Making sense of Tesla: An investor's guide to a unique company (Part 6 of 7)
Tesla, doing distribution differently
Tesla (TSLA) is the only luxury battery vehicle. Its business model is different too.
The photograph below is from Tesla’s first quarter shareholder letter. There’s only one vehicle, and you can see on the wall the options available from Tesla. The company’s goal is to minimize inventory costs and make each car when the customer orders it.
Tesla’s doing it differently
Tesla owns its distribution channel. In its first quarter letter to shareholders, Tesla management says it will expand the company’s sales and service footprint by 75% in 2014. In rough math, this brings the total to approximately 140 globally by year end 2014. For context, General Motors (GM) has 20,700 at year end 2013 globally. A GM dealer franchises use of the brand and sale of the product. In many jurisdictions, including individual states in the United States, this relationship is protected by state law. Dealers claim this protects consumers, as they can fix their vehicles. Tesla is currently pursuing legal cases in several states and countries to allow access to their markets. Tesla has been successful in several cases, but as Tesla becomes better known and makes a greater impact, dealer networks are increasing their resistance. This is an impediment to Tesla’s sales.
If Tesla were pursuing the market like traditional automakers, it would have a large inventory of cars. Tesla’s approach is different. It will have a sample of a car in a showroom but then fulfill the customers’ orders, who will then have to wait for the product. Interestingly, the inventory number is increasing from $340 million at year end 2013 to $450 million at March 31, 2014, due to shipments of vehicles overseas. Tesla owns the vehicle until delivery in most cases. As such, Tesla’s inventory is sitting on loading docks and ships as Tesla fulfills orders in Europe and Asia. At year end 2013, I calculate GM’s inventory turns at 9x and Tesla’s inventory turns at 5x. GM is turning its inventory more rapidly than Tesla.
Tesla states in the annual filing that it wants to maintain ownership of distributions and repairs to differentiate itself from the market, keeping greater control over local sales and services. This makes sense if you consider any exasperated conversation you’ve had with a service manager or running the gauntlet of buying a car. Tesla is selling cars over the Internet. This should reduce inventory, increase turns, and improve the consumer experience. Let’s take a look to see if this is playing out in Tesla’s financials in the next part of this series.
Tesla is taking on the major automobile manufacturers, including General Motors (GM), Toyota (TM), Ford (F), and Volkswagen (VOW). You could gain exposure to the entire sector through an exchange-traded fund like CARZ.
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