2017 Investor Roundtable:General Discussion

[sub]

Thanks Fred L: When will the $7,500 tax credit run out?

Tesla salespeople are telling Model 3 reservation holders that $7,500 federal tax credit runs out in 2017


My opinion: Attempt to sell you an S *now*

I stopped by Tesla in Dublin Ca on Monday, wife wanted to look at colors in person for our model 3. A model S/X isn't out of the question so we drove a model X for the first time while there. We were getting this same nudge but it did not come off as dishonest to me because the salespeople did not ask for my specific model 3 delivery window. Im December to February for LR.

I asked if they have been busy since Model 3 first deliveries and they said "yes".

 

[techmaven]

Auto-parts suppliers remain in denial: Musk's Electric-Car Vision Doubted by Major Auto-Parts Suppliers

Hmmm... internal combustion engine suppliers think there's still life in internal combustion engine cars. More interesting is that Magna thinks so too, which means that the coming competition that @mmd keeps talking about isn't coming in real volumes in the 2018 through 2025 time period. This article, like many Bloomberg articles mixes quotes from sources in a deceptive way. What we don't see is how much business these firms have with Tesla versus non-Tesla auto makers. They also mix in estimates from Bloomberg New Energy Finance which we already know is a biased and mistake prone source.

 

[esk8mw]

Indeed! Tesla's legal incompetence appears to be *non-material* to financial results, so far.

It's worth watching as a risk factor in case it might become material in the future, but right now it just doesn't matter. They'll make tons of money even if they lose a string of lawsuits, and even if you add up all the legal trouble they've made for themselves so far, they probably won't have to pay out a signifcant amount if they do lose.

It bugs me because I'm a cross-the-t, dot-the-i type.

This is the disclosure rule:
Selective Disclosure and Insider Trading

Regarding the material nonpublic disclosures, just pencil in a number for SEC fines in your model. They tend to be small and the SEC is practically off the job these days. The potential consequences are worse when they disclose *negative* information selectively because that can lead to shareholder derivative lawsuits, but that hasn't happened yet.

Your constant bashing of Tesla's in-house legal team grinds my gears.

First, you have the function of an in-house legal team all wrong. They are not designed to cross every t and dot every i. It is not smart (and often not possible) to do this in any organization and especially not a company like Tesla. An in-house legal team is designed to balance risk and cost outlay, in line with the Company's business strategy.

Could Tesla tighten some things up? Sure, but it might double the SG&A legal budget for lawyers at the company. Lawyers aren't cheap, even in-house ones. It's a marginal cost thing - reducing legal risk comes at a significant cost, which increases more and more as you try and address smaller and smaller issues.

A good General Counsel finds the inflection point that works for the business and goes from there. I have no reason to believe they haven't selected this point correctly. A great GC understands that having a few foot faults here and there is fine if they are managing the budget appropriately. The analysis doesn't end at "is there a legal risk here?" The next question is "what is the real life exposure?" and "OK, this is legally questionable but it is rarely enforced - do we care?" and "what will it cost to mitigate (note, not eliminate - that's almost never possible) this risk?" A fine for Reg FD isn't just going to fall in their lap, most likely. There will be a warning and probably an announcement by the SEC that it will be taken more seriously in the future (note: this is when good lawyers start to care more), THEN a fine if they continue to avoid the issue.

I don't blame Tesla for choosing to focus spending on actual business stuff rather than legal overhead. Surely you agree this money is better spent installing superchargers, building sales infrastructure and on R&D rather than spending a ton of money trying to eliminate every non-material risk out there.

Finally, in-house counsel spends a significant amount of time managing outside counsel. So, it's fair to say we can measure inside counsel by the quality of their outside counsel. I don't know who they use for day-to-day matters - most firms use 25-50 outside firms, picking and choosing particular firms/lawyers for each specialty because every firm has particular strengths and weaknesses. But I do know that when it counts - e.g., the SCTY merger - they hired Wachtell. Wachtell is - literally - the best and most expensive law firm on the planet. This shows that Tesla takes their legal obligations seriously more than anything else you can point to.

 

[neroden]

Apparently Tesla starting to produce M3 on the dedicated BIW line, a major milestone.

They also indicate slower growth of OpEx and increasing earnings leverage in 2018.

