@ValueAnalyst, I appreciate your focus on Tesla's statement in the Q4 2016 letter that they expect to finalize the locations for Gigafactory 3, 4 and possibly 5 later this year. This is a very important statement and I don't think it was made casually. Together with announcements on the rough timeline for the Tesla Semi, Pickup and Roadster reveals it suggests to me that Tesla intends to continue to push forward very hard to implement Master Plan Part Deux and that it is likely to exceed the 1M in 2020 goal, and wants to start getting investors comfortable with the idea that after the Model 3 launch they should expect rapid and possibly accelerating growth. I have long believed the 1M vehicle in 2020 goal was conservative and that Tesla hoped to exceed it, and these statements tend to confirm that belief in my mind.
What I am less clear about is your suggestion that Tesla will necessarily build GF 3, 4 and possibly 5 immediately after announcing the locations, and that they will complete production of the full facilities on a rapid timeline. Building 3-4 GFs simultaneously (including ongoing work on GF1) would require a fairly massive capital investment, even assuming favorable arrangements with local governments and Panasonic or other partners.
It seems more likely to me that they will stage the build-out of the GFs in some fashion rather than go full speed ahead with all 3-4. In this scenario, they would exceed 1M vehicles delivered in 2020, but would not hit your 4M vehicle figure until about 2-3 years later. I assume Tesla Semi and Pickup will place significant demands on GF battery production by 2020, which also factors into the equation.
Thank you for challenging me with a reasonable argument. I highly appreciate it as this helps me tremendously.
The following are the reasons why I see Tesla moving forward simultaneously and quickly on "Gigafactories 3, 4, and possibly 5."
1. Looking at investing (and other aspects of life) through a Game Theory lens has helped me tremendously over the years. Why would Tesla announce locations for possibly three additional Gigafactories at the same time, if they did not have the intention to break ground shortly thereafter (within three months as they did with GF1) and build all three simultaneously? Bears can say maybe Elon is trying to manipulate the stock, but I don't see that in his history despite his tweets and for the following reasons.
2. The demand is there (skip this paragraph if you agree). Tesla has captured one-third of the US luxury sedan market in four years, extremely quickly in terms of automotive industry timelines. Model X is on track to achieve that market share level in less than two years! I do not see a reason why the Model 3 cannot achieve the same level, other than production capacity. Even if the Model 3 eventually ends up with one-tenth of the market share the Model S/X achieved with smaller number of superchargers, smaller number of service centers, and lower brand awareness than what Tesla enjoys today, Tesla will not be able to meet demand, even with five Gigafactories. I hope we agree that demand is not the limiting factor for my prediction to be realized.
3. You raise a good point about capex needs to achieve such a goal, but if one actually thinks about how much capital is needed, and compares that to the benefits, one quickly realizes that (given that demand is there) Tesla should be building as many Gigafactories as possible. Basically, starting a Gigafactory costs a few hundred million dollars and a few billion over the full course of the project with majority of the cost being in tooling (so towards the end of the construction project). So the cost of starting all three simultaneously would be maybe a billion dollars. If the Model 3 ramp-up goes smoothly, as it seems to be so far, and Tesla produces 1 million cars over the next ~20 months, which I think is a strong possibility, that's $50B+ of revenue. Even if the gross margin is ~15% in earlier days of the Model 3 ramp up, that's many more billions than what it would take to
start the Gigafactories 3, 4, and possibly 5.
Further, I expect Tesla to now be able to take on non-dilutive corporate debt as its revenue multiplies in the next 12 months. This simple back-of-the-envelope calculation looks even brighter for Tesla beyond 2018 as the Model 3 production line (and gross margin) reaches maturity. Much much brighter.
4. So we established that the demand is there and that the cap-ex needs in the early construction stages are very manageable with an even brighter outlook in later years. What is the benefit? The benefits are two-fold: 1) the acceleration of production capacity pulls forward tens of billions of cash flow, and to any trained eye that has looked at discounted cash flow models (and I've worked on hundreds), such a move increases the Enterprise Value of a company tremendously.
More importantly, if Tesla can take market share from incumbents quickly, the probability of ICE car manufacturers going bankrupt before they can build their own Gigafactories (which is a must to compete with Tesla) increases. Again, this is another example where thinking strategically (i.e. game theory) is more helpful than just purely in numbers.
5. Finally note that the full build-out of Gigafactories 3, 4, and possibly 5 is not needed to realize my forecast of 4 million cars in 2020. With GF1 capacity raised to 1.5 million cars (triple of original forecast just two years ago), Elon/Tesla's history of pushing limits by multiple times and "order of magnitude" improvements version after version, recent creation of Tesla Advanced Automation, Elon's repeated comments around becoming the best manufacturer in the world, I believe even a partial build-out of the three additional gigafactories three years into the construction projects would be enough to achieve the 4 million car total capacity among the four Gigafactories.
I hope this is helpful. Please keep challenging me with thoughtful reasoning. I very much appreciate it.
