2017 Investor Roundtable:General Discussion

[Ichabod]

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?

It's not about just firing people who make a bad part. It's about managing a business so that it is constantly improving. You don't want just standard parts. You want better parts this year than last year. Outside companies will innovate to win new business. The widget department just keeps making them to spec to avoid getting fired.

 

[nienco2]

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.

Annual sales for that group of vehicles was aprox 225,00 units in 2016. So to estimate the market potential what percentage of those buyers do you think will choose a BEV in general and a model 3 in particular? keep in mind that's a pretty loyal customer base

 

[bdy0627]

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.

It surprises me that Tesla did not have the expertise/interest in pack manufacturing given their battery focus and the GF. It's probably about time they did all of the pack manufacturing themselves. It just would have been great if they had literally been ahead of the curve on this instead of picking up the pieces now. Still, just a matter of time.

 

[dennis]

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.

You are missing the fact that high tax states like CA, NY, NJ and IL rely less on support from the federal government than the red states do. The average Federal spending is $1.29 for each $1.00 of taxes collected. Even with those big deductions for state and local taxes, Californians only get $.99. Residents of Illinois and New Jersey get back about $.50. So the SALT deductions are in fact fair, since the high earnings/high taxes states are actually subsidizing SC/LA/FL/AL etc.

Which States Are Givers and Which Are Takers?

 

[Waiting4M3]

It's not about just firing people who make a bad part. It's about managing a business so that it is constantly improving. You don't want just standard parts. You want better parts this year than last year. Outside companies will innovate to win new business. The widget department just keeps making them to spec to avoid getting fired.

I'd bet Tesla has multiple people/teams designing parts as well, often big companies would try multiple options in parallel, both SW, HW. Also, Tesla has never sat on an existing design for too long without improving things.

 

[dennis]

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.

Did you know that for every $ of Federal tax that you as an Illinois resident send to Washington you get about $.55 back in Federal spending? If you lived in that "well run" state of Texas you would get back about $1.40. I'm sure the people in Texas are thankful for you contributing to the federal subsidy that keeps their state and local taxes low.

Which States Are Givers and Which Are Takers?

 

[Ichabod]

You are missing the fact that high tax states like CA, NY, NJ and IL rely less on support from the federal government than the red states do. The average Federal spending is $1.29 for each $1.00 of taxes collected. Even with those big deductions for state and local taxes, Californians only get $.99. Residents of Illinois and New Jersey get back about $.50. So the SALT deductions are in fact fair, since the high earnings/high taxes states are actually subsidizing SC/LA/FL/AL etc.

Which States Are Givers and Which Are Takers?

Unfortunately, it isn't that simple. Either way, you are conflating two separate issues, and really not justifying anything except that you are a victim in CA and don't want your taxes to go up.

To say that one thing is unfair so we should make other things unfair because it might counteract the unfairness for certain people is a poor argument. I'm saying that if we stop all the deductions, it solves one unfair issue, while making it more clear where other unfairness is, enabling us to get rid of those too. It won't happen anyway, but even Trump can have a good idea once in a while.

 

[dennis]

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.

You are missing several other key points that contribute to Tesla's lower costs with the Model 3:

1) The 400K+ reservations allowed Tesla to negotitate high volume contracts with suppliers by being able to substantiate that they would actually purchase in those volumes. In the auto industry higher volume definitely leads to lower prices. (This is one of the key reasons GM loses money on the Bolt because they only committed to relative small volumes.)

2) Tesla is designing all of its production facilities for the Model 3 for 500K cars/year. That is what makes the higher levels of automation economically feasible. I read somewhere recently that Tesla requires an internal hurtle rate of 40% IRR to justify capex spending.

3) BEV's are simpler to manufacture than ICE's, especially if they were designed from the ground up to be BEV only like the Model 3. In the past the cost savings from simplicity has been overshadowed by the higher cost of the batteries. That is no longer true for Tesla.

 

[kenliles]

Trump can have a good idea once in a while

first you have to have an idea,
then it can be good or bad

I didn't say that--

leaving the room

 

[Curt Renz]

Benzinga - minutes ago: Tesla Is To Vehicles What Apple Was To Cell Phones (NASDAQ:TSLA)(NASDAQ:AAPL)

 

[Zhelko Dimic]

It's not about just firing people who make a bad part. It's about managing a business so that it is constantly improving. You don't want just standard parts. You want better parts this year than last year. Outside companies will innovate to win new business. The widget department just keeps making them to spec to avoid getting fired.

