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Just How Many Model 3 Reservations Are Really There?

|About: Tesla Motors (TSLA)

Summary

Model 3 ramp is slower than Mr. Musk’s pet snail Gary.

My estimate is that real Model 3 reservation count has dwindled down below 75 thousand.

Many reasons emerging for Model 3 cancellations.

Per Tesla IR, rhere were 430,000 Model 3 reservation at end of Q2 of 2017.

It has been more than 6 months since Tesla’s ( TSLA) Model 3 ramp was to launch on the S curve. But so far, from VIN assignments to sparse delivery numbers, all signs point to an extremely slow ramp. That makes me  wonder if the company really has over 400,000 Model 3 reservations in its books.

(Source: insideevs. Original source: Tesla’s Model 3 launch.)

Recently, there has been a flood of articles and TV news reports repeating the same incorrect information that many have been saying for the last two years; viz. more than 500,000 people have put down a deposit for the Model 3. For an example, see the quote below from a CNBC article published today indicating close to 500,000 reservations. This is really surprising, as Tesla itself updated the tally to 455,000 last August.

Nearly 500,000 early adopters have put down $1,000 deposits for a Model 3," said USA Today. "That's a good start, but true success will require a zero to be added to that figure."

   I have always been curious if these are real reservations, or just the fake ones as we saw for PowerWall’s crazy off the hook demand. What makes me more suspicious is the really slow ramp of Model 3 in the face of such heavy demand. Moreover,a recent report from Bloomberg indicates there isn’t a whole lot of buyers for electric cars. We have almost 15 fully electric models and 26 plug-in hybrids on the US market today, but the total electric car sales have remained anemic (about one percent of total US auto sales of 18.21M in 2017). This is despite the huge push from California government to promote electric cars and push the pollution they produce to some distant lands.

So, I started looking at the recent deliveries and VIN assignments of Model 3. From this linked excel sheet, you can see that 33% of owners in the sample already received their cars. There are ~400 owners and almost same number of non-owner Model 3 reservationists registered in the Google sheet.

Item

Number

Comment

Total US reservations

952

Owner reservations

467

Owner invites

379

Invites/Reservations = 81%

Non owner reservations

485

Owner: Non-owner = 1:1

Cars delivered in sample

154

Delivered/Reservations = 33%

Total Model 3 delivered till Q4

1770

(Including employee deliveries)

(Source: Model 3 Invites Google Sheet .)

  The method I'll use is based on simple statistical sampling. the assumption that deliveries:reservation ratio in the sample data set is same (or close enough) to the ratio of (total deliveries):(total reservations). This is a reasonable assumption used in statistics. However, as always, please take my analysis with a grain of salt, since there could be sample bias in the data set, or the data set could itself be wrong.

   First, as we see from the summary in that worksheet, the number of non-owner reservation holders is almost same as the number of owner reservation holders. Second key point from that data is that 1/3 rd of the owners have already received their cars and 81% of owners are already invited.

One way to ball park total owner reservation number is to compare the delivery ratio in this sample data set to total delivered so far. We have 154 deliveries in the sample data set, while 1770 Model 3 were delivered till Q4’17. Let’s be generous and say, Tesla produced about 500 cars a week since then and delivered another 1500 to date, making total deliveries of 3500 to non-employees to date. So, that’s a multiplier of 23 to the delivery number in the sample data. Using same ratio, my expectation is that total owner reservation in US is 23 times 467, which is 10613. Since non-owner reservation count is close to owner reservation count, we can estimate total reservation count in US to be twice that; that is, roughly 21200.

From historical sales data for Tesla, we know that 40%-50% of Tesla sales are in the US. So, now, we can ball park the global remaining Model 3 reservation to be around 21200 times 100/40 = roughly 50,000. Let's be generous and round this up to 75,000 to be even more conservative and account for sample bias etc.

