2017 Investor Roundtable:General Discussion

[vgrinshpun]

Too easy. It's in category 'money is not the issue because we are just trialling this to see if the tech is viable and can be rolled out across our platform'.

You can't be more wrong on this. Building shells and providing electrical/mechanical, etc. for the Data centers and HPC centers is a cut throat business. It has well established lead-acid batteries based UPS and generator back-up options. Nobody is throwing money at trying new technology there.

Do not take it personally, but your whole premise about TE is way off.

 

[schonelucht]

Come on, now you´re overdoing it a bit. I agree that storage is having a slow start. But that is mostly because it is a new concept to most potential customers.

I don't think the facts agree here. When Elon did the first presentation on the Powerwall, interest was OFF THE WALL. Just look through old posts on this forum from back in the time. People were ready to sign up blindly. People still are signing up blindly. How many buyers are aware of the exact status of feature implementation on the Powerwall, do you think? The slow ramp up on TE was due to many thing, but a lack of customer interest it was not. I agree the sales lead trajectory on powerpack would reasonably expected to be longer. But not 2 year longer. That's stretching it. TE ramp is slow because Tesla does not have a product that it wants/can sell.

Look, when GM is only delivering 1000 Bolt's in the first few months, the usual suspects here are quick to draw the (unconfirmed) conclusion that's because they lose money on the car, it's only a mirage and not a product they want to sell. Blablalbla.

When Tesla is only delivering a few thousand powerwalls in the first few years(!!!!!), and their financial statements actually back up that they are losing money on the damn things quarter after quarter? Suddendly no one is willing to admit that the powerwall/pack so far have mainly been a show product that Tesla is not really willing to sell. It is simple as that.

 

[Ichabod]

Yes. And to be the downer about Tesla for a change, the CEO seems unconcerned about legal compliance or customer communications, so those areas will be weak. Which they are.

Currently I think this isn't a fatal flaw, but it's worth watching.

It gets annoying listening to *silly* bearish arguments when I can make better bearish arguments based on Tesla's demonstrated weaknesses.

I have too much to do today to continue to point out what has been proven time and again, but I'll put out one more long post on this whole vertical integration thing. Bottom line, it has proven to not work, over, and over, and over again. Tesla is doing a lot of things right, and has some advantages. Vertical integration is not one of them. If you think Tesla is going to have an advantage by following the methods of 100 years ago and vertically integrating, I'll give you two examples of smart people from opposite ends of the spectrum who will agree that the *silly* argument is the Tesla one:

Berkshire Hathaway - When they purchase a new company, say Union Tank Car and the BNSF, does the relationship between UTLX and BNSF change? Did BRK buy UTLX to provide tank cars to BNSF? No, BNSF continues to buy cars from anyone, and UTLX continues to sell cars to anyone. Why, because BRK knows that both companies operate more efficiently by competing fairly in their own markets with the full complement of market signals that comes by having to compete on every single deal. This is true across BRK. There are a variety of markets where BRK owns pieces up and down the supply chain and could easily create a vertically integrated entity. Mr. Buffett has a month or two of experience that says vertical integration doesn't work. Argue with him.

For a less popular option, let's talk about our friends the Kochs. Hate them all you want, they are wicked smart at making money. They trade oil and natural gas, own O&G pipelines, own various O&G processing plants, and own various consumers of the products made in refineries and gas plants, etc. Back in the day they even owned actual production at the well, but I'm not sure if they still do. Although uncle Charles and uncle Warren probably don't like eachother very much, you might be surprised to know that they see vertical integration the same. Every subsidiary, even ones that could easily be completely supplied by another subsidiary, stays separate. They operate in the market, having to learn, innovate, and compete on their own.

The reasons are obvious in business school as they are obvious to the major auto manufacturers as they are obvious to me and Charles and Warren. You can continue to think Elon has this one figured out, and I welcome your freedom to believe that. I don't even know why I waste my time, when I know even this post will be met with derision. As they say, you can lead a horse to water...

 

[Ichabod]

If you pay attention to those of us who own Teslas, you will know that in the hardware they are doing exactly this constantly, at a MUCH faster rate than ANY other car company I have ever seen. My car (!) has version 2 of the side mirrors, something like the 29th version of the drivetrain, version 5 IIRC of the door handles, version 2 of the chargeport, etc.


You assert that, but it turns out not to be true with Tesla. Now you know.

OK, just one more note, couldn't resist this one. Seriously? I do read the other areas on the site. The 29 iterations of the drive train, as well as the various other components that had HORRIBLE failure rates are not evidence of an effective strategy. Good effort.

