At the start of 2014, China was an unlimited market, able to absorb each and every car that Tesla could produce even if sales were zero in the rest of the world. From the 2/29/2014 investor conference call:
Elon Musk – “Yes, absolutely. Yes, I mean -- I think, based on current trends it seems unlikely that we'll be able to satisfy demand in China this year. So there will be unmet -- likely to be, I think, unmet demand in China.”
From the 5/8/2014 investor conference call:
Elon Musk – “So to the degree that our sales track that of other manufacturers presumably China would over time become the biggest market for Tesla. I mean that’s probably the best guess that anyone could make at this point, or in the short-term is that we really don't have a demand issue in China like we’ve got a lot of demand.”
Mid-year, Musk was still planning to accelerate the roll-out in China. From the 7/31/2014 investor conference call:
Elon Musk – “So in terms of number of stores by the end of next year -- or number of service centers I should say by the end of next year, actually I don't have that off-hand. But it's probably on the order of 100 in China alone, I'm guessing, by the end of next year.”
After leading-on investors for most of the year, Musk did a 180 and said that the rest of the world could absorb each and every car that Tesla could produce even if sales were zero in China. From the 11/6/2014 investor conference call:
Elon Musk – “I wouldn't say we're strongly dependent on China for deliveries next year. In fact, I believe even if we did not sell in China next year, we could probably still meet our targets. So even if there was zero China sales. We would like to exceed the targets, but even if we had no sales in China, we would still achieve the targets we mentioned in the quarterly earnings letter.”
And on 12/12/2014 Tesla China President Veronica Wu resigned.
See the Fortune article titled "VW aims to leapfrog Tesla, Nissan with new battery technology".
If I buy an electric vehicle from one of the majors, I know I'll get warranty service when I need it. Buying from an independent startup carries major risk to the buyer. While you acknowledge this intellectually, people don't yet have a gut understanding of this regarding Tesla. But when people begin to appreciate the potential of bankruptcy, they will stop buying the car, which will make bankruptcy quickly move from a potential to a certainty.
As Tesla approaches bankruptcy, potential buyers will realize that free charging and warranties end when the company is bankrupt. Tesla knows this. That's why they try so hard to maintain the illusion of viability. Talking about how many cars they'll be selling in 2020 makes people envision the company still being alive in 2020. But the balance sheet and cashflow statement portend an earlier demise. Between now and then, a couple more capital raises will bring in new investor cash to fund the daily losses. One day, potential car buyers and equity investors will all wake up and realize it was an illusion. When people stop believing then the company will collapse very quickly.
From the latest 10-Q: "We have no experience in the production of lithium-ion cells, and accordingly we intend to engage partners with significant experience in cell production. We recently formalized our agreement with Panasonic to partner on the Gigafactory. Panasonic will invest in production equipment that it will use to manufacture and supply us with battery cells."
Panasonic will make batteries in the Giggle Factory and sell those batteries. Tesla will buy.
That's correct, Tesla has openly admitted that they need Panasonic to manufacture batteries because Tesla has no relevant knowledge or experience. I'm astounded reading headlines like "Gundlach: I like Tesla, all about the batteries".
I’d like to clarify Tesla’s role in the Giggle Factory. Tesla will only build an empty factory. It’s up to Panasonic to put manufacturing equipment into the empty factory. Panasonic will then manufacture batteries and sell them to Tesla. Tesla has no experience with battery manufacturing is not claiming that Tesla will be manufacturing batteries in the Giggle Factory.
Panasonic has *not* fallen for the Tesla hype. They have not committed to the capital investment required to bring the Giggle Factory to full capacity. Panasonic stated that they plan to “continuously expand operations meeting with Tesla’s vehicle delivery schedule”. That’s a polite way of saying that they’ll wait to see if Tesla gets 500,000 car orders per year before Panasonic fills out the factory. That’s why Tesla had to back down and start talking about a smaller pilot production line. That’s all Tesla will ever see if they can’t sell more cars.
With no prior experience, Tesla has endless manufacturing problems. They recast this problem as a strength: “demand exceeds manufacturing capacity”.
The Battery Lie
Tesla claimed they could manufacture cars at a much higher rate if not for a “battery shortage”. Panasonic has delivered every battery order on time and never limited Tesla’s purchase quantities.
Retreat to New Markets
The CA market had an initial rush of buyers but then interest waned. Tesla was able to maintain the illusion of a shortage in CA by sending cars to new states. When the new state markets saturated, Tesla retreated to new countries like Norway. China was the last hope, but demand in China has proven exceptionally weak.
Losses and Cash Burn
Tesla needs a continual infusion of new cash just to keep operations going. Standard accounting statements in Tesla’s SEC reports document a severe operating loss and cash burn rate. Questionable non-GAAP adjusted accounting is used to claim profits that exist only in press releases.
Tesla hyperbole is legendary, including a Hollywood-style “reveal” for all-wheel drive! Tesla can’t manufacture 50,000 cars per year, would have difficulty selling that many cars, yet the Giggle Factory promises batteries for 500,000 cars. Tesla credibility and stock price peaked with the Giggle Factory.
Since Tesla promised a $40k car, many lower-priced competitors have arrived, and now BMW’s $42k luxury i3 is the most efficient production electric vehicle. Tesla still has nothing in this price range.
New Defects Discovered Daily
Tesla sales in Norway were loudly touted as a success. Now Tesla is quietly flying new replacement engines all the way to Norway.