Just to clarify. I'm pretty sure Model 3 was already produced on the dedicated BIW line, albeit slowly. (There really isn't any other way to produce it; the BIW assembly steps, involving welding and gluing of enormous parts which have to be held in place by robots, can't reasonably be done by hand. It would make no sense to have ever done them by hand, as it makes for a wildly different procedure from the assembly line procedure and has no value. Though perhaps the robots might have been in "training mode", which seems perfectly likely.)

I believe the article indicates that in August the Model 3 is being produced on the dedicated *final assembly* line. (Albeit probably slowly.)

 

[Waiting4M3]

Hmmm... internal combustion engine suppliers think there's still life in internal combustion engine cars. More interesting is that Magna thinks so too, which means that the coming competition that @mmd keeps talking about isn't coming in real volumes in the 2018 through 2025 time period. This article, like many Bloomberg articles mixes quotes from sources in a deceptive way. What we don't see is how much business these firms have with Tesla versus non-Tesla auto makers. They also mix in estimates from Bloomberg New Energy Finance which we already know is a biased and mistake prone source.

That's not good news for the ICE automakers. They're gonna have to drag their suppliers if they want to transition quickly to EV.

 

[neroden]

Usually automated storage and retrieval is a sign of misplaced priorities in manufacturing, as storage and retrieval add capital and operating costs (and more importantly cycle time to the inventory, and lags in cause and effect as downstream processes are often the place where flaws are found- they tie up money and effort and delay the discovery of flaws creating a junk exposure/risk) with no actual value added to the product.

You're spouting "just in time" thinking. Tesla is rejecting this because the force majuere risk from supply chain disruption is a serious threat to their business. (For yet another example, some of their parts come from South Korea.)

Pretty sure I am missing something.

I am quite sure this is primarily for parts from outside suppliers. Tesla absolutely requires a buffer of these in case of supply chain disruption. Tesla has had some *very serious* problems with supply chain disruption in the past. They *cannot allow* this to delay their production of cars.

While inside the factory, the number of boxes of small parts with code names sitting under bar codes was astounding. There was a lot of manual employee work involved in moving those parts. It's occupying a very large portion of the factory floor. Clearing that out *and* eliminating the manual labor involved would make more space for manufacturing *and* reduce labor costs.

The fact is that there needs to be some buffer for in-house parts too. There were racks of individual metal stamped components waiting to go to the BIW line. This is already being buffered because each stamping press produces more than one part. This probably requires a much smaller buffer, but the buffer is needed.

Note further that Tesla actually needs to permanently store parts for *service*, so those need to be stored as well.

Lots of reasons to have an automated storage facility.

 

[vgrinshpun]

Just to clarify. I'm pretty sure Model 3 was already produced on the dedicated BIW line, albeit slowly. (There really isn't any other way to produce it; the BIW assembly steps, involving welding and gluing of enormous parts which have to be held in place by robots, can't reasonably be done by hand. It would make no sense to have ever done them by hand, as it makes for a wildly different procedure from the assembly line procedure and has no value. Though perhaps the robots might have been in "training mode", which seems perfectly likely.)

I believe the article indicates that in August the Model 3 is being produced on the dedicated *final assembly* line. (Albeit probably slowly.)

I can't agree with you here. The RC *and* 30 cars delivered so far most definitely were NOT produced using the BIW production line. They were welded/glued/riveted in the pilot area photos of which surfaced during the build out of RC.

 

[neroden]

How much does another large press cost compared to a building that large, all the automation in it (or handling to get parts into and out of it), and all the inventory that is in it?

How much does another paint system cost?

How much does *land* cost?

The large presses are extremely expensive, actually. The entire inventory system probably costs less than one huge press. But more importantly, where is Tesla going to *put* another large press, while the parts inventory sits spread out across half the floor of the factory?

It makes a lot of sense to build vertical for inventory. If they can get an automated system for insertion and removal of parts, it's a huge labor savings.

Oh, and paint systems have a long lead time due to the emissions permitting.

 

[brian45011]

No, what I'm saying is that GAAP *consistently* provides misleading accounting. Period. It's important to know how GAAP accounts for things, because it's *wrong and misleading*.