 

[jbcarioca]

You can't be more wrong on this. Building shells and providing electrical/mechanical, etc. for the Data centers and HPC centers is a cut throat business. It has well established lead-acid batteries based UPS and generator back-up options. Nobody is throwing money at trying new technology there.

Do not take it personally, but your whole premise about TE is way off.

Most of us do not quite know the difference between UPS and peaker plants, for example. UPS batteries can be quite small because they are intended to handle the transition from grid power to generator (turbine or diesel) power. Peakers must be fairly large because their are buffering large loads for a minimum of several hours. Because of that difference UPS are nearly always lead-acid because they are cheap and durable when not deeply discharged. Peakers are huge so even space is a problem for lead-acid, as is discharge level and maintenance.

 

[schonelucht]

You can't be more wrong on this. Building shells and providing electrical/mechanical, etc. for the Data centers and HPC centers is a cut throat business. It has well established lead-acid batteries based UPS and generator back-up options.

And so is selling retail stuff to American consumers. Didn't keep Amazon from sinking billions in building out the meanest retail machine even seen. (Unironically enough also in datacenters)

Nobody is throwing money at trying new technology there.

Correct. Noone ever heard about Facebook, Google, Amazon or Microsoft investing and researching in technology to save on electricity costs in their datacenter. That positively doesn't happen. When Google says they invested $1B over the last years in better energy provision for its datacenter, that's just not true as well.

 

[hobbes]

I don't think the facts agree here. When Elon did the first presentation on the Powerwall, interest was OFF THE WALL. Just look through old posts on this forum from back in the time. People were ready to sign up blindly. People still are signing up blindly. How many buyers are aware of the exact status of feature implementation on the Powerwall, do you think? The slow ramp up on TE was due to many thing, but a lack of customer interest it was not. I agree the sales lead trajectory on powerpack would reasonably expected to be longer. But not 2 year longer. That's stretching it. TE ramp is slow because Tesla does not have a product that it wants/can sell.

Look, when GM is only delivering 1000 Bolt's in the first few months, the usual suspects here are quick to draw the (unconfirmed) conclusion that's because they lose money on the car, it's only a mirage and not a product they want to sell. Blablalbla.

When Tesla is only delivering a few thousand powerwalls in the first few years(!!!!!), and their financial statements actually back up that they are losing money on the damn things quarter after quarter? Suddendly no one is willing to admit that the powerwall/pack so far have mainly been a show product that Tesla is not really willing to sell. It is simple as that.

Think we have to differentiate between the private market where in most places power walls don´t make much sense econonmically IMHO (which people might not have realized in the beginning), given you have a stable grid, and the utilities that need alternatives on peaker plants if things are supposed to go more or less fully regenerative.

 

[jbcarioca]

I have too much to do today to continue to point out what has been proven time and again, but I'll put out one more long post on this ...

The reasons are obvious in business school as they are obvious to the major auto manufacturers as they are obvious to me and Charles and Warren. You can continue to think Elon has this one figured out, and I welcome your freedom to believe that. I don't even know why I waste my time, when I know even this post will be met with derision. As they say, you can lead a horse to water...

One would be a bit foolish to be derisive about your points. Your two examples are entertaining and instructive.

If I differ with you it is in terminology. We're loosely calling Tesla highly vertically integrated without being really clear.

Tesla builds nothing at all of "the machine that makes the machine". All the robots, presses etc are third party supplied. But...
If an externally supplied automated facility can actually build things faster and cheaper today,
will it not become more like the old-fashioned assembly process rather than old-fashioned manufacturing process?
It seems to me that the crucial issues are the changing definitions.
Vertical integration that is built on an automated process is very different.

My hero, Warren Buffet is a very old man who famously insists he knows from technology. He's changing, to wit BYD.

I don't know yet what I think about Tesla's choices. My suspicion is that they'll be happy to operate machines and no so pleased to have manual labor.

Frankly, I don't know if I am seeing this accurately. I think I am.

We have old style technology approaches in Apple and Porsche. They design some things, teh end buyer visible ones, and buy everything else from third parties.

Ones like Tesla seem to be different.

 

[electracity]

When Tesla is only delivering a few thousand powerwalls in the first few years(!!!!!), and their financial statements actually back up that they are losing money on the damn things quarter after quarter? Suddendly no one is willing to admit that the powerwall/pack so far have mainly been a show product that Tesla is not really willing to sell. It is simple as that.

It's remarkable, isn't it?

Musk forward prices his products, which I think is smart. This effectively means Tesla has negative margins until full planned production efficiency is achieved. Yet here in make-believe land Tesla has all these margin advantages today.

