O for a muse of fire…
I’m writing about Tesla’s (NASDAQ:TSLA) conference call, but there is no way my abridged description can fully capture its surreal quality. There was:
- The moment when Elon Musk, in high dudgeon, expressed outrage at the “journalists and editors with low integrity” who have reported that Tesla fired employees despite the absence of negative performance reviews. “Shame,” he said (though he never refuted any of the facts reported);
- the seemingly endless pause after Musk was reminded that three months ago he professed to be absolutely certain Tesla will achieve a Model 3 production rate of 10,000 by some point in 2018, and was asked whether he was still equally certain (spoiler alert: that was then; this is now);
- pretentious blather about step exponentials, S curves, vertical climbs, air friction, pushing robots to the limit, and speed as the ultimate weapon; and
- a series of statements so fatuous that respected members of the auto industry press are openly mocking Tesla and Musk as rank amateurs (for an example, start here at 13:30).
The operating losses were, just as CoverDrive forecast more than a month ago, an all-time record. They were, in fact, significantly higher than expected. I hope to put up a blog post soon wrapping up what CoverDrive nailed (a lot) and what he missed (not much).
Problems In Fremont
Even worse, as I wrote Wednesday evening, Tesla confirmed it has built only one Model 3 production line, capable of producing (at most) 250,000 Model 3 cars per year.
Much of the line has not yet been paid for. Another line likely will require another manufacturing facility. Paying for all that will require, in my estimation, several billion dollars.
And, of course, the one Model 3 line at Fremont is plagued with problems. How bad are those problems? Tesla is downplaying them, but jalopnik.com, in this deeply researched, must-read article, is not.
The Financial Times (subscription required) has just filed its own dispatch about the Fremont factory:
Newly-installed Kuka robots designed to speed up production are still being operated by hand, according to two people who visited the site in recent weeks.
“I have never seen so much manual labour on a line,” says one person, who has inspected car plants all over the world.
“It was swarming with people. When I go to a plant and it’s automated I expect to see a lot fewer people.”
Problems In Sparks
The Tesla team assembled for the conference call at the Nevada Gigafactory because, as Musk said, he wants to be at the place where the biggest problems lie.
Musk detailed problems with the Gigafactory battery module assembly, and blamed them on an unnamed subcontractor. Musk claimed Tesla has now rewritten 20 to 30 man years of software code writing in only four weeks, and indicated Tesla is throwing all its resources at the problem.
Meanwhile, one can only imagine the number of Panasonic cells stacking up while Tesla attempts to figure out how to package them into modules. Oh, how wise does Panasonic now appear for insisting on the “safety stock” provisions in its Gigafactory agreements.
About That “Zero Concern”…
At August’s conference call to review Q2 results, Musk stated:
What people should absolutely have zero concern about, and I mean zero, is that Tesla will achieve a 10,000-unit production week by the end of next year.
Ryan Brinkman of JPMorgan Securities (NYSE:JPM) evidently was curious to learn whether Musk still has zero concern:
But I think it’s less clear, from reading the letter, what’s happening with the previous guidance of the 10,000 units per week at some point in 2018. Is that now like beyond 2018?
Here, the great pause ensued. Someone gulped deeply and swallowed. Red Bull? Wine with Ambien? Having only audio and a transcript, I cannot say.
At long last, Musk spoke. It is, he said, “a bit too early” to make such forecasts. (Except, wait, didn’t you make it with absolute certitude three months ago?!)
But I mean, if you extrapolate from 5,000 units towards the end of Q1, we don’t want to call upon significant CapEx until we are confident about cash flow on Model 3, so then that’s a question of how long it takes to implement. I mean, that’s where you get to 10,000 units a week for Model 3, which is a number we are confident can be sustained from a demand standpoint.
I cannot adequately underscore the significance of this information. If one reviews the spreadsheets that accompany the target price analyses of Tesla’s bullish analysts, one sees they premised their valuations on the company’s ability to manufacture 400,000 Model 3 cars in 2018 or, if worst comes to worst, 2019.
It is now clear Tesla is unlikely to produce even half that number in 2018. Worse, Tesla will need to spend billions more (“significant CapEx”) to reach such capacity. That is, let us note, money Tesla does not presently have.
(And the money won’t be coming from profits, at least not in 2018. There will be none. Forecasts for 2018 losses continue to grow. Goldman Sachs (NYSE:GS), for instance, just increased its forecast of 2018 losses to $843 million.)