It's not so much an inherent flaw with GAAP, but the flexibility that GAAP allows in how it is applied. GAAP works well enough for companies who want to be transparent and present consistent details for investors to understand the risks. Not so well for companies whose corporate philosophy is typified by this kind of exchange:

"David Tamberrino - Goldman Sachs & Co. LLC
Can you share a little bit more maybe what the 1Q and 2Q order rate trends look like for the Model S and the X?
Deepak Ahuja - Tesla, Inc.
Not relevant."

Overhead costs are never properly part of gross margin, economically speaking. It's supposed to be the variable costs. But that's not always what GAAP thinks. Fixed costs creep into cost of services fairly often. I haven't dug through to see what the current state of GAAP is on this. The phrase "manufacturing overhead" indicates that overhead may be included. "Costs associated with providing maintenance services" may or may not include salaries.

Factory (manufacturing) overhead is part of COGS Manufacturing Overhead Costs | Explanation | AccountingCoach. The context is factory overhead attributable to the supply of power-train systems and components to 3rd parties. The revenue for those sales are reported in Services & Other so it's appropriate to include factory overhead in that category's COGS.

So where should salaries of those who perform maintenance services be booked?

I'm actually a little suspicious that the CPOs might be creating GAAP losses (and arguably real losses) on this line. I'm pretty sure the CPO business has terrible margins. Buy as trade-in, refurbish, sell... I'd assume they'd try to sell for slightly more than the cost of buy + refurbish, but *are the CPOs depreciated while they're on Tesla's property*? I haven't checked, but they probably ought to be, since used cars are a depreciating asset. In that case, buying is neutral from accrual perspective, but inventory takes a loss due to depreciation, and then later they sell for an amount which barely exceeds the depreciation. If there's any increase in CPO inventory, it would show up as a loss. If they end up having to sell CPOs at a loss, it would show up as a larger loss. If they hand entire batches of trade-in cars to a broker for auction, as they have been known to do... I'm not at all sure they're making a profit on *that*.

They have a pretty high degree of control over the pricing and the costs for service. Much less so in the used car business. I'm more inclined to suspect that of being the source of losses on this line, but of course there's no way to tell.

Used car inventory is increasingly a problem for Tesla which began resale value guarantees in April 2013, direct leases in June 2014, and resale value guarantees to banking affiliates in December, 2014. Collectively, somewhere between a quarter and a third of Tesla's deliveries (~70-80k out of ~230k total) have been pursuant to those programs, most of which had 3 year terms. Inventory is not depreciated, but valued at the lower of cost or market. As used vehicles' values decline with age, the inventory is written down. The Cash Flow statements show inventory write-downs of $27 MM in 1Q17 and $44.3 MM in 2Q17 (not necessarily all from used cars, but the trend is increasing.) EV-CPO shows used inventory that has been offered for sale since 2015 and the corresponding pricing reductions.

It's good news, bad news: if Tesla were to aggressively mark-down and dispose of that increasingly obsolete fleet of used cars in would juice the cash balance but have an adverse effect on Net Income.

 

[vgrinshpun]

Hmmm... internal combustion engine suppliers think there's still life in internal combustion engine cars. More interesting is that Magna thinks so too, which means that the coming competition that @mmd keeps talking about isn't coming in real volumes in the 2018 through 2025 time period. This article, like many Bloomberg articles mixes quotes from sources in a deceptive way. What we don't see is how much business these firms have with Tesla versus non-Tesla auto makers. They also mix in estimates from Bloomberg New Energy Finance which we already know is a biased and mistake prone source.

Exactly my thinking. All the talk about obliterating competition is hollow.

The quotes from Magna executive are damning:

Magna International Inc., the top parts supplier in North America by sales, sees pure electric cars being between 3 percent and 6 percent of global new vehicle deliveries by 2025. Chief Executive Officer Don Walker told an industry conference last week that automakers share his skepticism of faster market penetration, but can’t say so publicly.

“They know what’s going to happen, but they have to say what is going to be popular to be perceived as a progressive company,” Walker said Aug. 2 at the Center for Automotive Research Management Briefing Seminars near Traverse City, Michigan.

 

[RobStark]

That Automotive News article refers to an analyst call in _May_ about the Model 3 long before the 2017Q2 call in which Musk backtracked. It then says "in the conversation" he said that the Model Y would have much less. The only conversation mentioned in the article is the May call. It says nothing about a new call, or re-iterating the wiring reduction. Other junk sites then refer to that Automotive News article.

