2017 Investor Roundtable:General Discussion

[dennis]

For Tesla, I could care less about the tax credits. Tesla is the only company that no longer needs them. If 100,000 model 3 reservations cancelled, it would leave 400,000+ or and endless amount of insatiable demand. Where as companies building compliance cars will lose $7500 more per car. Maybe they will but zevs from Tesla instead.

I cant believe I'm saying this but I agree with @myusername that the macro effects of no tax reform will be bad and really bad for Americans. The lib hatred for all things Trump has clouded your minds to what is really a good deal for middle and lower class Americans where the vast majority of Americans will pay significantly less in fed taxes with the large standard deduction.

My guess is that the EV credit would be used as a bargaining chip to lure a Dem vote or two. It makes no sense to get rid of it while not touching the solar credit, which must be much bigger.

If the Republicans were really interested in lower taxes for the middle class they would take away the capital gains treatment for carried interest which Trump claimed he would get rid of. This benefits the super-rich hedge fund managers, private equity partners and venture capitalists. They would also keep the estate tax in place which affects only the richest 0.2% of Americans.

Instead they are limiting the state and local tax deductions which hurts middle class voters in Democratic states like CA and NY. Families in those states making $100K-$250K will see their Federal taxes rise under the proposed plan. Meanwhile Trump's billionaire buddies enjoy their tax breaks.

 

[Ichabod]

If you really want to understand what Tesla's potential is with the Model 3, I suggest you do the following. (It will take some time and effort on your part, but will be worthwhile).

- First, study the specs for the base Model 3 that costs $35,000
- Then configure an entry level BMW 320i to match the specs and included features of the base Model 3
- Next configure a Mercedes C300, Audi A4, Lexus is250 with the same specs. (You won't need to do all of them because you will notice a pattern).
- If you like, compare the LR Model 3 to the BMW 330i or 340i
- When the pricing is announced for the AWD Model 3, you can compare it to the 340i xDrive. Also compare the Performace Model 3 to the BMW M3

In case you are lazy, here's the conclusion: the Model 3 costs less than a comparably equipped BMW/Mercedes/Audi/Lexus small sedan. Add in the intangible "cool factor" associated with the Tesla brand. Then tell me why Tesla won't sell as many Model 3's as they can make (500K+ per year) for the foreseeable future.

I think this pretty much sums up the bear case. Given current battery costs, the cost of an electric drivetrain including the battery is optimistically comparable to ICE, but realistically somewhat more expensive. The rest of the car is not in any meaningful way cheaper than the BMW, Audi, Mercedes, etc. you cite. So, it appears to an outsider that Tesla is offering for 35k a car that others charge more for, and those others even earn lower margin on those than Tesla aims to get on the Model 3. The math seems questionable, hence the criticism that Tesla is selling dollar bills for 80 cents. I don't know Tesla's costs, and all I can do is take them at their word. However, your example of all those nice cars that cost more than a Model 3 for comparable specs begs the question of how Tesla can do that, all while also earning unprecedented margins.

 

[Reciprocity]

If the Republicans were really interested in lower taxes for the middle class they would take away the capital gains treatment for carried interest which Trump claimed he would get rid of. This benefits the super-rich hedge fund managers, private equity partners and venture capitalists. They would also keep the estate tax in place which affects only the richest 0.2% of Americans.

Instead they are limiting the state and local tax deductions which hurts middle class voters in Democratic states like CA and NY. Families in those states making $100K-$250K will see their Federal taxes rise under the proposed plan. Meanwhile Trump's billionaire buddies enjoy their tax breaks.

First bold, I agree and so does trump, but the swamp does not like to be drained. Trump does not write the laws.

The second bold is not true, the brackets are moving up as well as a much higher standard deduction that would offset much of that. In general it costs more to live in those places as well and people get paid a lot more, higher taxes come with the territory. I am in Chicago, my taxes would be going up as well because almost 10% of my income goes to property taxes. Think about that for a second. That does not even include State and other local taxes. This state is an absolute mess. If those states were well run, like say Texas, then taxes would be low and so would cost of living.

 

[MP3Mike]

However, your example of all those nice cars that cost more than a Model 3 for comparable specs begs the question of how Tesla can do that, all while also earning unprecedented margins.

One part of it is vertical integration, Tesla keeps most of the profit for themselves, where the normal ICE makers spread the profit around to all the suppliers that make their parts.

