EU Market Situation and Outlook

[maoing]

Agree, demand is an issue for TM and it's not as strong as expected. With mix of 70D, I expect US GM will be 25%, EU 15%, China 20% (inventory sale with very light margin). So the TM's GM will be 20% or slightly higher compared to 30% projection. Then TM won't be able to generate positive cash flow in Q3, Q4 is possible but won't be very significant. I guess pricing is the secret weapon Elon mentioned in last CC, this is the last resort to stimulate demand by the cost of GM.

With staggering spending projection and less cash flow generation than expection, what will TM do next? I think financing is very possible in this year and possible around the corner in April. What do your guys think?

Thanks. Very helpful. It will be difficult for TM to beat the margins with such prices, but yes, volume has to be the 1st priority. These prices also say Tesla does not take 50K or 100K demand taken for granted.

 

[pGo]

With staggering spending projection and less cash flow generation than expection, what will TM do next? I think financing is very possible in this year and possible around the corner in April. What do your guys think?

I don't believe now is the time for another offering. If they do it, market won't receive it well. Looking at the recent news from Elon, it is hard to predict what's next but best time would be to do it after showing M3 prototype and start reservation.

 

[SteveG3]

Agree, demand is an issue for TM and it's not as strong as expected. With mix of 70D, I expect US GM will be 25%, EU 15%, China 20% (inventory sale with very light margin). So the TM's GM will be 20% or slightly higher compared to 30% projection. Then TM won't be able to generate positive cash flow in Q3, Q4 is possible but won't be very significant. I guess pricing is the secret weapon Elon mentioned in last CC, this is the last resort to stimulate demand by the cost of GM.

With staggering spending projection and less cash flow generation than expection, what will TM do next? I think financing is very possible in this year and possible around the corner in April. What do your guys think?

While it seems gross margins will be down, I strongly doubt they will be 20%. Just focusing on the Model S, I suspect the U.S. will be 30% GM and roughly 65% of deliveries, the EU ~20% GM and 25% of deliveries, and China 25% GM and ~10% of deliveries. That comes to 27% GM overall for the Model S. The Model X will likely be nearly all U.S. deliveries, and I don't know of any reason to think margins for this year's 5K or so X will be any lower than what Tesla thought they'd be in February of this year when Tesla expected to be cash flow positive around Q3 or Q4.

If Tesla is down 3% on GM on 50K Model S with an ASP of $100K, that comes to about $150 million less cash this year than they thought at guidance in February. I think this is the high side of a possible reduction in cash, as they likely saw currency risk at the time guidance was given, and this may have already been accounted for. Even if it is as much as $150 million less cash this year than Tesla thought, I don't see this as necessitating a capital raise. Perhaps they will decide to do the securitization they discussed related to the lease program to pick up a bit more cash.

fwiw, I ball parked these numbers based on the fact that they are getting hurt with currency rates in Europe, and having to pay for some charging expenses for customers in China, partially offset by the price increase in the EU, and the strong popularity of the high margin P85D, and D in general.

 

[Cobos]

Also keep in mind the Norwegian krone is essentially pegged to oil prices. So a $15-$20 increase in barrel price will make the GM much better for Norway. Adding $15 to the price of oil before Q415 strikes me as fairly reasonable.

Cobos

 

[Model 3]

... it’s suicide to increase european price by 10%.

The price in NOK already has got a around 10% increase since nov. 14.

 

[AustinPowers]

Tesla seems to be intentionally keeping the European prices lower, since today they increased option prices everywhere and changed base prices as well, but they didn't increase overall European prices. They seem to be holding a general discount of ~10% as of today. Here I have charts with Norwegian prices (krone) and Euro prices compared to prices in the US. Note that I included the regulatory and documentation fee for all cars, I also excluded the 21% VAT from Netherlands cars and options. I used the most recent exchange rates.

View attachment 77369

Unfortunately the IE9 that I have here at work completely messes up the Design Studio so that I can't configure or indeed see anything clearly, but at least the base price for the new 70D is shown as 75.800 Euro which is considerably more than the Dutch price of 64.120 Euro.

