2017 Investor Roundtable:General Discussion

[mrdoubleb]

One way to protect the battery IP, honor any long term contracts with Panasonic on Japanese production, somewhat lessen capital needed for the Chinese factory and end the logistics insanity that is shipping Japanese Pana cells to the US and then shipping cars + packs back to Asia for the local market would be to:

- use Japanese cell production for pack assembly at the new Chinese factory for both vehicles and TE business sold into Asia
- have GF1 supply all Fremont vehicles (S 3 X) and TE products going into the Americas and, for the time being, Europe

While this would probably mean an S/X redesign for the new cell format, that would need to come eventually anyway and would only need to happen by the time the Chinese factory is operational

 

[myusername]

We’re Tracking Every Project Elon Musk Has Dreamed Up. this one tracks all projects and shows the ones that were on time as well.
~ cheers.

well that's quite a website... I didn't see "Tesla Energy $400m in 2016 and $2.5b in 2017". I suppose revenue/profit projections are not "projects"... but these should also be tracked... such as statements around cash flow... profit and revenue growth... because in the end... that's what really matters.

EDIT: yeah, raise your hand if you think TE and all of the future glory described on the 1Q15 CC is a success... according to 2015 projections we should have seen approximately $3b in revenue by now along with stupid high margins... according to this forum as of a year ago from today... a large 2017 ramp was expected resulting in billions... remember?... now go look at this "project tracker" and find all the projects marked complete regarding Tesla Energy... according to this, it's already a success.

 

[dennis]

Tesla sources parts from NA because that's where the cars are made and it shortens the supply chain. Parts that are custom to the model 3 could be vertically integrated but many parts could be sourced closer to where the cars are made. Can Tesla get comparable quality parts in China?

Before we can say anything about the 25% issue we need to know if it's even a thing. What insentives for EVs do they have in China for consumers? To me 25% of profit is not bad, it's the sharing it IP that is problematic. Tesla won't have much in terms of profit from that specific business for years so it really seems more like it's about the IP. Why do we assume they must partner with a car company when they could just partner with a tech, energy or utility company. Could see some very good reasons to want to partner with someone that is not directly a competitor but someone who can help them access the Chinese market more easily. Like a company with high quality retail locations or a utility that can add powerwalls to homes with solar or a solar company.

They keep taking about free trade zones in every article I have read. A 25% tariff makes me think they don't know what "free trade" means. Progress seems positive though and I could see them announce an India, Europe and East coast manufacturing to go with China.

The other question is what products besides 3 and Y do they make.. Solar roof? PW2 and PP2? Semi? S/X? I doubt S/X as it seems they could build enough in Fremont for the world. Does having local manufacturing help with imported S/X? Do they have to do a tilburg like setup and source the packs from China to qualify? A lot of questions, it will be interesting once we have a real announcement.

You're confusing a few things here:

- JV's are usually 50/50, so if they did a JV they would have to share 50% of the profits.

- 25% is the tax on imported cars

- the free trade zone allows the foreign company to set up manufacturing in China without having a JV partner and thus no requirement for profit and technology sharing. There are other benefits you can read about by Googling "China free trade zones".

- while the free trade zone is physically located inside China, products "imported" to China from the FTZ are subject to import duty.

There are obviously trade offs between doing a JV vs. locating a wholly owned factory in an FTZ. I believe Tesla has been pursuing manufacturing in China for a long enough time to have made the right overall decision.

 

[dennis]

One way to protect the battery IP, honor any long term contracts with Panasonic on Japanese production, somewhat lessen capital needed for the Chinese factory and end the logistics insanity that is shipping Japanese Pana cells to the US and then shipping cars + packs back to Asia for the local market would be to:

- use Japanese cell production for pack assembly at the new Chinese factory for both vehicles and TE business sold into Asia
- have GF1 supply all Fremont vehicles (S 3 X) and TE products going into the Americas and, for the time being, Europe

While this would probably mean an S/X redesign for the new cell format, that would need to come eventually anyway and would only need to happen by the time the Chinese factory is operational

Building a battery plus car manufacturing facility in China is at least a two year project. I would expect Tesla to focus that factory on the highest volume products for the Chinese market since they are the most price sensitive. That means the Model Y and the Model 3. Which one comes first would depend on the relative timing of CGF and Model Y readiness.