 

[Ichabod]

If the Republicans were really interested in lower taxes for the middle class they would take away the capital gains treatment for carried interest which Trump claimed he would get rid of. This benefits the super-rich hedge fund managers, private equity partners and venture capitalists. They would also keep the estate tax in place which affects only the richest 0.2% of Americans.

Instead they are limiting the state and local tax deductions which hurts middle class voters in Democratic states like CA and NY. Families in those states making $100K-$250K will see their Federal taxes rise under the proposed plan. Meanwhile Trump's billionaire buddies enjoy their tax breaks.

I'm no Trump fan, but I think it is meaningful to point out that by having state tax deduction, essentially that just means that tax payers in low tax states subsidize those in high tax states, since whatever difference there is in state tax rates is evened out by deducting from the federal level. Personally, I think it is high time voters and governments in high tax states feel the natural consequences of those taxes, rather than have it erased by savings on federal taxes.

 

[WarpedOne]

However, your example of all those nice cars that cost more than a Model 3 for comparable specs begs the question of how Tesla can do that, all while also earning unprecedented margins.

Machine that builds the machine...

BMW on the other hand ...

 

[Ichabod]

One part of it is vertical integration, Tesla keeps most of the profit for themselves, where the normal ICE makers spread the profit around to all the suppliers that make their parts.

I get the theory, but in practice vertical integration does not necessarily save cost. There is great cost savings to be had in specialization and economies of scale in that specialization. Maybe you are right and that's the trick. Time will tell.

 

[Ichabod]

Machine that builds the machine...

BMW on the other hand ...

As others, fair point, but far from proof. I have no doubt BMW has extremely qualified and experienced engineers who figure out whether robots or mechanically assisted human labor will be most efficient for each task. Tesla appears to have come to a different conclusion. I certainly can't say who is right. It's hard to believe that BMW couldn't automate this task if they wanted to.

 

[22522]

I get the theory, but in practice vertical integration does not necessarily save cost. There is great cost savings to be had in specialization and economies of scale in that specialization. Maybe you are right and that's the trick. Time will tell.

Tesla has a practice of staffing with specialists to support a few generalists at the top that are smarter than the average bear. It is a company size thing that coincided with the departure of Ms. Brown.

This practice, and volume over the threshold required to support the specialization, cause vertical integration to make sense in your map.

There are combinations at the boundaries that reduce costs that remain undiscovered if the specialists are geographically separated. And inventory/value added/not added activity ratios that can make vertical integration helpful, as long as the vertically integrated elements don't start negotiating with each other.

Cooperation adds value and negotiation destroys value. Sloppy mid management practices are the biggest threat to Tesla's future...

I think Elon keep it straight by doing actual work, on occasion.

 

[Krugerrand]

June 2018... either $100 or $450... and that's after a touch of $250 either way.

This is a double down on next stop 270, eh?

 

[elasalle]

Jobless claims rise more than expected as hurricane backlog clears
macros down due to jobless claims? seem to be trending back up though ..

 

[Krugerrand]

Looks like Elon lost weight. Good. I was worried about it for a while.

It might be more of a worry that he’s lost it. Weight gain or reduction can be equally as bad depending on the cause.

 

[Krugerrand]

are you suggesting the ASP for the M3 will be close to $35k?... are any of you holding out for the $35k model?... if not, then how much are you intending to pay... $45k?... does that happen to be the price you find in the configurations above of these other cars?

I’m pretty sure his suggestion was that you’re lazy.

 

[Ichabod]

Tesla has a practice of staffing with specialists to support a few generalists at the top that are smarter than the average bear. It is a company size thing that coincided with the departure of Ms. Brown.

This practice, and volume over the threshold required to support the specialization, cause vertical integration to make sense in your map.

There are combinations at the boundaries that reduce costs that remain undiscovered if the specialists are geographically separated. And inventory/value added/not added activity ratios that can make vertical integration helpful, as long as the vertically integrated elements don't start negotiating with each other.

Cooperation adds value and negotiation destroys value. Sloppy mid management practices are the biggest threat to Tesla's future...

I think Elon keep it straight by doing actual work, on occasion.

