It's time to talk Tesla
It's quarterly financial reporting time again for Tesla. Its third-quarter results reveal an even larger than expected largest-loss-to-date and the pushing back of the Model 3 production timeline by about three months, but also record sales of its Model S and X. With analysts keen to gain insight into a company going through a seemingly turbulent time — besides stumbling on Model 3 production ramp up, it had mass firings of workers from both its automotive and former SolarCity staffs, a delay in its Tesla Semi reveal, and a $500 million raising of its warehouse agreement, among other things — we expected a lot of questions surrounding these issues.
Blue Tesla Model 3
Musk, perhaps a little under the weather and, no doubt, exhausted from trying to get the Model 3 production train back on track, kicked off the call by talking up Model S and X production and the company's incredible growth over the past five years, predicting that it would, in the coming five years, grow by an order of magnitude from today's position. Maybe two. Then, he turned to excoriating the media about its coverage of the recent mass firings. He was noticeably perturbed. Actually, scratch that. The man was pissed.
Apparently he took great umbrage that there was speculation in the press about Model 3 production and other aspects of the company's affairs after, as we mentioned, hundreds were fired from Tesla operations and SolarCity. Of course, the company itself was quite opaque with regards to this issue, sticking with the performance reviews as the reason for letting so many go. When reports from former employees of SolarCity arose claiming no performance review had been held there, the company remained silent. No doubt frustration flows in both directions.
He then went into some depth on the battery bottleneck that's been a pain in his own neck for the past month or so. To underline the issue and the extent to which they were dealing with them, it was mentioned that the call was being held from the Gigafactory outside of Reno, Nevada. Indeed, we are well aware that Musk has been spending a lot of time there, as he posted a video of himself and others drinking and roasting s'mores over an open bonfire on the roof of the facility.
Explaining the battery bottleneck, Musk said manufacturing of the modules that go inside the packs takes place in four separate "zones." Two of those were fine, another not so great, and one, well, according to the entrepreneur, the subcontractor dropped the ball and then didn't tell them the ball was dropped. Apparently this resulted in the need to rewrite a lot of software from scratch and make electromechanical changes to the design. The good news from all of that is that, according to Musk, the reconfigured zones are now "three times more effective." To his credit, he shoulders the ultimate blame for the failure on himself and Tesla, since they were the ones who chose the supplier.
Getting into the call, we have to say we were a little disappointed in some of the questions. "What production level of hell, exactly, are you at right now, given that the 9th level is the worst" (we're paraphrasing a little), is not extremely helpful nor does it lead to insightful answers. In case you wondering, though, Musk says they are in the eighth level, getting ready to leave for the 7th.
Tinted Model 3
Here are a few further bullet points of what we learned.
- Model 3 production should reach 5,000 per week by Q1 2018, sometime in March.
- Model 3 is a 10-year project. This might also indicate how long the S and X might last before a re-do.
- Musk now expects Model 3 production to be in the thousands per week by the end of the year.
- Autopilot equal to a human's ability is achievable with current hardware. If required to achieve higher level from regulatory standpoint, hardware (seems to refer mainly to computer processor) will be replaced for owners who've already paid for full autonomy.
- CFO Deepak Ahuja maintains that cash flow will improve significantly with the increased production of Model 3 and capital expenses are being carefully managed. Interestingly, he seemed to imply a slowing of service center and Supercharger rollout in order to keep expenses under control.
- Gross margins on Model S and X were down due to the sale of inventory cars, as well as the marking down of some 90 kWh cars which they wanted to discontinue. They are expected to return to the mid-twenty percent level.
- Tesla is trying to differentiate the Model S from the Model 3 by offering more value in the S. Therefore, they all come with air suspension now, for example.
- Despite a decrease in Model S and X production — from 2,000 per week to 1,800 — sales are expected to be higher, since they still have some inventory vehicles to move.
- Tesla is very short staffed right now. (Surprise!) Third shift S and X workers are being moved to Model 3.
- Musk says next quarter they'll be able to give more precise information on production expectations. Perhaps some clarity
- Musk says, "Don't set your watch by this," but China factory should start in about three years and produce two hundred thousand or more Model 3 and Model Y vehicles for that market and nearby regions. Possibly some Model S and X as well.
- Model S and X quality continues to improve.
- CPO sales are expected to reach $1 billion for 2017.
- Musk says they are asking suppliers for faster robots. says they should need a strobe light to see them, that air friction should be factoring into their speed ability. He then hints they may be designing their own robots internally.
- Manufacturing in China is important for lowering cost, making vehicles more affordable to Chinese consumers. It not related to material supplies for permanent magnet inside Model 3 motors.
- Expect conventional solar sales to increase as product is brought into stores.
- Solar Roof is still undergoing pilot engineering, and is installed on more than ten houses. Expect Buffalo factory to begin production by the end of the year.
- Australia energy storage project appears to be on target.
- Energy storage battery production is separate from automotive and is doing well. There may be some constraints in the longer term future, due to availability of lithium hydroxide, nickel, separator, and even electrolyte. (They downplayed cobalt constraints.)