The gigafactory can't possibly be making product efficiently today. The processes don't work well yet.

 

[Intl Professor]

One would be a bit foolish to be derisive about your points. Your two examples are entertaining and instructive.

If I differ with you it is in terminology. We're loosely calling Tesla highly vertically integrated without being really clear.

Tesla builds nothing at all of "the machine that makes the machine". All the robots, presses etc are third party supplied. But...
If an externally supplied automated facility can actually build things faster and cheaper today,
will it not become more like the old-fashioned assembly process rather than old-fashioned manufacturing process?
It seems to me that the crucial issues are the changing definitions.
Vertical integration that is built on an automated process is very different.

My hero, Warren Buffet is a very old man who famously insists he knows from technology. He's changing, to wit BYD.

I don't know yet what I think about Tesla's choices. My suspicion is that they'll be happy to operate machines and no so pleased to have manual labor.

Frankly, I don't know if I am seeing this accurately. I think I am.

We have old style technology approaches in Apple and Porsche. They design some things, teh end buyer visible ones, and buy everything else from third parties.

Ones like Tesla seem to be different.

Just a quick but safe guess, physics first principles? I think the same for Amazon. It is no accident each CEO has a strong science background.

 

[vgrinshpun]

Correct. Noone ever heard about Facebook, Google, Amazon or Microsoft investing and researching in technology to save on electricity costs in their datacenter. That positively doesn't happen. When Google says they invested $1B over the last years in better energy provision for its datacenter, that's just not true as well.

I am wondering whether you even read the article I linked. You are talking apples and oranges. Please provide link(s), and then we can discuss.

 

[Intl Professor]

How do physics first principles work in the cases of Tesla and Amazon.

Tesla:

Electric motors are better in every way than ICE. Quiet, instant torque, fine tuneable, efficient, simple to operate, simple to assemble, scalable, and we have known these advantages and used them for more than a century in many applications. They have one problem: range when applied to a moveable appliance like cars. Hence batteries are key. In 2010 when I learned the roadster had a range of 300 miles (as advertised) I invested for the first time in TSLA. It follows that the range problem can also be solved with superchargers, and then the need for batteries can be ameliorated by the first Gigafactory idea, and then the grid problem associated with peakers can be solved with more battery applications, and then the power supply problem can be met with solar roofs, not just cells, and combining all of the above, and AI, etc. Tesla success and its future is merely a logical series of steps using science to solve problems based on first principles.

The same with

Amazon, Alibaba, Ten Cent, Facebook:

Not being a business type it is harder for me to imagine the key to Bezos' success, so others will quickly set me straight, but let me guess anyway since I'm foolish and old enough to have nothing to lose in credibility.

Logistics may be the key to retailing along with scale and with both you have greater access to products and customers. That is true of shops, stores, and later, supermarkets, malls, etc. That is true of the early success of Sears Roebuck catalogs in the day. Now computers have revolutionized advertising along with the internet to change retailing once again in a radically disruptive way. That success with computers demands storage of information. That also means distribution centers, and revolutions in delivery patterns. At first I thought drones a crazy-ass idea, but now, not so much. With data centers the next branch is computer service, AI for rent, etc. Bring that to the masses and....

 

[30seconds]

Problem with big suppliers is that their business model is dependent on reliable manufacturing outputs and costs. So process improvements are incremental to keep the risk down. No desire, or even internal support, for wholesale rethinking of components unless the consumer can see the difference.

OK, just one more note, couldn't resist this one. Seriously? I do read the other areas on the site. The 29 iterations of the drive train, as well as the various other components that had HORRIBLE failure rates are not evidence of an effective strategy. Good effort.

They are evidence of Tesla being able to rapidly innovate their products and take care of issues as they arise. Very unlike, lets say BMW, which shipped tens of thousands of cars with faulty fuel pumps even after they knew them to be an issue.

Or the current uncorking of most 75 and 75D vehicles. I haven't heard of a single non-integrated automaker who was able to increase power while the cars are already in the field (Of course VW/ Audi are showing that they can eventually update software to decrease power/ efficiency).

Or, its 5+ years since the S started shipping and not a single competitor is available. Maybe because the traditional supply chain has zero experience with EV vehicles and is still struggling to get up to speed.

 

[dirtyofries]

Billionaire Ron Baron still believes he can make 20 times his money on Tesla

The billionaire investor's firm has invested in Tesla for about three years, and has about a $500 million stake in the carmaker, Baron told CNBC's "Squawk Box" on Friday. He said the position has made about $150 million in profits.