Even if afforded the time and money, the additional Model 3 capacity would arrive well after more formidable EV competition arrives.
In short, Tesla is far from ready to produce the promised number of Model 3 cars. It needs lots more time. It needs lots more money.
I do not believe Tesla’s share price comes close to reflecting this reality. This news has not yet sunk in.
Tesla In China: Hype, But No Substance
Stories circulating several weeks ago suggested Tesla was on the cusp of signing some important deal that would give the company access to Chinese customers on favorable, tariff-free terms.
There is no such deal. Rod Lache of Deutsche Bank (NYSE:DB) asked about China, and Musk answered:
The China plant is sort of something like – this is just a like don’t say, but it’s sort of a rough target of start of production in about three years and it would be serving the China market and perhaps some other countries in the region and that’s really the intent, is to be able to provide Model 3 and Model – won’t be making Model S and Model X, but we’ll be making probably Model 3, probably Model Y primarily for the local Chinese market and it’s really the only way to make the cars affordable in China, but it’s three years out, so.
Musk also indicated there would be no material capital expended on China until at least 2019. Assuming two years to build a factory in China, that means no Tesla production in China until 2021 at the earliest.
Assuming, of course, Tesla has funds on hand for such capital expenditures, which it doesn’t.
And assuming Tesla had reached a deal to free it from Chinese tariffs, which it hasn’t.
Flashing Red Lights On Autopilot
I’m far from an expert on autonomous driving. I hope Paulo Santos, who is such an expert, will soon write about the latest developments at length.
In a key exchange, the Nomura (NYSE:NMR) analyst noted that Nvidia (NASDAQ:NVDA) is claiming its newest autonomous driving hardware is 10 times more powerful that what Tesla is using. Do you need hardware upgrades, asked the analyst, “to advance Autopilot?”
Elon Reeve Musk – Tesla, Inc.
Well, first of all, I think that we will be able to achieve full autonomy with the current hardware. The question is, it’s not just full autonomy, but full autonomy with what level of reliability, and what will be acceptable to regulators. But I feel quite confident that we can achieve human level – approximately human level autonomy with the current computing hardware.
Now, regulators may require some significant margin above human capability in order for a full autonomy to be engaged. They may say, it needs to be 50% safer, 100% safer, 1000% safer, I don’t know. I’m not sure they know, either. But that’s – but I think I’m confident that we can get to approximately human level with our current hardware. And, yeah, we’ll have more to say on the hardware front soon, we’re just not ready to say anything now. But I feel very optimistic on that front.
For customers that have signed up for full software capability, we’ll push that option. The – if it does turn out that, that a computer upgrade is necessary in order to meet the regulatory requirements in that area, we will replace the computer with something with greater power, which is sort of, unplug the old one, plug the new one in. But we feel confident of the competitiveness of our hardware strategy. I would say that, we are certain that our hardware strategy is better than any other option, by a lot.
Read that carefully. Haven’t we always been told that Tesla’s autonomous driving far exceed human capability?
Also, are we now hearing, far more explicitly than ever before, a warning that Tesla’s system may not meet regulatory scrutiny?
And, is not Musk acknowledging Tesla may need to replace the hardware it is now installing in cars it claims will be capable of Level 5 full self-driving? Does anyone believe such a replacement is merely a matter of unplugging an old one and plugging in a new one?
Tesla car buyers already have filed a class action lawsuit claiming Tesla fraudulently inflated its autonomous driving claims. I see only more trouble ahead. Your mileage may vary.
We Badly Need Superchargers And Service Centers, But We’re Going To Conserve Cash
CFO Deepak Ahuja spoke about the “positive virtuous cycle of cash flow” whereby Tesla first collects proceeds for a Model 3 sale and only then pays its suppliers. (Question for Mr. Ahuja: how, exactly, is that working out?)
He said Tesla would be paying off “all the remaining Model 3 related CapEx” during this quarter and the next, after which “CapEx payments will start to decline.” In other words, Tesla will “manage” capital expenditures related to service centers and Superchargers.
This stunned the highly respected Tony Sacconaghi of Sanford C. Bernstein & Co., who recently expressed concerns with Tesla’s shortcomings in customer service.
Elon, you just talked about sort of this trade-off between growth and capital spending. And quite frankly, I think it’s really the first time that I’ve heard you talk about that potential trade-off. Usually, Tesla’s been all about doing as much as quickly as possible to lead the move to electrification, to establish a first-mover advantage, et cetera.