AN references May call for 5k meters of wiring for Model 3.

It is not clear they referenced the day earlier call or the May 5 call for Model Y as I reread the article..

Suppose AN could be rehashing 3 month old news as news but that is not like AN. This is the trade journal of record for the automobile industry.

 

[neroden]

Assuming the ABL creditors have made the proper filings under Article 9 of the UCC, the unsecured note would be behind the ABL creditors in priority to GF assets.

Yep, it's now backing the ABL.

The primary reason the GF is of minimal value as collateral for debt is that the Panasonic lease grants the lessee rights of Quiet Enjoyment.

That's simply not how it works, as I've explained before. A steady lessee makes it *better* collateral. An unleased building is bad collateral, a leased building is good collateral. But I won't argue with you about that further.

Some have asserted the bond solicitation is not really a recent decision to provide a contingency cushion against force majeure events, but something that has been planned for awhile.

Well, I think Musk doesn't like dilution and has always wanted to issue bonds if he could issue them at the right price. The current record low yields in the junk bond market are the right price. :shrug:

 

[RobStark]

Generally I would wish well for any companies entering the BEV sector, but honestly I don't want people to be distracted from a company that can delivery great BEVs while already having a great charging network available. I think that a number of these smaller companies such as Dubuc Motors are really only interested in seed money or being acquired, rather than actually following through.

Dubuc is interested in being "The Ferrari of EVs" not a mass market automobile company. They have a practical design in that it is a sports car that can fit a 7' 350 lbs professional athlete. That is potentially a huge market for very expensive sports cars. It just seems really ugly to me.

Lucid, it seems does have hopes, of being a BMW type company. In the Bay Area and Greater Los Angeles there is already people saying they want a BEV "but preferably not a Tesla like EVERYBODY has." LOL. It would be good to have a choice of compelling BEVs.

 

[neroden]

Your constant bashing of Tesla's in-house legal team grinds my gears.

I appreciate your comment and it's helpful. However, it confirms my belief that they're incompetent, so I'm going to keep bashing Todd Maron, the *divorce lawyer* who Musk hired to do work which is *outside his competence*. He should have been fired years ago and replaced with someone who actually knew fields of law which are *relevant*.

First, you have the function of an in-house legal team all wrong. They are not designed to cross every t and dot every i. It is not smart (and often not possible) to do this in any organization and especially not a company like Tesla. An in-house legal team is designed to balance risk and cost outlay, in line with the Company's business strategy.

Well, thanks for the description. So they're basically designed to say "yeah, you can get away with lawbreaking here". That is quite consistent with the behavior of corporate legal teams that I've seen, certainly.

I don't blame Tesla for choosing to focus spending on actual business stuff rather than legal overhead. Surely you agree this money is better spent installing superchargers, building sales infrastructure and on R&D rather than spending a ton of money trying to eliminate every non-material risk out there.

*Sigh* I don't think the cost of eliminating the legal risks I've identified is significant. In fact, I suspect it's less than $5000 TOTAL. (Send out a memo reminding execs to publish their presentations which they gave to private investors. Or have IR check at the end of each week and publish said presentations. Provide a license notice for the pirated software in the owners manual of the car.)

At some point, it seems extraordinarily irresponsible to take risks which are *that cheap* to mitigate. And Tesla is well past that point.

The cost/benefit analysis of Tesla's in-house legal team is incompetent. Which you'd expect when you have a divorce lawyer running things. I'm sure he's a perfectly good divorce lawyer, but he's way out of his depth. His divorce background may also be biasing him against sensible behavior, because there are certain sorts of tactics which are effective in a divorce case and counterproductive in corporate law.

They write bad legal filings in their fights with the dealerships. I don't know how much that costs them in the long run, but geez, I could write better filings. This may also be due to the divorce-lawyer background; they're making the wrong type of pitch.

They didn't even do the basic paralegal work to figure out the registration/insurance rules in each of the 50 states before they started selling the cars in 50 states, which created *angry customers*. They seem to have finally straightened that out now, but geez, it would have been less than two days work for one paralegal to just look the rules up and put them in a single binder to give to their sales staff.

I'm talking about *really cheap, basic due diligence* stuff which isn't/wasn't being done. Tesla' legal team *sucks*, and there's no way around that.

