Tesla Vs. Ford: Inventory Transparency

Jul. 27, 2018 2:58 PM ETTesla, Inc. (TSLA)F, STLA136 Comments
Anton Wahlman profile picture
Anton Wahlman
6.97K Followers

Summary

  • There are legitimate reasons, in principle, for having “logistics hubs” where you store cars on the way from factory to stores around the country.
  • However, as with sugar, there is a right quantity to everything. Without the kind of data Ford supplies on a monthly basis, we cannot know how good or bad this is.
  • That said, and in addition to legitimate logistics, there is not only the potential for logistics incompetency in matching factory output to deliveries.
  • There is also the possibility that fewer Model 3 deposit holders converted to orders, causing the inventory to pile up.
  • This lower Model 3 demand in the U.S. and Canada could cause Tesla to accelerate availability of the $36,000 version, as well as the European introduction.

I’m getting a lot of questions in the last few days, on the subject of those pictures and videos of thousands of Teslas (NASDAQ:TSLA) sitting in the California desert and gathering dust. You’ve all seen the pictures and videos over the last week, on Twitter and elsewhere, so no need to link to them here. However, since some of you will still be asking, here is one of the best examples.

Tesla has responded to the observations by saying that this is just normal logistics, seeing as it’s impossible to perfectly match the factory output to distribution around the continent. Bears think that these cars are unsold or in some cases even defective.

The purpose of this article is to sort out these arguments, including a comparison with how Ford (F) discloses this kind of data on a monthly basis, in great detail.

In Tesla’s defense, there is precedent for these kinds of “logistics storage hubs.” I remember attending a launch event for the Fiat (FCAU) 500 electric car approximately half a decade ago. It was a car that was going to be sold primarily in California.

At that event, it was explained that Fiat would employ two logistics hubs - one in Southern California, and one in Northern California - in order to better serve the dealerships. This was a product where almost all units were going to be sold in two relatively small and concentrated geographies: San Francisco Bay, and the Los Angeles-San Diego corridor. That made it very easy.

Having these two logistics hubs would enable the Fiat dealers to carry fewer units on hand - perhaps only 2-5 units per dealer - while being able to get an extra unit or two, to show colors etc., sometimes on less than a day’s notice. The same argument could apply to Tesla today.

Therefore, there is nothing wrong or nefarious in principle, with Tesla doing this today. Other automakers are and have been doing variants of this kind of practice.

However, the story does not end there. It’s like asking the age-old question: “Is sugar good for you?”

And the answer to that question is: It depends. In the right quantity, and of the right kind, sugar is a good thing. However, in the wrong quantity, and of the wrong kind, sugar is a bad thing.

Just looking at a dusty parking lot in the middle of the California desert and seeing thousands of Teslas baking in the sun, does not give us a good answer either way. We are missing a lot of data, in order to judge the situation.

For example:

  • On average, how long have the Teslas been sitting on those lots been sitting there?

  • On average, how long are the Teslas sitting on those lots expected to remain on those or similar lots elsewhere in the logistics food chain?

  • What is the breakdown between Model S, X and 3?

  • Do any of the Teslas on those lots need any fixing or rework?

  • Are all of those Teslas sold, i.e., have a VIN matched with a customer contract? Or are some of them waiting for a buyer?

We cannot judge this situation without getting precise answers from Tesla to those questions. Maybe all of these cars are in perfect shape, all sold, and are only sitting there for a couple of days before being trucked to the stores around the continent. If so, this is not a problem. The bears would have been barking up the wrong cactus (sorry, couldn’t help it).

The closest we get to transparency about the situation comes from Tesla’s quarterly “vehicle production and deliveries” report. The most recent one was published by Tesla on July 2.

The relevant paragraph in this report was this one: “11,166 Model 3 vehicles and 3,892 Model S and X vehicles were in transit to customers at the end of Q2, and will be delivered in early Q3. The high number of customer vehicles in transit for Model 3 was primarily due to a significant increase in production towards the end of the quarter.”

The July 2 statement does not give us all the data we need to judge whether the thousands of Teslas sitting in the California desert is a problem or not. For example:

  • Are all of those Teslas in the desert considered to be “in transit to customers”?

  • What is the composition of Teslas that are considered to be in transit - sitting at stores vs. in the California desert vs. on trucks vs. on trains vs. on boats etc.?