 

[Intl Professor]

Should be interesting to hear Elon's view on how they are going to approach China.

I could be wrong, but I don't think he will approach this directly, say in response to questions at audio conference on November 1. We shall find out about his approach as decisions are announced or otherwise discovered. And if the Chinese are smart, and they are and certainly more interested in doing the right thing than the USG (as we used to call it). Elon will get the right thing out of them, as we see slowly evolving now.

 

[Intl Professor]

By the "right thing" I mean energy policy and trade policy. Some here might agree with my view and with much more authority however racist, that overall Chinese businessmen are very smart and worthy opposites to our best. Not so much in the case of government run antiques leftover from the good old communist (I mean socialist) days.

A good friend of mine, a retired P&G executive, once sold a factory to the Chinese. His main complaint was the time it took to wade through front men and finally get to someone who could make the decision. (Possibly while the top negotiated things within the company, MHO.)

 

[Reciprocity]

You're confusing a few things here:

- JV's are usually 50/50, so if they did a JV they would have to share 50% of the profits.

- 25% is the tax on imported cars

- the free trade zone allows the foreign company to set up manufacturing in China without having a JV partner and thus no requirement for profit and technology sharing. There are other benefits you can read about by Googling "China free trade zones".

- while the free trade zone is physically located inside China, products "imported" to China from the FTZ are subject to import duty.

There are obviously trade offs between doing a JV vs. locating a wholly owned factory in an FTZ. I believe Tesla has been pursuing manufacturing in China for a long enough time to have made the right overall decision.

I'm not confused though I may have confused you. I get that profit is 50/50 but profits are a negative % now and would be in China for years while they built the business there. Profits are still net right? So a partner would actually have to pay Tesla for some time to be a partner as they share costs as well. It's not a free ride.

I'm Not confused what free trade zones are in China. I'm saying China is confused as to what "free trade" means, which is no tariffs. Like none. They should be called non free trade zones. Or the only place in China where you get to own your own business zones.

Back to my original point, let's say Tesla is netting 10% profits.. In say 10 years, because as you know Tesla is going to be expanding and growing and not showing huge profits for a long time and even longer in China where they are starting from nothing on the cost side of the financials. Splitting that 50/50 is nothing. What is something is splitting the IP 50/50 because that has tremendous value. The other issue I see with a partnerships is that they have a say in what you focus on and how you run the business. The 50% of profit is nothing, in 5 years they can add 5% to the retail price if the car to compensate. It's all the other strings that are problematic and probably a non starter for Tesla.

 

[Intl Professor]

I skimmed this looking for answers to some of the issues raised here, but could feel a headache coming on due to overtaxed brain cells so only found one nugget. Bottom line: "China has specific rules differentiating an EPZ from a FTZ. For example, 70% of goods in EPZs must be exported, but there is no such quota for FTZs."

Free-trade zone - Wikipedia

 

[myusername]

If u dont hire locally, how are you supposed to save anything?

American workers in shanghai, how is this supposed to save anything. And do you think they have enough employees now to staff an entire new factory in shanghai? Then they are seriously wasting money atm. ;-)

well... i'm totally confused... i thought Tesla was the Silicon Valley solution to manufacturing where the Alien Dreadnaught was supposed to virtually eliminate the "simple workers" in the factory... so what is the point of any of this?... or maybe the Alien Dreadnaught was just a stupid name to make the stock go up... or they're going to create an Alien Dreadnaught in China?... what's going on... why am I even saying these stupid words?

 

[dennis]

I'm not confused though I may have confused you. I get that profit is 50/50 but profits are a negative % now and would be in China for years while they built the business there. Profits are still net right? So a partner would actually have to pay Tesla for some time to be a partner as they share costs as well. It's not a free ride.

I'm Not confused what free trade zones are in China. I'm saying China is confused as to what "free trade" means, which is no tariffs. Like none. They should be called non free trade zones. Or the only place in China where you get to own your own business zones.