Finally, in-house counsel spends a significant amount of time managing outside counsel. So, it's fair to say we can measure inside counsel by the quality of their outside counsel. I don't know who they use for day-to-day matters - most firms use 25-50 outside firms, picking and choosing particular firms/lawyers for each specialty because every firm has particular strengths and weaknesses.

I have some references. They've made poor choices of outside counsel on other issues.

But I do know that when it counts - e.g., the SCTY merger - they hired Wachtell. Wachtell is - literally - the best and most expensive law firm on the planet. This shows that Tesla takes their legal obligations seriously more than anything else you can point to.

Well, fine, they hired the most expensive firm on that one.

I suspect Musk could have made that call without going through his divorce lawyer.

I stand by my assessment: Todd Maron is fundamentally not competent to perform his current job. He is a liability to the company. He should be replaced with someone with a more suitable skill set.

 

[22522]

How much does *land* cost?

The large presses are extremely expensive, actually. The entire inventory system probably costs less than one huge press. But more importantly, where is Tesla going to *put* another large press, while the parts inventory sits spread out across half the floor of the factory?

It makes a lot of sense to build vertical for inventory. If they can get an automated system for insertion and removal of parts, it's a huge labor savings.

Oh, and paint systems have a long lead time due to the emissions permitting.

I appreciate addressing the supply line disruption risk. The key used to be not losing orientation on a part ever. As reorientation is expensive.

What I think I am missing is transportation packaging is not always engineered to preserve orientation, so people spend a lot of time sorting socks in the factory.

 

[neroden]

I can't agree with you here. The RC *and* 30 cars delivered so far most definitely were NOT produced using the BIW production line. They were welded/glued/riveted in the pilot area photos of which surfaced during the buildt out of RC.

Link to photos?

They're going to have potential quality problems with those cars if they weren't welded/glued on the line. At the least, they're going to have different problems than all later cars.

 

[techmaven]

Exactly my thinking. All the talk about obliterating competition is hollow.

The quotes from Magna executive are damning:

Yes... Tesla perma-bears like @mmd and @tftf keep talking about coming competition. And sure, some new models will be introduced. However, Magna will be building the Jaguar i-Pace. They also build vehicles like the BMW X3. They provide the powertrain for the Ford Focus Electric and Ford Energi models. They know the amount of EVs that will be coming in the new few years from BMW, GM, Ford, Jaguar, Daimler, and so forth. There just aren't going to be that many. We also know this due to the battery production contracts. It doesn't matter if LG/Samsung/CATL and so forth talk about possible 2020 or 2025 capacity. What matters is the commitments, including sourcing contracts from the automakers as well as actual battery cell production investments communicated to investors. Tesla is the automaker and the battery cell supplier, so when Tesla says they see demand and will be building a certain number, that's very different than battery cell only makers. And we really haven't seen actual volume commitments from the major automakers. Merely just model introductions. Well, introducing a model and building 14k of them (Hyundai Ioniq) or 13k of them (Jaguar i-Pace) just doesn't move the needle. Hyundai is moving up their production by 50%, but then that's only 14k to 21k and that's a global number.

 

[neroden]

GAAP works well enough for companies who want to be transparent and present consistent details for investors to understand the risks. Not so well for companies whose corporate philosophy is typified by this kind of exchange:

"David Tamberrino - Goldman Sachs & Co. LLC
Can you share a little bit more maybe what the 1Q and 2Q order rate trends look like for the Model S and the X?
Deepak Ahuja - Tesla, Inc.
Not relevant."

Speaking of corporate philosophy of minimizing information release, have you seen Amazon's reports? They got consistently less and less detailed every year. Deliberate choice by Bezos.

 

[AlMc]

I can't agree with you here. The RC *and* 30 cars delivered so far most definitely were NOT produced using the BIW production line. They were welded/glued/riveted in the pilot area photos of which surfaced during the buildt out of RC.

Agree. I think they have a prototype line set up for the initial 3s and will be moving over to the BIW line in September? (just a theory)

 

[brian45011]

Apparently Tesla starting to produce M3 on the dedicated BIW line, a major milestone.

They also indicate slower growth of OpEx and increasing earnings leverage in 2018.

If Aaron Chew is VP of Investor Relations, what are Mr. Evanson's and Ms. James' titles.