Or you can be like Amazon, Day 1 company(google it), constantly striving for improvements and having managers with unreasonable requirements. That way you out-innovate third parties, and I'm quite sure this is how Tesla is internally structured

 

[Ichabod]

I'd bet Tesla has multiple people/teams designing parts as well, often big companies would try multiple options in parallel, both SW, HW. Also, Tesla has never sat on an existing design for too long without improving things.

Perfect example. For Tesla to get improvement, you believe Tesla employes multiple teams to do things that others just outsource. If some random seat builder in Slovenia goes under trying to innovate seat making in a flawed way, BMW won't even know about it. If they succeed, they reap the benefits from the lower cost and/or better price. To get a similar benefit, Tesla must bear the cost themselves, and if it doesn't succeed, they don't get any benefit, just cost.

 

[Ichabod]

You are missing several other key points that contribute to Tesla's lower costs with the Model 3:

1) The 400K+ reservations allowed Tesla to negotitate high volume contracts with suppliers by being able to substantiate that they would actually purchase in those volumes. In the auto industry higher volume definitely leads to lower prices. (This is one of the key reasons GM loses money on the Bolt because they only committed to relative small volumes.)

2) Tesla is designing all of its production facilities for the Model 3 for 500K cars/year. That is what makes the higher levels of automation economically feasible. I read somewhere recently that Tesla requires an internal hurtle rate of 40% IRR to justify capex spending.

3) BEV's are simpler to manufacture than ICE's, especially if they were designed from the ground up to be BEV only like the Model 3. In the past the cost savings from simplicity has been overshadowed by the higher cost of the batteries. That is no longer true for Tesla.

1) - good point, although I expect that BMW, Audi and others get pretty good pricing too based on both volume and relationship
2) - I don't think that is the case, since 3 production is only now expected to get to 5k/week in early 2018, with a yet undefined amount of additional capital required to get to 500k/yr.
3) - goes back to my original argument, that the "balance of car" is basically comparable to that of an ICE car, and Tesla is expecting to do that part cheaper. Yes, the drivetrain is simpler to manufacture. No doubt. But the seats, windows, doors, suspension, steering, etc. are not meaningfully different in EV vs. ICE. If you argue that the simplicity of assembling an EV drivetrain balances out the battery cost, then fair enough. The concern is the rest of the car. The suspension if anything might be more expensive due to battery weight, and everything else is comparable to an ICE. So how will Tesla make the balance of car for less than others, and make a bigger margin? Will point 1) be enough? Hopefully.

 

[dennis]

Unfortunately, it isn't that simple. Either way, you are conflating two separate issues, and really not justifying anything except that you are a victim in CA and don't want your taxes to go up.

To say that one thing is unfair so we should make other things unfair because it might counteract the unfairness for certain people is a poor argument. I'm saying that if we stop all the deductions, it solves one unfair issue, while making it more clear where other unfairness is, enabling us to get rid of those too. It won't happen anyway, but even Trump can have a good idea once in a while.

It is not good to presuppose motive. In fact I don't get to deduct my CA state taxes because I am subject to the alternative minimum tax which only allows for charitable and mortgage interest deductions (sound familiar?). But my taxes will go up under the proposed plan because the alt min rate of 28% is going away and some of my income would be subject to the 35% rate.

As far as conflating separate issues, I was attempting to point out that rather than individuals in the low tax rate states subsidizing those in the high tax rate states the opposite is true based on where the Federal government chooses to spend the tax dollars it collects.

 

[electracity]

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".

1) Alien Dreadnaught is a nonexistent solution to a nonexistent problem. Fodder for the naive.
2) Mobileye invented autopilot, Musk took credit for a while.
3) I have no idea how FWD apply to what I said. Deciding to put resources towards modifying a gull wing door design is a marketing decision.