Baron said it can yield about 20 times his initial investment over the next 10 to 15 years.

 

[electracity]

Billionaire Ron Baron still believes he can make 20 times his money on Tesla

The billionaire investor's firm has invested in Tesla for about three years, and has about a $500 million stake in the carmaker, Baron told CNBC's "Squawk Box" on Friday. He said the position has made about $150 million in profits.

Baron said it can yield about 20 times his initial investment over the next 10 to 15 years.

His public optimism doesn't mean he is not hedging his downside risk.

It's also possible to believe that Tesla has a long term upside potential of 20x while still questioning where the capex is going to come from to support growth.

This is what happens when ValueAnalyst disappears. I forget where the billions of dollars of free cash flow is going to come from.

 

[TradingInvest]

His public optimism doesn't mean he is not hedging his downside risk.

It's also possible to believe that Tesla has a long term upside potential of 20x while still questioning where the capex is going to come from to support growth.

This is what happens when ValueAnalyst disappears. I forget where the billions of dollars of free cash flow is going to come from.

Every successful investor has his own investment style. Ron Baron is not a trader. He predicts long term trend and buys the leaders in that trend, holds many years for many fold gain. This approach makes sense for those who can predict the major trend and can find the leaders.

EV, autonomous driving with AI, and renewable energy are among the biggest trends in the next 15 years. Tesla is the leader. If there is anything, I think Ron's position was too small when TSLA was at $210. He might add more in the near future.

Elon explained that they expect to get large cash flow from Model 3, they will use that to fund more expansion.

 

[ValueAnalyst]

His public optimism doesn't mean he is not hedging his downside risk.

It's also possible to believe that Tesla has a long term upside potential of 20x while still questioning where the capex is going to come from to support growth.

This is what happens when ValueAnalyst disappears. I forget where the billions of dollars of free cash flow is going to come from.

Model 3 negative cash cycle.

If anyone needs me to remind them of Tesla's incredible future, please include @ValueAnalyst in your post.

 

[Fallenone]

Negative margins, positive Gigafactory. Guess where the money is going? Expansion... fastest growing car company...

He's talking about TE products that have negative gross margins. Those money are not used in expansion, it's simply lost by not covering COGS.

 

[landis]

Bottom line, it has proven to not work, over, and over, and over again. Tesla is doing a lot of things right, and has some advantages. Vertical integration is not one of them. If you think Tesla is going to have an advantage by following the methods of 100 years ago and vertically integrating, I'll give you two examples of smart people from opposite ends of the spectrum who will agree that the *silly* argument is the Tesla one:

I am not a working mathematician (unless software counts), but thousands of examples of failure is not the same as proof that it never makes sense. Only one working (counter) example is needed to prove the thesis false.
The examples you provided are excellent and are no doubt best practices for conglomerates.

Clearly you have a strong opinion on this subject. It almost seems like you might be a recently jilted supplier ;-)

I think it may be helpful to more carefully define vertical integration. I presume we all agree that multiple process steps by itself does not qualify as vertical integration. It is also well known that Tesla does in fact have a number component suppliers.
So perhaps a better characterization of the argument is at what percentage of insourced components is appropriate.

Is it fair to assume that your argument is more than zero but a small number can make sense? Or must it be zero?

I don't know yet what I think about Tesla's choices. My suspicion is that they'll be happy to operate machines and no so pleased to have manual labor.

Frankly, I don't know if I am seeing this accurately. I think I am.

I agree.

That is the premise of alien dreadnaught isn't it.

EM has a track record for driving out costs and not adverse to insourcing when it makes sense. (Read the biography if you haven't already.) Is there any evidence that outsourcing is not also always seen as an option?

Panasonic cells at the GF is an interesting both/and choice. It avoids redundant transportation costs and those 'pennies' add up at scale.
As is the cell can supplier inside the GF.

Rather than debating "IF vertical integration", would be more productive to discuss/debate "how much insourcing and vertical integration"?

 

[Bobfitz1]

I find it interesting when political bickering gets so black and white, good vs evil, right vs wrong, naive vs wise. It's one big gray sludge to me, on all sides of the aisle.

False equivalency is rampant in the media and may be the single greatest cause of people voting against their true interests.
One example is media pretending that the far left is no better than the far right. The truth is there is a far greater percentage of the right wing that is way to the extreme right than there is on the left. Most of the individuals on the left are what used to be called moderates.

The best example for this forum is which political side believes in climate change science and which denies it?
Which side wants policies to move from ICE to EV? Elon Musk is both a progressive and a capitalist.