Back to my original point, let's say Tesla is netting 10% profits.. In say 10 years, because as you know Tesla is going to be expanding and growing and not showing huge profits for a long time and even longer in China where they are starting from nothing on the cost side of the financials. Splitting that 50/50 is nothing. What is something is splitting the IP 50/50 because that has tremendous value. The other issue I see with a partnerships is that they have a say in what you focus on and how you run the business. The 50% of profit is nothing, in 5 years they can add 5% to the retail price if the car to compensate. It's all the other strings that are problematic and probably a non starter for Tesla.

Gross margins and therefore gross profits are positive, not negative. Manufacturing Model 3/Y in China will have positive gross profits. It should also have positive net profits because there will be large volumes and there will be very little incremental R&D and SG&A attributable to that operation. Thus a JV partner would be sharing in profits not losses.

 

[TradingInvest]

I'm not confused though I may have confused you. I get that profit is 50/50 but profits are a negative % now and would be in China for years while they built the business there. Profits are still net right? So a partner would actually have to pay Tesla for some time to be a partner as they share costs as well. It's not a free ride.

I'm Not confused what free trade zones are in China. I'm saying China is confused as to what "free trade" means, which is no tariffs. Like none. They should be called non free trade zones. Or the only place in China where you get to own your own business zones.

Back to my original point, let's say Tesla is netting 10% profits.. In say 10 years, because as you know Tesla is going to be expanding and growing and not showing huge profits for a long time and even longer in China where they are starting from nothing on the cost side of the financials. Splitting that 50/50 is nothing. What is something is splitting the IP 50/50 because that has tremendous value. The other issue I see with a partnerships is that they have a say in what you focus on and how you run the business. The 50% of profit is nothing, in 5 years they can add 5% to the retail price if the car to compensate. It's all the other strings that are problematic and probably a non starter for Tesla.

For those who don't believe Tesla will be huge (in China), then splitting 50/50 is fine. Elon has big plans. By the time Tesla becomes a trillion dollar company, the Chinese market will account for 25% of Tesla's business. It's a big deal.

I agree with the additional reasons that you talked about. Long time ago Elon said he is not a fan of joint subsidiaries. For a wholly-owned unit, he can make quick decisions without wasting time.

 

[hobbes]

The 800lbs gorilla in the room is that having an agreement with Chinese government, first of a kind, to set the factory without JV partners gives Elon, who is brilliant and shrewd negotiator, upper hand in any negotiations with a JV partner, if he sees fit to have such an arrangement.

A bit of nitpicking - the reported deal was made with the Shanghai government, not the central government. Might make a difference, might not.

What I don´t quite understand - as the free trade zones are there for foreign companies to set up factories, and that´s just what Tesla wants to do, what were the negotiations and the resulting deal about? Is there something more than there was reported so far?

 

[dennis]

A bit of nitpicking - the reported deal was made with the Shanghai government, not the central government. Might make a difference, might not.

What I don´t quite understand - as the free trade zones are there for foreign companies to set up factories, and that´s just what Tesla wants to do, what were the negotiations and the resulting deal about? Is there something more than there was reported so far?

IIRC auto manufacturing was not one of the specific industries originally approved for the FTV.

 

[3Victoria]

I was not criticizing Elon for calling his shot, just pointing out that none of his predictions for FSD or EAP have come to pass much less on time. I might have been to general with comments, I was speaking mostly of the features required for the cross country demo. I am totally fine with the way Elon manages his company and sets the bar rediculusly high. I just focus on the results and not on the talk and I like the results so I'm fine with tuning my Elon filter as goals are met.

I think they need at a minimum high def 3d maps, which wouldn't be terribly difficult if they had a set route, but since they don't, they need a lot more areas mapped. Maps are required for navigating exits and any kind of intersection where you need to be able to stop. You could do it with vision but it would much harder then just knowing exactly where the exit is instead of being able to identify it based on imagery and inaccurate gps. One thing just occurred to me, the weather will be an issue as Dec-Feb time frame will have a greater chance for snow, which is another reason you need high def 3d maps so you know where the Lanes are when the road is covered with snow.