 

[jbcarioca]

1) - good point, although I expect that BMW, Audi and others get pretty good pricing too based on both volume and relationship
2) - I don't think that is the case, since 3 production is only now expected to get to 5k/week in early 2018, with a yet undefined amount of additional capital required to get to 500k/yr.
3) - goes back to my original argument, that the "balance of car" is basically comparable to that of an ICE car, and Tesla is expecting to do that part cheaper. Yes, the drivetrain is simpler to manufacture. No doubt. But the seats, windows, doors, suspension, steering, etc. are not meaningfully different in EV vs. ICE. If you argue that the simplicity of assembling an EV drivetrain balances out the battery cost, then fair enough. The concern is the rest of the car. The suspension if anything might be more expensive due to battery weight, and everything else is comparable to an ICE. So how will Tesla make the balance of car for less than others, and make a bigger margin? Will point 1) be enough? Hopefully.

I haven't run numbers recently but when I last did ICE costs for Engine, and Transmission were typically around 40% of the total cost. Back then that relationship tended to hold pretty much across price points. It may have changed.

I'll wager that the costs for battery and motors are right now in a similar place for Tesla, probably higher for others.
Tesla prices are likely to be higher than those of the major auto companies, party due to volumes and partly due to long established processes. Dealing with Tesla is certainly not as easy as it is with GM, for example.

 

[Ichabod]

Or you can be like Amazon, Day 1 company(google it), constantly striving for improvements and having managers with unreasonable requirements. That way you out-innovate third parties, and I'm quite sure this is how Tesla is internally structured

Amazon isn't vertically integrating to save margin. They are just innovating, and in some cases, that includes delving into upstream and downstream parts of the business. Amazon isn't starting its own UPS to get the UPS margin. They are innovating new ways to do what UPS does (drones, etc.). If anything, Amazon has been the ultimate outsourcer. Their original business model has been to make other people do all the work, and then they just reap a tiny sliver of the profit by connecting customers with suppliers. AWS and other "innovations" have been natural outgrowths of Amazon's core competencies developed in its original model. It innovated by figuring out how those internal resources could be commercialized for others. I fail to see how this relates to Tesla.

 

[mongo]

It surprises me that Tesla did not have the expertise/interest in pack manufacturing given their battery focus and the GF. It's probably about time they did all of the pack manufacturing themselves. It just would have been great if they had literally been ahead of the curve on this instead of picking up the pieces now. Still, just a matter of time.

It is not easy/fast to assemble a team to do a specialized task. First you need to hire enough people who want to move to where the work is at a salary that works for both parties. Then you need to set them up with all the space and tools to do the job. Then there is the time for the people who came from different places to jell into a well oiled machine. At that point, their subcontractors are back where the people came from, not at their new local.

versus:
Hire a company that does the thing you want, has a facility with employees, and meets your price/ timing target. Added advantage is that, if they don't work out, your initial contract is all the exposure/ obligation you have. If they do work out, you buy the business and keep them at the same location working exclusively for you.

 

[dennis]

1) - good point, although I expect that BMW, Audi and others get pretty good pricing too based on both volume and relationship
2) - I don't think that is the case, since 3 production is only now expected to get to 5k/week in early 2018, with a yet undefined amount of additional capital required to get to 500k/yr.
3) - goes back to my original argument, that the "balance of car" is basically comparable to that of an ICE car, and Tesla is expecting to do that part cheaper. Yes, the drivetrain is simpler to manufacture. No doubt. But the seats, windows, doors, suspension, steering, etc. are not meaningfully different in EV vs. ICE. If you argue that the simplicity of assembling an EV drivetrain balances out the battery cost, then fair enough. The concern is the rest of the car. The suspension if anything might be more expensive due to battery weight, and everything else is comparable to an ICE. So how will Tesla make the balance of car for less than others, and make a bigger margin? Will point 1) be enough? Hopefully.

1 - Pricing depends much more on the volume of each individual part rather than the aggregate volume with a particular supplier.
2 - There are many parts to the production of the Model 3 - batteries and motors in Reno, individual components in Lathrop, Fremont and elsewhere, and stamping, body-in-white, paint shop and final assembly in Fremont. Elon pointed out on the most recent CC that a number of areas are already capable of 10K/week. They will determine where the bottlenecks are to get to 10K as they ramp up to 5K.
3 - The Model 3 weighs less than 100 lbs. more than a 320i

 

[SwTslaGrl]

"1) Alien Dreadnaught is a nonexistent solution to a nonexistent problem. Fodder for the naive."

I think the manufacturing improvement described in this article in in the AD direction,
4th largest solar cell manufacturer makes play for 20% of industry
“These include: robotic workstations, traceable QA capabilities, improved workflow efficiency, optimized material transportation, and advanced data analytics.“