Has Model 3 Demand Really Collapsed In The U.S.? Ask Tesla

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About: Tesla, Inc. (TSLA)
by: Tokyo Picker
Summary

Model 3's production is being largely sent overseas.

Bulls expect a refocus on North America for the last few weeks of the quarter.

Is there sufficient demand left for premium Model 3 in North America to fulfill their hopes.

Tesla (TSLA) has now achieved relatively stable production volume for the Model 3. This is good news for the bulls - production hell seems to have cooled. However, is it also good news for the bears? Some bears, including myself, have always said that only after production has stabilized will the basic Tesla question be answerable. Is there enough long-term demand for the Model 3, at a price where Tesla can make a profit, to absorb the numbers being produced?

Fortunately, for Tesla, their excellent brand name, the long (much longer than anticipated) gestation period of the Model 3, and income tax credits in various jurisdictions (most importantly, at the US federal level) pulled forward a lot of demand to create a backlog. By this I mean that many people who wanted an Model 3 during the post-announcement and pre-production period had to put down a reservation rather than buying the car outright, while those who might have liked to buy an Model 3 in 2019 or 2020 because of previous leases running down or other personal circumstances were incentivized by the step-down federal income tax credit to buy in 2018 instead (this latter factor is still working to pull US demand in 2019 from 2020 and from H2 2019 to H1 2019, albeit less strongly). This meant that when the Model 3 finally launched, it did so into an artificially high demand.

Once that pull-forward demand backlog has been substantially satisfied, Tesla will settle into a more regular Model 3 demand pattern. Bulls feel that it will still show a rapidly increasing trend and that Tesla will, therefore, be able to profitably sell every Model 3, no matter which variant, it produces. Bears suspect that demand, at least but possibly not only for premium variants (including the MR), will be insufficient to profitably absorb supply. In North America, where everyone with a reservation has been offered a car and where the tax credits are stepping down (US) or disappearing (e.g. Ontario), it seems that the pull-forward demand backlog is largely exhausted, and so it is becoming easier to discern the trajectory of sustainable demand.

Tesla's Q1 2019 Model 3 Delivery Strategy

This quarter marks the debut of the Model 3 in international (other than Canada) markets. Clearly, Tesla is prioritizing deliveries to LHD Europe and China in the early part of the quarter. Over at the TMC owners' investment forum, various authors are providing and collating usefully detailed information on which Model 3 carrying ships are going where and when they will arrive and on the capacity being achieved at the various importing locations (for example, the 3,000 car per week capacity at Zeebrugge). In order to maximize Q1 revenue and achieve Elon Musk's hope for "tiny profit", the apparent Tesla strategy is to export as many Model 3s as can be delivered to non-North American customers (taking into account shipping times, import formalities, and local deliveries) by March 31, and then, nimbly switch back to satisfy the North American customers who have been waiting (and accumulating - effectively creating short-term, intra-quarter backlog, although this time by delaying North American deliveries, rather than by failing to meet overall production targets) while the cars they wanted were sent overseas. Judging by the Inside EVs January US deliveries estimate of 6,500 Model 3s - for comparison, roughly one-tenth of Q4 '18's North American total of 63,359 deliveries - it is certainly true that a substantial majority of Model 3 production (roughly 20,000 - 25,000 per month) was being shipped overseas or placed into inventory.

So How About the Backlog of North American Buyers?

How many eager North American purchasers of Model 3s are lining up, taking their places in the ever-growing tsunami of demand, which will wash away bears, ICE cars, and EV competitors alike. Only Tesla knows, and they won't tell us, but if we ask them carefully, they will inadvertently give us a pretty strong hint.

If you go to Tesla's US website and attempt to order a Model 3 (no need to go all the way to the payment stage), you will get a delivery date estimate, which will take into account your zip code. Picking a selection of states, this is what we get (as I write this on Feb. 13, Singapore time):

Location Model 3
MR LR AWD P AWD
Alaska February February February
California February February February
Florida February February February
Illinois February February Late February
Maine February February Late February
Massachusetts February February Late February
North Dakota February February Late February
Texas February February Late February

This is a pretty amazing result. This tells us that there is so little demand backlog - people who have ordered but are still in the delivery queue - that Tesla can deliver, out of inventory or remaining February production - any of the three variants to anywhere in the country within February. To make matters worse, Tesla divides months into three (presumably roughly equal) portions and, as can be seen for the table above, most deliveries can still be made within the middle third of February. Given shipping times from the production facilities in California and the usual 2-3 day delivery formalities, this suggests that there are large inventories of Model 3s placed around the country from which cars can be provided almost instantaneously.

In doing this test, it occurred to me that the results might be biased by my picking the standard variant (no options) offered on the website. I, therefore, picked the most popular - MR - variant, selected every non-standard option available and retried the test.

Non-standard Variant

These were the results:

Location
California February
Florida February
Illinois February
Maine February
Massachusetts February
North Dakota February
Texas February

As can be seen, no change.

As a final check, I tried the original test from the Canadian website for selected provinces:

Location Model 3
MR LR AWD P AWD
BC Late February Late February Early March
Nova Scotia Late February Late February Early March
Ontario Late February Late February Early March

A difference of no more than 10 days.

What does it all mean?

At a time when most Model 3 production is being shipped overseas, there is insufficient Model 3 demand in North America to mop up the remainder of current production and inventories. Once Tesla shifts back to trying to sell the majority of production domestically, supply will overwhelm demand and Tesla will need to resort to price cutting (which they seem already to have been doing prophylactically) and/or discounting, as they have done in some overseas markets for previous models. Neither of these will be good for their already shrinking profits.

In the Q4 earnings call, Musk made the risible statement that:

The demand for - the demand for Model 3 is insanely high. The inhibitor is affordability. It's just like people literally don't have the money to buy the car. It's got nothing to do with desire. They just don't have enough money in their bank account. If the car can be made more affordable, the demand is extraordinary."

In effect, he was informing us that the demand curve slopes downward to the right and ultimately, can reach a very large number at a price close to zero - a revelation which should not come as a surprise to any competent investor.

Given that the North American data above is showing that Tesla cannot survive on premium Model 3 demand, Musk's comments in his blog post of January 18, 2019, that "Higher volume and manufacturing design improvements are crucial for Tesla to achieve the economies of scale required to manufacture the standard range (220 miles), standard interior Model 3 at $35k and still be a viable company. There isn't any other way." are far more realistic and credible.

As for his assertion in the earnings call that "we're thinking about demand almost zero right now." I just don't believe it. And neither should you.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in TSLA over the next 72 hours. 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.