  • Plus, all of the other questions I listed above, such as how long the cars are sitting there, and are expected to sit there going forward.

You may ask: How does all of this compare to other automakers?

Let’s take a look at Ford. It not only produces sales reports quarterly, as Tesla does, but it does so monthly. They look like this, published July 3 for the June month, in terms of U.S. sales.

Look carefully at page 2. You will see how Ford breaks down its inventories in terms of:

  • In transit to dealerships, vs. sitting at dealerships.

  • Absolute number of units vs. days’ supply.

  • Cars vs. SUVs vs. trucks.

  • June 2018 vs. May 2018 vs. June 2017.

In other words, most importantly for this exercise, Ford shows where the cars are - on the way to the dealerships, or sitting in inventory at the dealerships - and how many days are in each of those two stages. And it does so on a monthly - not quarterly - basis. This is what transparency should look like at all automakers.

If Tesla provided this kind of transparency, the Kremlinology surrounding videographing and photographing the thousands of Teslas gathering dust in the California desert would be accompanied with less drama and uncertainty. As it stands, almost any scenario is possible. With transparency, we would not need to speculate nearly as much.

My theory: Three factors combined.

Lacking such transparency, I offer my interpretation of what is going on. It is a combination of three things:

  1. Normal logistics. The right kind of buffer is probably not zero, even though many automakers do a good job of shipping directly from the end of the assembly line to dealers around the world. What we don’t know is how much is “good” and “appropriate” vs. “unhealthy.” Just like sugar!

  2. Incompetency. Remember the “Alien Dreadnaught?” That was supposed to be the fully automated factory. Instead, we ended up with a tent and more workers per car produced than almost any other brand this side of Bugatti. Basically, Tesla just doesn’t have skill to ship directly from factory to the customers at the stores.

  3. Inventory glut. This point deserves a slightly longer explanation, so see below!

The reason Tesla opened up Model 3 purchases to everyone in early July, effectively making deposit holders since March 31, 2016 disappointed, is that too few such deposit holders were converting to actual Model 3 purchases.

We have discussed some of these factors behind the lower-than-expected conversion rate before:

  1. Many deposit holders are located outside North America, so they have not yet been allowed to configure (order).

  2. Many deposit holders are waiting for the $36,000 ($35,000 + mandatory $1,000 delivery fee) version, which arrives in the next couple of months, so they too have not yet been allowed to configure (order).

In the meantime, Tesla had very few SKUs of the Model 3 in production until the middle of 2018 - before the all-wheel drive and Performance production began. Before then, it was basically a choice of a few colors. The two wheel options could be changed at the stores, and the Autopilot software is just that: Software. Tesla could basically reprint the Monroney at the store level, and sell the car to another customer, if necessary. All that needed to match from the factory was the color.

Given this flexibility, there was even less excuse for Tesla to have a logistics issue. It could very swiftly switch around the cars in the process, in order to match a customer in a most nimble way. There really was no excuse for having an inventory problem.

Therefore, a plausible - but not proven - explanation for at least a part of the inventory pile-up in the hottest of California deserts, is that Tesla simply overproduced what ought to have been easy-to-allocate Model 3 units, but for whatever reason too few deposit holders chose to convert these deposits into actual orders.

It seems pretty clear how Tesla will attempt to mitigate this issue starting around the time of the August 1 financial results conference call:

  1. Start to offer the $36,000 version sooner than what is currently expected (end-2018). Even if Tesla loses money on every unit it sells, it may be better than having excess units gathering dust in the California desert.

  2. Accelerate the deliveries to overseas markets, especially Europe. I expect Tesla to adjust to the lower-than-expected demand in the U.S. and Canadian markets, by doing all it can to speed up the market introduction in Europe. This is difficult, but they will do whatever they can to try.

So now you know what to expect on the August 1 quarterly financial results conference call.

This article was written by

Anton Wahlman profile picture
6.97K Followers
I am a former sell-side analyst -- UBS 1996-2002, Needham 2002-2006 and ThinkEquity 2006-2008. These days I review automobiles and other technology products, as well as analyze the automotive and technology industries, and coming up with long/short ideas. I also continue to write (less frequently) on macroeconomics and politics.

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: At the time of submitting this article for publication, the author was short TSLA. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers.

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