Time will tell and I'm assuming they are testing this already and probably have for months if Elon really intends to accomplish this goal in the next 2-4 months. Remember that for atleast a year they have had atleast enough some to make that video. I know it was not the most impressive video but it gives you an idea of where they were at 1 year ago. AP2 already did freeways well, so freeway interchanges and some local streets... Just time it so you leave the West coast at 3am and arrive in the easy coast at 3am..

I don't think we can claim what is and is not required for the cross-country drive. Certainly it is nice to have high-def maps -- whatever the exact definition of those is, and I understood that Tesla was doing high resolution mapping already.

However, I am pretty sure that the codebase for FSD is not the same as the present EAP, although it may use some of the lower level visual code (likely neural net (NN)). EAP driving logistics is more likely to be 'hard-coded' vs a deep NN for FSD. In addition, they need to integrate route planning into the larger code. The earlier FSD demo is quite impressive when you realize that it the route planning was apparently hacked in at the few weeks, judging by the disengagement errors the previous month before the successful run.

If Tesla does successfully accomplish a free-route crossing in the next 6 months it will be a very impressive accomplishment.

 

[Lessmog]

IIRC auto manufacturing was not one of the specific industries originally approved for the FTV.

I want my FTV

 

[Mike Smith]

Here is is the Washington Post report from September regarding China potentially opening up EV manufacturing to foreigners without JV partners:

Business: Washington Post Business Page, Business News

There is nothing in there about still needing to pay import fees - which would make no sense since the cars wouldn't be imported and it would be completely counter to the idea of a 'free trade zone'. Today's WSJ report from Tim Higgins (who has been no friend to Tesla in the past) bizarrely tries to throw cold water on this with no evidence. All he says is that as of now foreign companies pay 25% import fees, and a former Chrysler executive he talked to doesn't see why this would be changed. Nevermind that Chinese officials said last month that that is exactly what china is considering doing specifically for EVs.

 

[dc_h]

If without local partner in China story is true, prepare for huge CapEx and capital raise.

I disagree. Maybe bonds, 1-2 billion.
By the time they start the heavy spend from the Model 3 will be done and cash flow of a 20+ billion dollar company can better fund a new plant then the 5 billion dollar company that started gigs factory 1. Funding in China should be pretty cheap as well.
If capex I would guess Tencent taking a new 5% tranche of stock for ~ 3 billion. I also think completion will be much faster in China than in the USA. Battery production systems are already designed and first line likely ready with the first section of the plant. The assembly and paint line will take longer but they can follow design of Fremont. I assume they’ll get a stamping press locally as well.
Can they finish in 2018, or have initial production running by end of 18?

 

[kenliles]

No surprise to anyone here
EPA cancels climate-change talk to be delivered by agency scientists: report — The Hill

Meanwhile
“Record-breaking heat and fierce Santa Ana winds are forecast for portions of Southern California on both Monday and Tuesday, which would help fan and exacerbate any wildfires that might flare up.

"The duration, strength, and widespread nature of this Santa Ana wind event combined with extreme heat will bring dangerous fire weather conditions to Southwest California through Tuesday," the National Weather Service warned.

Red flag warnings have been posted all the way from Santa Barbara to San Diego...”
Record heat, fierce Santa Ana winds to fuel wildfire threat in California

Trumped again

 

[Fallenone]

I disagree. Maybe bonds, 1-2 billion.
By the time they start the heavy spend from the Model 3 will be done and cash flow of a 20+ billion dollar company can better fund a new plant then the 5 billion dollar company that started gigs factory 1. Funding in China should be pretty cheap as well.
If capex I would guess Tencent taking a new 5% tranche of stock for ~ 3 billion. I also think completion will be much faster in China than in the USA. Battery production systems are already designed and first line likely ready with the first section of the plant. The assembly and paint line will take longer but they can follow design of Fremont. I assume they’ll get a stamping press locally as well.
Can they finish in 2018, or have initial production running by end of 18?

Bond is still capital raise.

 

[kenliles]

Bond is still capital raise.

Yes it is
and Bonds, equity, and use of all profits are all warranted. Tesla is way under diluted against the opportunity IMO. I’ve long believed their capitalization is far behind the available rate of market expansion.