2017 Investor Roundtable:General Discussion

[schonelucht]

B.S. German engineers still have disciple and pride. They aren't going to quit over working non stop for a month or two in Nevada.

They also have a family life which they may value higher than some on this board with a more 'American' view on work/family balance. I suppose it's no coincidence that they got more than they were initially asking for in their recent wage negotiations. They knew they had a lot of leverage : Elon needed them more than the other way around.

 

[SPadival]

It may indeed be better to ask those in the know first before you LOL about something you clearly know nothing about.

LOL

 

[erthquake]

This is one of the reasons I admire Musk. There are very few people with his combination of drive, success, empathy, and appreciation for those "on the front lines." Literally.

Elon Musk made a secret appearance to elite US Marines and gave a stirring speech

"I will never forget it; it set the tone for his entire talk," Musselman said. "He said, 'I wanted to come and speak to this group,' and I get the chills even saying it, 'Because whenever there's danger in the world, you all are the first to go and die."

Musk continued to say he had a great amount of respect for their service to the country, according to Musselman.

"And the whole room, you could've heard a pin drop," Musselman said. "When he said that, the way he said it, it wasn't prepared, there was no script. He was genuinely looking up in the air to find the words to say 'Thank you for doing this for our country.'"

If there's anyone who, after reading that article, thinks Musk doesn't care about his workers and what they go through, then I don't know what to say.

That Musk spends hours and hours on the factory floor getting his hands dirty is akin to the generals of old leading their troops on the front lines. And, obviously, I realize those generals and their troops risk way more.

 

[kbM3]

The auto industry margin reporting is particularly difficult to compare because of the nature of the industry.
Most auto manufacturers, like Porsche, actually manufacture very little, but outsource to others such as Valmet and Magna Steyr. They also produce in their own factories but nearly all their sales come from vehicles derived from other VAG models and almost all of their parts are bought from others.
Tesla may be the most vertically integrated manufacturer today. If the Panasonic JV contribution is added, they certainly are. For the ICE equivalents:
Engines are often done through joint ventures or bought from other manufacturers. For the most part, more than half, transmissions are bought from third parties with such companies as ZF. Others (Ford and GM new 10 speed for example) are developed jointly by otherwise competitive companies.

What does that have to do with Gross and Net Margins. Among other things, classification. Depending on how these sourcing deals are structures gross margins might shrink or rise based on how development and manufacturing infrastructure have been amortized.

Porsche has long benefitted by their good fortune to buy big parts of their vehicles through VAG, that amortized over large volumes and allocated modest overhead. Others, like Opel/Vauxhall/Holden/Saab did the same but their parent allocated overhead to them in a way that reduced their margins. Both have lots of complexity and many intervening variable.

In practice very few people can accurately compare GM's from one builder to another and nobody can do so precisely.

Still these comparisons are all we have and they do tend to mean something in relative terms if not absolute.

Probably lots of people will disagree with me about my next point. I think Tesla GM's are very impressive and will probably reach 25% overall sometimes around mid-2018. Other things remaining equal the higher the growth rate the lower will be GM. Why? Because staffing, inventory and infrastructure costs tend to lead sales revenue. That is insignificant on a steady state.

So we have many analysts (the bears) who do not really understand the impact of growth rates on nominally steady sate accounting.
Other analysts, like those who assess credit risk, can readily understand how to mitigate those calculation discrepancies though techniques that adjust between periods, for example. Some people cringe at one or the other.
Then there is a third way,
By making JV's and Tier One deals manufacturers can outsource lots of capital cost and buy with purchase price amortizing costs they'd otherwise have on the balance sheet.
and a fourth way,
Don't make your own product at all, outsource it all. Those"badge-engineered" ones tend to have high OM low GM. We probably know lots of these, most resulting from intra company deals which export development costs such as Chevrolet Cruze/Daewoo Lacetti. Such vehicles mostly have shared engineering but the accounting principles used allow treatment to vary according to tax consequences and public perceptions. Usually that depresses Gross margin and increases Operating margin. Sometimes, as in Isuzu Rodeo/Honda Passport and
Honda Accord/Rover 600 the derivative was a nearly zero marginal cost way of introducing a new model. those have essentially auto-dealer-like margins.

Once we evaluate all those details and others, if we can, we realize that Tesla is exceedingly efficient in use of capital, and continue to be. It seems most people who bore themselves with this detail become quite optimistic about the future of Tesla. Strange 'trade secrets' (i.e. not secret but usually ignored) begin to appear, such as the very modest cost of the Supercharger network. We also begin to see that if Tesla even achieves 50% of Model 3 expectations their OM will suddenly skyrocket.

Lastly, we finally begin to understand the impact of production automation for Model 3. Devilishly tricky to coordinated ~500 robots. Once done the GM's go exceedingly high and the OM's go with it. Once that is resolved it will be replicable with far less angst. In accounting terms most of that angst appears as diminished GM's and increased Opex and Capex. In transition the accounting is very messy. Even so the clues are all there.

Some of us want desperately to model all this. I have used up far too much memory with my iterations. Probably a few of us have done that. Not so much the 'analysts', because this stuff is work.