This is a far cry from the 500,000 some national TV reporters are still ignorantly repeating on broadcast television.  We are not even considering the effect of huge number of cancellations that will happen once the federal EV tax credit expires for Tesla. It also doesn’t surprise me that Tesla recently reiterated (see image below on schwab.com TSLA buzz feed; I cannot find any other reference to this private meeting) their need to raise more capital if it doesn’t hit 5000 a week by Q2’2018. I can assure you, another capital raise on that excuse is a certainty at this point.

(Source: From Charles Schwab news feed on TSLA. Published Jan 17, 2018)

Before you discard my estimate as absurd, please think for a moment. If we disregard the absurdly high Model 3 reservation count touted by Tesla and regurgitated (sometimes even blown up) by reporters, do the actions of the company line up well with this lower number? I believe the answer is a resounding yes. Tesla Model 3 ramp shows no sign of life. Tesla was hand assembling cars as recently as July. Tesla has repeatedly broken its own near term promises for Model 3 ramp. Tesla has not expanded Gigafactory or the Fremont factory for the massive production volume it has claimed. Tesla has not gone on a hiring frenzy to ramp up to 5000 Model 3 a week. All these actions line up pretty well with a low reservation count. In fact, I would argue that the ramp is not going any faster than the rollout of Tesla’s previous niche products.

Tesla's take on the apparent discrepancy

Based on SA Editors' feedback, I contacted Tesla IR on the noted discrepancy and explained my method in brief. For the purpose of making this article fair and balanced, I included my email and response (after redacting Tesla IR rep's actual name) verbatim below.

Dear Tesla IR,

     I am looking at the Model 3 owner vs. non-owner reservations data in this sheet below (see overview sheet) and have some concerns.

Model 3 Invites

 

Model 3 invites - Google Sheets

docs.google.com

The version of the browser you are using is no longer supported. Please upgrade to a supported browser.Dismiss

 

There are 464 owner and 482 non-owner reservations in the sheet. 81% of the owner reservations have already received invitations, and nearly 33% have already received their cars. Also, non-owner reservation count is same as owner reservation count, and historically US sales are ~40% of worldwide sales.

From these data points, and Tesla’s 1770 Model 3 deliveries till end of Q4, I conclude that the total Model 3 reservation remaining is close to 50,000, not 500,000 indicated by Media reports, or 455,000 last disclosed by Tesla in August 2017.

Can you please explain the discrepancy? Specifically, how such a high percent of reservation holders received their cars before Model 3 production ramped up significantly? If not, would you disclose the current worldwide Model 3 reservations remaining?

Best regards, Tesla Investor”

I promptly received an (automatic?) response as below:

Thank you for contacting Tesla. Just like our products, we try to be as efficient as possible.  We find that virtually all investor questions are answered in our FAQ page. If your question is not addressed there, please email XYZ at XYZ@tesla.com. Thank you, Tesla Motors”

So I forwarded the same email with this message to XYZ, who replied as below (emphasis mine). The 430,000 number at end nof Q2'17 is something new; Tesla has never disclosed this number before. At this point, I'm not certain if a low level Tesla investor relations employee will know the full story. If we believe this response to be correct, the number verified by PWC is the customer deposit amount, but not necessarily the model 3 reservation count.

Hi, what is the source of this data? How would anyone be able to get data from all of our reservation holders around the world since we don’t disclose those details?

We publish our “ Customer Deposits” number in our quarterly Balance Sheet. This number is verified by our auditors: PWC.

At the end of Q3, we disclosed $686 million of deposits on our accounts. At the end of 2017 Q2, we had about 430,000 net reservations for Model 3 and that number has increased significantly since.

Hope this helps, XYZ.”

Where are the reservations going?

So what happened to all the reservations? I think the factors below (not necessarily in order of significance) have slowly eaten away the reservations Tesla originally had. There may be more that I have missed.

  • Tesla upsold Model S to Model 3 reservation holders, converting many reservations to Model S sales.
  • Many people canceled once they saw the minimalist interior and high price tag of the car Competitive offerings are getting better and sweeter every day
  • Issues with Tesla’s cars (quality issues, slow super charging and impracticality of long distance travel, long waits at super chargers)
  • Tesla’s business practices(bait and switch on Model 3 interior materials , deceptive selling practices of vaporware such as FSD, poor service quality, etc.) are finally taking their tolls
  • Scalpers who waited in line are frustrated that they didn’t get the cars first to flip, and are now disappointed by low demand for this car to make a profitable flip. (See Ebay listing prices for some proof.)
  • Possibly many reservations were put down initially by Tesla shareholders and fans to boost the number and help the company raise more capital on the hype, similar to what happened for Powerwall launch 3 years ago.

