Part 3 of 3. We've already had a (quite good) preview discussion last night. Here's where my spreadsheet stands right now for Gross Margin percentages.
ZEV+GHG credits 100%
Roadster and Toyota both 20%.
Development Services 50%.
Model S 5% (15% higher than last quarter).
Obviously the important discussion will be around Model S margins. It's probably best to identify the opportunities for improving GM and estimate how much each can contribute. Are there any items that need to be added to this list?
1. Price of purchased components.
2. Rework material and hours. (improvement to "first time quality")
3. Temp worker hours, excluding rework hours.
4. Overtime hours, excluding rework hours.
5. Inspection hours.
6. Premium freight.
7. Process adjustments that improve overall line speed.
8. Reduced operating inventory.
9. Improved delivery logistics.
From the 8-K: “As we enter 2013, production efficiency is improving substantially as labor inputs decline and initial end-of-line production quality improves. We expect first quarter material, labor and overhead costs to be substantially lower than in the fourth quarter of 2012, and for this trend to continue in 2013. As a result of these actions and the favorable impact of regulatory credits, Q1 gross margin is projected to improve to the mid-teens percentage range.” Muskahuja are NOT saying Q1 Model S Gross Margin, but rather OVERALL GM will reach the mid teens. Your values get GP to about $82M, or 16%. It’s probably not worth arguing, but I think…
(1) Model S GM is too optimistic. If they hit 0, they will have done well. Too much immutable tooling, process, and product design on a line already operating at designed rate of output.
(2) It’s unlikely Roadster and powertrain are 20%. You can bet Toyota is getting declining pricing. Further, Roadster will suffer from the “end-of-the-line” syndrome where final units generally run up the hours as final assembly and test are done on an opportunistic basis by a preoccupied shop. 15% is more like it.
(3) Lifetime Development GM is 43%. Big surges happen with a major revenue recognition event. We just had one. I would assume more like average margins for 2012, about 42%
This brings my GP view to $60M vs your $82.
Profitability guidance in the second key statement: “In the first quarter of 2013, we expect to generate slightly positive net income, on a non-GAAP basis.” “These targets would be achieved through a combination of improved gross margin and lower R&D expenses.” Subtract stock awards and warrant liability changes, they expect $0. Your guess on how much the GAAP adjustment would be, but based growing stock-based comp, I would put the adjustment at $22M.
Using your numbers, GAAP NI = ($27M), non-GAAP NI = ($2M). Pretty close to the 8-K promise.
Using my numbers, GAAP NI = ($49M), non-GAAP NI = ($25M).
Sentiment: Strong Sell
Looking at the big picture, based on the 2012Q4 filling, conference call, Tesla's operations were as ugly as they can get in the production business. Production was at less than half the rated capacity, inventory was hi, supply chain was a nightmare having to double order and pay for air freight. I suspect the production line was out of tolerances and the cars were coming out panels out of tolerance, drive train issues, software glitches. High labor cost to fix the product. I have actually seen this kind of stuff before. Unit costs go up 50+%. Yes, it is was ugly from a cost stand point.
The good part about the last quarter, is that most of this stuff can be fixed. Most labor and material costs can be brought down, with few notable exceptions like Li-ion that have limitations. As an outsider, it is hard to quantify the improvements in efficiency, except to say that given how ugly last quarter was from operation point of view, there is significant room for improvement, especially with doubling of volumes.
WT, I agree with you 100%. I tried to quantify all of the things that could improve Model S GM. I honestly don't see how they can get into positive GM. Seems that I have some pasting problems, so I'll try another post with the numbers.
1. The variation in the discounts/price drops due to volume, tech maturity can vary significantly. Battery costs should drop by 10% or more with volume and tech maturity. Electronics cost should drop by 30-50% due to the increase in volume and Moore's Law. That would include the LCD, processors, inverter, etc. Mechanical components going from sample sizes to 20,000/year should get 20-30% discounts. Just based on my experience.
2. If Tesla succeed is tightening the tolerances of the presses with the proper adjustment of the dies, pressures, temp, painting, etc; adjusting the assembly robots, welding robots so that tolerances go from 1 mm, to 1/4 to 1/10 mm, then the amount of rework drops big time. They spent a lot of over time, temp labor. Outside materials like the quality of the sheet material, glass, gaskets, electronics, etc are important. They got to perform, otherwise it is a waste of $$$ replacing them in the finished product.
3. If the plant and the components are optimized, then the plant should run with minimal glitches and stoppages. It means less hours than last Q, while production doubles. As Elon indicated this labor should be gone.
4. Once the plant is optimized, there should not be stoppages. The plant should be able to produce 80 cars/day with minimal overtime. Volume doubles so labor/car should be cut by nearly 50% in terms of cost.