Resale Guarantee Time Bomb
To stimulate sales, Tesla started a resale guarantee that portends a flood of used cars returning to Tesla in 2016. Will Tesla repurchase and scrap the cars, or dump them on the used car market?
Finished goods inventory is valued at the production cost, about $56,000 per car. $226 million in inventory is about 4,000 cars. It seems that Elon was exaggerating when he claimed they sold every available car.
TSLA’s typical Model S is produced at a cost of $56,000 and offered for sale at $71,000. Starting April 2013 TSLA had difficulty finding buyers so they began offering a resale guarantee. To entice a sale today, TSLA guarantees that in 3 years they will buy back the car for $45,000.
If the car is a lemon, the customer will sell it back to TSLA. If three years’ experience makes the customer realize they don’t want an electric car, they will sell it back to TSLA. But if the customer does appreciate an electric car they will also realize that $45,000 is more than enough to buy a new electric car. They will sell the old car back to TSLA then buy a new car, maybe from TSLA or maybe from a competitor. The bottom line is that all of the cars with a resale guarantee will be sold back to TSLA.
TSLA’s quarterly loss reports have claimed that the resale guarantee doesn’t cost the company any cash because they receive the full $71,000 at the time of sale. That’s only true up until April 2016 when the first 3 year-old card start being returned to TSLA, each with a due bill of $45,000 payable immediately in cash. So how many cars are there with a guarantee? As of 9/30/2014 the total is over 8,800 cars which create a future liability of over $397 million.
Where will TSLA get the $397 million in cash when the collector comes knocking? And what will they do with a fleet of 3 year-old vehicles. Recall that they were forced to offer the resale guarantee because they couldn’t find enough buyers for the new cars.
As others have already noted, instead of declaring ZEV credit sales as revenue, TSLA hides these by counting the revenue not as revenue, but rather as a reduction in cost of automotive sales. This artificially improves gross margin, and gives management some discretionary control over the reported gross margin. In 3Q2014 the true gross margin was 20.5% but TSLA applied $76.1 million sales of regulatory credits to make the gross margin appear to be 29.5% Then, while reporting the results management gushed about the gross margin increase over 3Q2012 as if it was due to improving manufacturing efficiencies! The true gross margin for 3Q2014 was *worse* than 3Q2013.
4Q2014 gross margin will certainly be lower than 29.5%, yet management will still report a sequential increase in gross margin! How can this be? The shell game involves selecting which one-time events count and which don’t. Since ZEV credit sales were high in 3Q2014, these “count” and are used to show annual and sequential improvement when reporting 3Q2014. In 4Q2014 when there are minimal ZEV credit sales, management will rewrite the accounting rules and say ZEV credit sales were akin to one-time events and shouldn’t be counted when making 4Q2014 comparisons to 3Q2014.
The shell game of one-time events seems effective at distracting bagholders from the facts that the company loses money each and every quarter and these losses are getting worse.
China just agreed to a national carbon cap. A Chinese coal-burning electric plant would have to put a lot of carbon into the atmosphere to power a big heavy Tesla. A fuel-efficient gas-burning car has less of a carbon footprint, and a tiny KNDI electric car has even less. Good-bye, Earth-destroying Tesla.
Several bagholders have mistakenly thought that the recent quarterly loss was due to expenses for retooling the manufacturing plant to produce "the D".
While the cost of building or retooling a manufacturing plant does burn a lot of cash, it does not appear as an operating expense and does not impact quarterly profits. Instead, it is counted as a capital investment and appears on the cash flow statement as "purchase of property and equipment". Once the new manufacturing equipment is being used, the total cost is amortized over the expected lifetime of the equipment and a fraction of the total cost does appear every quarter as an operating expense. Companies that present non-GAAP earnings usually remove this amortized cost because "it's just amortization of previous expenses, not an actual cash cost". This enables them to bleed unlimited cash while never acknowledging the cost.
Years ago, when I shorted a stock the true believers always said "it's just like Microsoft when it was only..."
Times have changed, and now the trash gets compared to Apple. But Microsoft and Apple are profitable. The stocks that I short require a continual influx of new capital to stay alive because they burn cash quickly.
I went to fill-up Friday morning an pulled into my favorite station which was advertising $2.89. Before I got out of the car, I saw the station next door had $2.87. I was thinking about driving next door to save $0.02 when I noticed the actual pump price at my station: $2.85. They can't change the street sign fast enough to keep up with plummeting gas prices. The nearest Tesla station is about 45 minutes away.
"Tesla is draining its cash funding an unneeded battery plant ..."
But the battery plant is needed. It is critical to maintaining the illusion that demand far outstrips supply. I've seen "the new manufacturing" plant used in several Chinese stocks scams but can't recall an American precedent. In the Chinese cases they proceeded with the relatively cheap concrete work but never installed the expensive manufacturing equipment. The concrete has great visual impact and gets the naive investors calculating profits based on future sales from the high capacity future plant. This allows the company to raise new capital "for the new manufacturing plant". Pouring a little concrete has a great ROI.
That’s a loss of over $9,500 per car. As sales increase, economies of scale could reduce the loss per car. But, scaling up production requires a *lot* of capital. The quarterly loss of $74.4 million does not include quarterly capital investments over $284 million. The upcoming battery factory technically won’t count as a loss, but the investment requires a huge amount of cash. Where will they get all the cash? Clearly not from selling cars.