Again, I get the theory, and you very well may be proven correct. However, it remains a theory, and one that most other companies don't ascribe to. I have also seen it first hand. You are correct that the problems do come at mid-management level. For one, when a business unit only has once customer, and that customer only has one source, the drive to innovate and stay at the bleeding edge of that specialty goes away. When I am on of 50 widget makers competing in the widget market, I'd better make for damn sure my widgets are the best they can be and that I am making them as efficiently as possible. When I'm the widget making corner of the big factory, the widget consuming corner of the factory takes my widgets, period. Innovation and efficiency now depend on intrinsic motivation of the managers, rather than being inherently driven as a requirement for market survival. Multiply this effect across hundreds or more components, and we see why large manufacturers outsource most, or sometimes all component manufacturing.

 

[22522]

Again, I get the theory, and you very well may be proven correct. However, it remains a theory, and one that most other companies don't ascribe to. I have also seen it first hand. You are correct that the problems do come at mid-management level. For one, when a business unit only has once customer, and that customer only has one source, the drive to innovate and stay at the bleeding edge of that specialty goes away. When I am on of 50 widget makers competing in the widget market, I'd better make for damn sure my widgets are the best they can be and that I am making them as efficiently as possible. When I'm the widget making corner of the big factory, the widget consuming corner of the factory takes my widgets, period. Innovation and efficiency now depend on intrinsic motivation of the managers, rather than being inherently driven as a requirement for market survival. Multiply this effect across hundreds or more components, and we see why large manufacturers outsource most, or sometimes all component manufacturing.

I agree with the monkey wrench part.

But the River Rouge plant worked for a number of years with a strong dictator named Henry Ford. So it is something more than a theory... maybe a transitionally successful approach that loses when it becomes corrupted.

... Like Democracy.

 

[electracity]

One part of it is vertical integration, Tesla keeps most of the profit for themselves, where the normal ICE makers spread the profit around to all the suppliers that make their parts.

Profits? What profits? What you will see when the model 3 finally ramps is Tesla recapturing capex. Great margins will be "next year".

But all kinds of work that goes into the model 3 will not wrap to a cost center impacting gross margin. The external audit function doesn't get far into cost accounting. Tesla can fake margins. They have a less flexibility with P&L.

The model 3 is too nice and Tesla is too new at manufacturing to make the margins Musk pretends to be realistic. Vertical integration is the opposite of leveraging other companies capex expenditures. Tesla needs to pick at what it should be really good at and farm out everything else.

Tesla not hiring the expertise to design and program pack production in house is strange. Musk claiming superiority in mainstream auto manufacturing is also very strange. Pack manufacturing at high volume is new and very much a core technology for Tesla. High volume auto manufacturing is very advanced and competitive. With the former Tesla, should be aim at being the best. With the later, Tesla should aim for competence.

A CEO who can't establish boundaries for his ambition and a clueless board of directors is how concepts such as "Alien Dreadnaught" are born.

 

[Ichabod]

I agree with the monkey wrench part.

But the River Rouge plant worked for a number of years with a strong dictator named Henry Ford. So it is something more than a theory... maybe a transitionally successful approach that loses when it becomes corrupted.

... Like Democracy.

I 100% agree on the political interpretation, but for the business, not so much. Ford didn't move away from the founder's original method because they became corrupted. They moved away from it as the industry matured. When Ford assembled the line for the Model T, he was creating the market almost as much as he was creating the product to fill that market. He wasn't competing against 15 other mass market automobile companies. He was creating the mass market automobile and market from scratch. His only real competition was with whether he could make something compelling enough to be a mass market. He didn't have to be more efficient than the next guy, because there was no next guy, at first. Within only a few years, there were many companies making mass market automobiles, and the maturity of the market mandated greater efficiency than was ever possible in his original vertically integrated model.
Look, I don't know that Tesla will be less efficient than the competitors. Going back to my original post today, I'm simply pointing out that Tesla's success seems to hinge on making the "balance of car" cheaper than anyone else. Going back to the way the original mass market car maker did it in the 20s may be the key. It doesn't seem obvious that it would be, but who knows.

 

[Reciprocity]

Profits? What profits? What you will see when the model 3 finally ramps is Tesla recapturing capex. Great margins will be "next year".

But all kinds of work that goes into the model 3 will not wrap to a cost center impacting gross margin. The external audit function doesn't get far into cost accounting. Tesla can fake margins. They have a less flexibility with P&L.

The model 3 is too nice and Tesla is too new at manufacturing to make the margins Musk pretends to be realistic. Vertical integration is the opposite of leveraging other companies capex expenditures. Tesla needs to pick at what it should be really good at and farm out everything else.

