tesla Semi received no mention whatsoever in the company’s Q1 2018 update letter. Why would this potentially revolutionary vehicle get no love at all?
Wheels Come Off The Semi Project
The answer was provided during the Q&A portion of the Q1 earnings call. Here is an enlightening exchange between CNBC’s Phil LeBeau and Musk:
Phil LeBeau - CNBC LLC
With the Tesla Semi, how many reservations do you guys now have approximately? And where are you in the process as far as the development and the rollout of the first model in terms of timeline, when you guys expect that to happen, et cetera?
Elon Reeve Musk - Tesla, Inc.
I actually don't know how many reservations we have for the Semi. About 2,000? Okay. I mean, we haven't really tried to sell the Semi. It's not like there's like an ongoing sales effort, so sales – orders for Semi are like opportunistic, really companies approaching us. Yeah, it's not something we really think about much.
This is a fascinating acknowledgment from an individual who mere months ago had been planning to disrupt the massive trucking industry, and to start doing so in 2019. Yet, for some reason, the Semi is “not something we really think about much.”
Here’s the rub: If the Semi looked like it could claim a significant market, then Tesla would be moving forward with it. That would not necessarily require massive capital outlays toward building a production facility – not at first, anyway. But one would expect the company to at least tout the market opportunity and continue to promise that development would be coming soon. Instead, investors have been left with a rather peculiar silence.
Musk tried to brush off the mere 2,000 or so preorders as unimportant, since Tesla has not been advertising the Semi at all. Yet that is a tiny number of orders, especially considering the hundreds of orders that went on the books in the first couple of months after the unveiling. Evidently, orders have stalled out. This will be unsurprising to anyone who has studied the trucking industry in more than cursory detail. When we discussed the prospects of the Tesla Semi back in January, we pointed out the real reasons companies were ordering Teslas, and why the mass demand Tesla predicted would never materialize:
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…
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.
The dearth of orders admitted to by Musk on the latest earnings call bears out our original reservations about the project. It now seems evident that Tesla has abandoned the Semi project – or at least put it way back on the backburner.
That conclusion is borne out by more than just the anemic preorders and the company’s caginess. Tesla’s capital expenditure plans also support the conclusion. Specifically, the company announced it was cutting capex projections for 2018, from $3.4 billion to less than $3 billion. Apparently, the company has "significantly cut back on its capex projections by focusing on the critical near-term needs."
In other words, it is cutting costs and pushing back growth projects to conserve cash during the still agonizingly slow Model 3 ramp. With Tesla’s net working capital deficit having reached a record level, the urge to pull back from expensive adventures makes sense from a financial perspective. But it takes the sheen off of the story of endless growth that Tesla has relied upon to justify its massive market capitalization.
Investor’s Eye View
Taking all this information together, we can conclude that the Tesla Semi project has been stalled, if not canceled entirely. The cost of building and equipping a manufacturing facility could easily exceed $1 billion, and this would be necessary if the Semi was ever going to leave the prototype stage. Certainly, there is no room at the Fremont facility, as Musk also pointed out on the latest earnings call. The company already has to build or buy a facility to produce the promised Model Y, which Musk admits will not be happening until 2020. The promise of 2019 production always looked fanciful. Now, it has been abandoned in all but name.
Worse still for Tesla is the fact that its corporate clients do not have the seemingly infinite patience of its retail flock. With no sign of production happening, and no timeline for even starting on the horizon, many preorders will likely be canceled, which will require the return of millions of dollars Tesla can ill afford to lose in its current straitened state.
There is also the looming specter of competition, including Thor Trucking, which intends to launch its own all-electric big rig in 2019, ahead of Tesla’s original promised launch date. Nikola Motor Company, another EV startup, is also swiftly developing its own electric semi, and is suing Tesla for $2 billion on design patent violation grounds for good measure.
The most likely result will be that the Tesla Semi never sees the light of day. That is probably good for Tesla’s cash position, since building a facility would likely end up an expensive albatross, but it will come at the cost of a decent slice of the Tesla growth story.
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.