So, is the hesitancy in going all-out growth, is that a concern that you might run out of cash and have to raise more cash? Is that a bandwidth concern for the organization in terms of trying to do too much, too quickly? Is that a concern about using capital effectively? What’s at the root of that decision? And why is there even a decision, I guess, is the question.
Musk, Ahuja, and Straubel began discussing “nutty” and “crazy” growth rates, and comparing Tesla’s progress with Henry Ford’s Model T. Musk said that if Tesla continues at its present rate, “Tesla will be the largest car company in the world by volume as well.”
(As well as what? Largest in the world by operating losses? By cash burn? And, in point of fact, Tesla’s trailing-12-month numbers show hardly any growth at all.)
Go to the transcript and judge for yourself, but I found the answers to be elliptical, vague, and evasive.
As, evidently, did Mr. Sacconaghi. Because he then did something that hardly ever happens in a Tesla quarterly conference call. He followed up on his question:
But, really, perhaps to punctuate a little bit more, you’ve talked about pretty soon you’re going to be close to cash flow generative once you get the volume on the Model 3. And so, I’m just surprised why you’re actually not trying to step on that as quickly as possible because ostensibly once you get to that level, then cash flow really doesn’t become a problem.
And so, is there any difference in that view? Otherwise I’m just struggling to sort of reconcile why you don’t want to get to scale, get to volume, get to positive operating cash flow, as quickly as possible?
Once again, Musk, Ahuja, and Straubel all chimed in. To my way of thinking, the answers went round and round the mulberry bush.
Was Mr. Sacconaghi satisfied with the answers? He did finally say, “fair enough” and moved on to another topic. But, were those answers truly fair enough for him? TBD.
Solar Roof Tiles
I described earlier this week how Tesla, in its quarterly update, offered nothing but vague generalities about the solar roof tile product. The topic did not come up in the conference call.
My own guess, based on what one sees and what one does not see, is that this product, which had not been fully developed or minimally tested before it was shown off a year ago, has run into significant problems. Which may be just as well because it’s hard to conceive how it could ever be more than a tiny niche enterprise.
Tesla Energy Cells
Are any cells for Tesla Energy products now being made at the Gigafactory? (We know, for instance, that the cells for the South Australia project were manufactured by Samsung (OTC:SSNLF).)
No one asked, and Tesla did not volunteer the information.
I’ve already discussed the exchange between Tony Sacconaghi and the Tesla officers. What evidently sparked Mr. Sacconaghi’s curiosity about capital expenditures was an earlier question by Deutsche Bank’s Rod Lache, inquiring about whether Tesla’s 2018 capital expenditures would be lower than those in 2017.
Here’s the answer from CEO Musk:
Yeah, absolutely. Some elements will require almost no CapEx. It really comes to realize that the – you really want to make a factory that grows incredibly fast.
Like, really, I think speed is the ultimate weapon when it comes to innovation or production. And we are pushing robots to the limit in terms of the speed that they can operate at, and asking our suppliers to make robots go way faster, and they are shocked because nobody has ever asked them that question. It’s like if you can see the robot move, it’s too slow. We should be caring about air friction like things moving so fast. You should need a strobe light to see it.
And that’s incredibly critical to CapEx efficiency. And obviously we’re going to be designing a lot of the robotic elements and what makes the robots internally. So, yes, because current suppliers are just too slow to respond in some cases.
If you are long Tesla, or wanting to be, and the force and logic of that answer impresses you, then you might well view the recent share price dive as a buying opportunity.
If you are long Tesla, and the glibness and vacuity of that answer concerns you (and, in case there is any doubt, my personal view is that the answer is glib and vacuous), then perhaps now might be a good time to sell.
Not as good as last week, to be sure, but still good.
The New Tax Bill
House Republicans have now unveiled the details of their new tax bill. It eliminates the federal income tax credit for electric vehicles, effective December 31 of this year. It also scales back various solar tax credits.
Whether any such tax reform bill passes, and even if it does, whether such provisions survive the inevitable legislative horse trading, are open questions.
Musk in the past has claimed Tesla does not need subsidies. I imagine, though, that we will soon be hearing a different story from Tesla, and concerted lobbying against these provisions.
A topic for another day, but obviously one worth following.
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: I am short TSLA via long-dated options.