Tesla not hiring the expertise to design and program pack production in house is strange. Musk claiming superiority in mainstream auto manufacturing is also very strange. Pack manufacturing at high volume is new and very much a core technology for Tesla. High volume auto manufacturing is very advanced and competitive. With the former Tesla, should be aim at being the best. With the later, Tesla should aim for competence.

A CEO who can't establish boundaries for his ambition and a clueless board of directors is how concepts such as "Alien Dreadnaught" are born.

Im pretty sure that is how Rocket re-usability is born as well. I guess that's how Falcon Winged doors and Autopilot are born as well. Love them or hate them, my car is like a celebrity and people want to take pictures of if. Was it hubris, sure. The reason Alien Dreadnoughts, Autopilot and FWD dont exist at other manufacturers is that they do not take risks and no one who is innovative would ever work for them because they would crap on their ideas as "to risky". If you dont like risk, then go invest in GM. I'm betting on the guy who does the "Impossible" on a regular basis. A few months later then his hubris dictates but about a decade earlier then the rest,. This idea that anyone was going to put in any real funding into EVs without Tesla is ludicrous (No pun intended actually just noticed it.) And they are not doing it because its cool, they are doing to save their own companies. Tesla is successfully demolishing high margin market share at a rate that no one thought possible. The Model 3 isnt even available and its destroyed a large chunk of the market share for that segment. Now BMW, VW and Daimler are all the sudden investing upwards of $100B on EV development. Cash burn much? I have some very bad news for those companies, they wont be taking market share from Tesla, they will be taking market share from Daimler, VW and BMW and all at lower margins then their ICE alternatives that they are displacing.

Is the Model 3 late? By some measures. By others, its still a year early. As an investor, its a good idea to adjust your expectations based on what Elon says. Its really not hard. What matters is that when they commit to something, FWD for example, they get done no matter what. Even if they are impossible. Better late then never, and still years ahead of the pack.

 

[Waiting4M3]

Again, I get the theory, and you very well may be proven correct. However, it remains a theory, and one that most other companies don't ascribe to. I have also seen it first hand. You are correct that the problems do come at mid-management level. For one, when a business unit only has once customer, and that customer only has one source, the drive to innovate and stay at the bleeding edge of that specialty goes away. When I am on of 50 widget makers competing in the widget market, I'd better make for damn sure my widgets are the best they can be and that I am making them as efficiently as possible. When I'm the widget making corner of the big factory, the widget consuming corner of the factory takes my widgets, period. Innovation and efficiency now depend on intrinsic motivation of the managers, rather than being inherently driven as a requirement for market survival. Multiply this effect across hundreds or more components, and we see why large manufacturers outsource most, or sometimes all component manufacturing.

Internal vertical integration doesn't mean single source. How is it different between Tesla tracking S/N of component parts back to production line workers/shifts, and fire the under-performers, vs tracking it back to external supplier and fire the substandard ones?

 

[jbcarioca]

If we are to be "Fair and Balanced" about the Tesla Model 3 rampup issues we might compare with other manufacturers.
As it happens the most significant advances in factory automation have been made, mostly, prior to 2002, when Facebook first appeared (ranking Harvard coed physical attributes at the time IIRC). Twitter and Instagram did not exist. The Audi Ingolstadt factory pioneering with Kuka, was invisible until it had been running successfully. Nissan Sunderland evolved over years outside public view, to be the most efficient plant in Europe.

Now we look at Tesla with Twitter, Instagram and Facebook following every single step, and drones investigating the externalities. Tesla cannot ahem a glitch without us knowing all about it within a few days at the longest. Not only that, Tesla has mostly Fremont and Sparks, both convenient for all sorts of external observation.

Frankly, we never heard about problems, delays or stresses at any of those three facilities. They were all new, sort of, but built on the experiences of dozens of other car building programs. With Tesla the whole world is watching for every hiccup. Even more so when the CEO sets new standards for hubristic goals and world-transforming achievement (hyperbole:Not! SpaceX, PayPal and Tesla have indeed transformed their industries and upset the world order. Three times, three totally different industries)

So we now want Tesla to do things on time, within budget, flawless, mature. Folks: "ain't gonna happen". It will be fine, in Elon time. Did we really expect it to be different? I don't think so, we hoped and dreamed it would be different, but we really knew that instant, cheap and perfect don't happen.