The mystery still remains, how the customer deposit number remains so high in the quarterly reports. Now we have the semi truck and Roadster 2.0 deposits coming in to the picture to obfuscate the reservation count further. We may never find out the correct answer to this mystery.

But isn't the slow ramp associated with the challenges and troubles at the assembly line, and not necessarily demand?

This is a question brought up by my editors, and it is a fair question that many Tesla investors will have in their minds. It all boils down to whether you believe all the excuses Tesla provides. For example, the recent battery pack assembly bottleneck was never mentioned, and Panasonic even stated that the bottleneck is not on their side. We have seen similar excuse for Model S&X ramp as well, and there have been many articles written here how Tesla has been throttling Model S production to match demand. I think, a similar story is at play here. Even if we assume that there are 455,000 Model 3 reservations and 1000% convert to orders, the production rates of 5000 a week or 10,000 a week is not sustainable, because this total count has not changed much in the last 2 years. If Tesla hits 10,000 a week, the entire waitlist of 455,00 will be produced and delivered in a year. Then what? So, I think it is quite likely that it is the demand or cost factors that's slowing down Model 3 ramp, not production bottlenecks. Also, if Tesla wanted faster ramp, they would have allocated more resources to Model 3 production. It is hard to believe that the company cannot predict the production rates just one month ahead, as it happened in the last 2 quarters.

More bad news about Model 3 coming out every day

Every day it seems we get more bad news. Today it is the panel gaps, tomorrow the bait and switch of Alcantara headliner. Next day it’s the bumpy ride. The lack of AWD and lease options doesn’t help either. It almost seems like Model 3 is doomed to fail. I am not surprised at all by the extremely slow ramp of Model 3. Moreover, Tesla reported in Q3'17 shareholder letter (under OUTLOOK section) that it reallocated only 10% of Model S&X assembly workers to Model 3 line. You can get a fair idea what the expectation is going forward for Tesla’s Model 3 ramp. I think we can all safely kiss good bye to the aspirational goal of 5000 a week Model 3 production rate Tesla set forth just few weeks ago. Not just for Q2 of 2018, but forever. As the CNN auto reviewer noted, this gimmicky minimalist car is not designed for the mass market.

There are also missing basic features, poor quality rear view camera and a host of other issues brought to the fore by early owners. To Tesla bears, these come as no surprises as the company tries to cut corners and launch a half-baked product to keep the lights on. Shareholders should be very wary of the uphill challenges this car faces in generating sustained demand for the promised 5000/week run rate.

Let’s face the reality. Model 3 is not at par with the competing offerings at its current price point when it comes to creature comfort and practicality. As CNN auto reviewer Peter Valdes-Dapena correctly pointed out, those who really want a Tesla and can’t afford a Model S will still grudgingly accept the Model 3. But it is not really a competitive car for the masses. And we aren’t even talking about the real $35,000 car. Since Tesla didn’t even register the short range version with EPA yet, no one knows if the $35000 car will ever appear, or if Tesla will pull another one like it did for Model S 40.

Conclusion

With Mr. Musk’s pet snail Gary beating the Model 3 S-curve ramp, investors can be sure of one thing. More capital raise for Tesla is coming for many more years, till Wall Street remains upbeat on Tesla.  Please take my analysis here with a grain of salt. Hopefully, Tesla will update the Model 3 reservation count on a regular basis in the future. If I were long, I would be cautious on Tesla for this year. This year may finally be the turning point for the company.

Disclosure: I am/we are short TSLA.

Additional disclosure: Please use your own judgment for your investments, and check any suggestions implied here independently. The author is not responsible or liable for your financial decisions. This article is only here to put some facts in the right perspective.