Simply stated, my predictions:
- 2018 will be profitable GAAP and non-GAAP. GM's will be >20% and would be higher except for the costs for Model Y, Semi and the next GF;
-CAPEX will decline in relative terms while accelerating in absolute terms;
-OPEX will be gradually declining as a % of sales;
-during 2018 new arrangements will allow CPO to be recorded as wholesale while reselling in Tesla stores with accounting looking 'dealer-like'

Two huge major issues;

The retail distribution system. At scale the impact of the NADA-States in the US will become serious. If the US Supreme Court does not resolve that issue Plan B will happen. While I have an opinion I do not know how this will be treated. I think this is a more important issue for GM's and sales than is Model 3 buildup.

China. How this issue will be resolved will have huge consequence for every accounting and business issue. GM's, OM's, sales and Capex will all be greatly affected.

All of this ends out boing the GM issue writ large in my opinion. Porsche always can have high GM because it need not deal with any of this and in fact can have most of Capex dealt with through parental support. There is an analogy: a child in 30's, still living with parents, working as a Wall Street trader. High income, low expense, apparent independence. That's Porsche.

Maybe my favorite post ever. Thank you.

One question. What Y, Semi and next GF costs are you expecting to hit GM in 2018? As I understand it, Tesla does not include R&D in GM.

 

[Intl Professor]

Some people actually like a challenge, but you are correct it the job is nothing but 80 hour weeks it will get old. And grohmann people didn't seem to want options, just more pay and guaranteed jobs, so it shows where their minds are at when it comes to taking risks.

Not all Germans are alike, of course, but remember that the first stamping press at Fremont was a used German one (I guess) but the installers were from Germany and elected to stay and work for Tesla. Given a choice I prefer to live in Sacramento, midway between GF1 and Bay Area. Paradise. But then, we are right after New Orleans in flood threat and live right next to a levee. I used to cross the American River to my classes, but now an "extinguished professor," have to use the bridge.

 

[jbcarioca]

Maybe my favorite post ever. Thank you.

One question. What Y, Semi and next GF costs are you expecting to hit GM in 2018? As I understand it, Tesla does not include R&D in GM.

R&D accounting classification is the primary question. Certainly the designers, engineers and other resources developing the vehicles will be classed as R&D. How overhead, production preparations and supplier roles are dealt with can be quite variable. Since both Semi and Y are said to be derived from Model 3 I expect a majority of both to be expensed but the precise policies have thus far not been disclosed.

Supercharger buildout, Service Centers, Sales facilities, Rangers are all being greatly expanded. All will be in SG&A.

As people repeatedly mention the direct sales model of Tesla affects GM because dealer margin is included. It affects sales because Tesla recognizes sales only when transferred to end purchaser. Almost all other manufacturers recognize income when vehicles are shipped to a dealer. Thus Tesla sales are much more conservatively stated than for others.

Finally, I expect 2018 R&D will stay about the same as this year, but GM ought to recover nicely.

 

[Ugliest1]

In 1945 as kids we were holed up in a somewhat problematic hotel in Venezuela as my Dad was helping to build a new water supply for Caracas. Our breakfast was cornflakes augmented by some "raisin like protein" supplements with wings and six legs. They did not move, however; must have drowned. But I regress again.

They might have just been resting when you were looking. Or, "pining for the fiance".

 

[Intl Professor]

They might have just been resting when you were looking. Or, "pining for the fiance".

I shy from anthropomorphisms. (Six syllable words more often and fewer words. Occam's snikersneeshly-sotospeak.) You are so lucky I'm old and cant't count beyond the seven fingers on a hand.

 

[Ugliest1]

Just confirmation from another source. The "wreckage or a heap of rubble" may hyperbole or an honest description of how bad it was. There may have even been robot collisions with damage.

I know nothing of today's German culture, but I can absolutely see an expert in their field, employed by a world-class company (even before a recent purchase of that company), going to another country to fix something, and upon being interviewed back in their own country, describing any size of problem as a wreckage, or heap of rubble. The comments seem genuine to me given human nature.

Whether there really was a true heap of rubble at Tesla, or just some complicated problems that needed to be worked out... well, that's anybody's guess.

 

[Ugliest1]

You are so lucky I'm old and cant't count beyond the seven fingers on a hand.

Well, you know there are three kinds of people in the world: those who can count, and those who can't.

 

[Bet TSLA]

R&D accounting classification is the primary question. Certainly the designers, engineers and other resources developing the vehicles will be classed as R&D. How overhead, production preparations and supplier roles are dealt with can be quite variable. Since both Semi and Y are said to be derived from Model 3 I expect a majority of both to be expensed but the precise policies have thus far not been disclosed.

Supercharger buildout, Service Centers, Sales facilities, Rangers are all being greatly expanded. All will be in SG&A.

As people repeatedly mention the direct sales model of Tesla affects GM because dealer margin is included. It affects sales because Tesla recognizes sales only when transferred to end purchaser. Almost all other manufacturers recognize income when vehicles are shipped to a dealer. Thus Tesla sales are much more conservatively stated than for others.