5. Quality goes up, inspection costs drops. Sampling parameters change.
6. Should not need any. I hope they source commodity stuff like tires from the US.
7. If they are smart they will spend $$$ getting their own and vendor engineers working to tune the robots. Do statistical data collection on tolerances, etc. The whole Deming thing.
8. Inventory - It will be tough to reduce. They have to order in batches to get volume discounts. Production going up too.
9. Implement something easier and cheaper than SAP? $$$
I join the other skeptics (aka "Tesla haters") here in commending you for your thoughtful and civil posts articulating an information-based long perspective.
It's unclear to me why you think there will be a significant volume-based unit price reduction for batteries. The supply agreement with Panasonic was filed as Exhibit 10.50 to the 10k filed on 2-27-12. It is dated 10/5/11. Attachment 1 to that agreement sets forth the pricing structure, but all the substantive content is redacted. Nonetheless, the structure shows pricing by projected volume, in half-year increments from 2H11 through 2H15.
In late 2011, Tesla was projecting S sales at 5-7,000/year for 2012, 20,000/year for 2013 and combined S & X sales of 30-35,000/year for 2014. And, possibly even higher vehicle sales in 2015 with the delivery of the Bluemenstar. With the delays in both S and X production, if anything, it would seem Tesla may be experiencing higher volume-based unit pricing for batteries, but certainly not a step reduction.
On a side note, I noticed last year's 10k includes from PWC:
"We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-167874) of Tesla Motors, Inc. of our report dated February 27, 2012 relating to the financial statements and THE EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING, which appears in this Form 10-K." (emphasis added) This year's 10k says the auditor's statement will be provided with the proxy. FWIW, Tesla has yet to provide any context for "unpaid plant and equipment" and why it was originally mis-classified
Quite honestly, an outsider's ability to see into future GM is very difficult. In Q4, the inventory level rose dramatically, as did accounts payable. This could be a good thing or a bad thing - outsiders just don't know. Without a good understanding of what is in that inventory and how it translates to sales in Q1, it is very difficult to then forecast either as a long or as a short.
Since a large part of the expense of the production of an Tesla car is the batteries, it makes sense that a large portion of that inventory is Panasonic 18650 batteries. Inverters are another chunk. Tesla makes their own motors, so copper, steel, and finished and partially finished motors have to be another chunk. Another large chunk is likely aluminum or aluminum parts. What we don't know is how much of the power train production (battery, inverter, motor) is going to Toyota and how much is going to Model S. We don't know the margins for the RAV4 EV power train production. We don't know the payment terms of the Panasonic 18650 batteries. We don't know the terms of Tesla's purchase commitment to Panasonic for batteries that locked in a lower price point (Mr. Musk eluded to a lower price point, but not the terms).
There's so much we don't know, we can only infer by guidance and what we know about the components from the outside. We know that the 18650 batteries have dropped dramatically in price (maybe even under $200/kWh); that Panasonic is making a profit in the unit that makes batteries; that Tesla is continuing to use the older 3.1Ah batteries instead of the newer 3.4Ah; that Tesla is paying less for the 18650 batteries today than they were at the start of Q4 2012, but that the Model S pricing has risen. We know that the battery pack assembly is likely expensive, but since Tesla is doing it themselves, they can control costs.
It is likely that Tesla S production cost issues in Q4 were abundant and they have to work through those issues item by item.
" What we don't know is how much of the power train production (battery, inverter, motor) is going to Toyota and how much is going to Model S."
Toyota is planning on selling under 800 a year for 3 years.
Yes there is a lot we don't know but I thought I'd get this one closer.
"We know that....... that Panasonic is making a profit in the unit that makes batteries;"
Actually we know that to be false.
Panasonic was trying to sell a large part of its rechargeable battery making plants. A third if I remember correctly.
Panasonic Selling Healthcare Business in a Bid to Raise Cash
According to sources, Panasonic has made plans to sell its healthcare business segment in an effort to raise cash.
The Japanese electronics company is facing significant financial problems. Last November, Panasonic reported a $9.6-billion loss, which caused the company’s shares to lose one fifth of their value.
The losses came from write-downs in Panasonic’s solar, battery and mobile handset businesses. The company had invested heavily in plasma television sets, rechargeable batteries and solar panels with the acquisition of Sanyo in 2009."
I wouldn't be expecting batteries to fall in price soon. It appears to get business battery makers were signing contracts that had them selling at a loss. They built large capacity that is being written off and companies are going bankrupt. I wouldn't hold my breath waiting for a drop in price.
Likely this has something to do with the delay of Gen3.