Finally, I expect 2018 R&D will stay about the same as this year, but GM ought to recover nicely.

So, admittedly the analysis is difficult, but do you have a number for how much profit Tesla is making per vehicle? Is there a meaningful way to come up with such a number?

 

[Starno]

I know nothing of today's German culture, but I can absolutely see an expert in their field, employed by a world-class company (even before a recent purchase of that company), going to another country to fix something, and upon being interviewed back in their own country, describing any size of problem as a wreckage, or heap of rubble. The comments seem genuine to me given human nature.

Whether there really was a true heap of rubble at Tesla, or just some complicated problems that needed to be worked out... well, that's anybody's guess.

Well ... we like perfect processes (order). Tesla isn't yet a mature company with every inch of what they do being calculated etc. a lot of things are still " raw " in Tesla.

 

[ls7corvete]

How much of this is self full-filling? Anyone think that the subcontractor of the pack manufacturing line read all the FUD and assumed they would never have to produce a line that met up to Tesla's expectations?

 

[justin w]

So, admittedly the analysis is difficult, but do you have a number for how much profit Tesla is making per vehicle? Is there a meaningful way to come up with such a number?

Tesla is losing 6k on every model 3s they sell.. it i almost like a charity. kind of sad

 

[jbcarioca]

So, admittedly the analysis is difficult, but do you have a number for how much profit Tesla is making per vehicle? Is there a meaningful way to come up with such a number?

GAAP does establish quite good consistency, in my opinion anyway, even though such things as Gross Margin are not ecactly comparable between companies, partly due to different cost structures.

I believe the Tesla reported Gross Margin by Model is accurate. For Tesla non-GAAP is more indicative, so 25% for the third quarter. Non-GAAP excludes sales of pollution credits so it is actually lower than GAAP. When comparing to other manufacturers one would use their GAAP.

Sorry no answer seems to be short. Anyway, Porsche at 16% is the typical best. If Porsche owned it’s own dealers their number would probably be around 28%, assuming their global dealer GM is around 12%. That number is unknown, so I applied the GM based on the half dozen Porsche dealers I knew about. The dealer GM will always be an adjustment to compare Tesla with others. Dealer GM is highly variable.

The large discrepancies between Tesla and others are:
1. Advertising;
2. Dealer/Distributor Margins;
3. Timing of sales recognition (dealer vs end user)
4. R&D ( steady state vs very high growth, different items included)

Tesla should have GM above most others because of more efficient distribution if nothing else.

 

[justin w]

How much of this is self full-filling? Anyone think that the subcontractor of the pack manufacturing line read all the FUD and assumed they would never have to produce a line that met up to Tesla's expectations?

those subcontractors dropped the balls not only on EM and Tesla, but also investors.. Next time EM should do background checks to ensure they dont hire scrub contractors and cause stocks to fall..

everyone including moms, grandma, aunties, long lost brothers, etc were expecting TSLA to shoot up to the moon. scrub contractors failed everyone

 

[Yuri_G]

those subcontractors dropped the balls not only on EM and Tesla, but also investors.. Next time EM should do background checks to ensure they dont hire scrub contractors and cause stocks to fall..

everyone including moms, grandma, aunties, long lost brothers, etc were expecting TSLA to zoom up to the moon. scrub contractors failed everyone

Should have been obvious they were going to be rubbish. I mean who would hire prepubescent subcontractors?

 

[sundaymorning]

Tesla is losing 6k on every model 3s they sell.. it i almost like a charity. kind of sad

By this logic you may want to pray that Tesla sells 5,000,000 cars per year, losing 6k each will mean lots of profits for shorts.

 

[Bet TSLA]

GAAP does establish quite good consistency, in my opinion anyway, even though such things as Gross Margin are not ecactly comparable between companies, partly due to different cost structures.

I believe the Tesla reported Gross Margin by Model is accurate. For Tesla non-GAAP is more indicative, so 25% for the third quarter. Non-GAAP excludes sales of pollution credits so it is actually lower than GAAP. When comparing to other manufacturers one would use their GAAP.

Sorry no answer seems to be short. Anyway, Porsche at 16% is the typical best. If Porsche owned it’s own dealers their number would probably be around 28%, assuming their global dealer GM is around 12%. That number is unknown, so I applied the GM based on the half dozen Porsche dealers I knew about. The dealer GM will always be an adjustment to compare Tesla with others. Dealer GM is highly variable.

The large discrepancies between Tesla and others are:
1. Advertising;
2. Dealer/Distributor Margins;
3. Timing of sales recognition (dealer vs end user)
4. R&D ( steady state vs very high growth, different items included)

Tesla should have GM above most others because of more efficient distribution if nothing else.

So far as I can tell Tesla reports R&D and SG&A as separate line items, not part of the gross margin calculation. Shouldn't some (maybe even most) of those expenses be considered part of the cost of the vehicle? Or am I missing something obvious?

 

[AudubonB]

The only thing I got is more automation. Pack is designed differently enough from current packs for high speed automation automation. If you recall they had issues with the beer 100KWh packs.

I'm still trying to figure this one out. It must be Saturday night.