- - - Updated - - -

Are you suggesting that Tesla should follow BMW/Audi/Daimler in marking up their cars by an extra 10% so that people can have the joy of negotiating discounts of between 2% and 10%? Price negotiations with traditional OEMs always end up at a price the OEM is happy with and often higher. Flat pricing seems easier and fairer to me.

The issue that you don't mention that I think is a hinderance is getting in on corporate fleet deals. My limited understanding of the German luxury car market is that very few of those cars are actually purchased by individuals, but rather are company cars.

Basically correct on the second part, the majority of cars from middle class up are registered as company cars, with some luxury cars like Ferraris that number can go up as high as 100%. (Although no one has yet convinced me why a Ferrari should be eligable as a company car - unless you own a luxury car hire service).

And yes, Tesla should be willing to negotiate on prices. Germans aren't generally well known to haggle a lot, but the more expensive the product, the higher the willingness to not accept the price shown at face value. And as apart from a house a car is the most expensive thing that most people over here ever buy in their lives, the willingness to negotiate the price is very high. Of course some people buy cars at the sticker price, but they seem to be a small minority. Especially as it is well known that one can easily get discounts of at least around 10 percent, with some more unpopular models discounts can go up as high as 40 percent, expecially on foreign cars or those that a nearing a model change (and by that I don't mean new model year, but "mark x+1" model, like with the current VW Touran that is soon to be replaced by the Mark II model, which is not just a facelift but a completely new Touran).

 

[schonelucht]

Unfortunately the IE9 that I have here at work completely messes up the Design Studio so that I can't configure or indeed see anything clearly, but at least the base price for the new 70D is shown as 75.800 Euro which is considerably more than the Dutch price of 64.120 Euro.

That's because by law prices for consumers have to include VAT (21%) in the Netherlands (actually I believe the same is true for Germany, no?) while US prices are generally listed without applicable sales taxes. Taxes obviously don't contribute to gross margins so that's why no32 used those in his comparison.

 

[Newb]

The issue that you don't mention that I think is a hinderance is getting in on corporate fleet deals. My limited understanding of the German luxury car market is that very few of those cars are actually purchased by individuals, but rather are company cars.

That's exactly the point, Robert. And looking at the Q1 registrations I'm not satisfied, but content, given the odds TM is facing over here.

To give you some perspective, first I'd like to provide you with some numbers regarding Q1 sales in the luxury sedan segment (Oberklasse):

• 7,740 new cars registered (6,710 company/fleet cars)
• TOP 5: MB S-Class (1,848), MB CLS-Class (1,315), Audi A7/S7 (1,279), Audi A8/S8 (1,091), BMW 6 series (470)
• Tesla Model S ranks #9 with 294 new registrations

=>Roughly 87% of Q1 registrations (i.e. 6,700) were company or fleet cars (gewerbliche Halter). But it's not all "fleet cars" in that segment. It's a quite heterogeneous group:

• Dealerships are registering cars for their employees as company cars or for test drives or for selling those cars further to customers (Tageszulassung) [keep in mind that dealership networks are huge; MB has well over 1,000 official dealerships in the country]
• Individuals owning their own company (or "self-employed" persons) register new cars as company cars
• And of course, all sorts of enterprises and companies, public authorities, etc. buy and register their cars as company cars / fleet cars

This means, in turn, that each quarter just about 1,000 cars of the luxury sedan segment are bought by private customers here in Germany. This is a tiny market. In this private customer list, Tesla ranks quite well in Q1 private customer registrations, given the above and the national brand bias:
#1 MB S-Class with 270 units
#2 MB CLS-Class with 199 units
#3 Audi A7/S7 with 170 units
#4 Tesla Model S with 84 units (Thereby, among private customers in the 75-125k€ price segment, Model S is more popular than Porsche Panamera, BMW 6 series, BMW 7 series, Audi A8/S8, Jaguar XJ, Maserati Quattroporte, Chevy Corvette, all Aston Martins, Bentleys etc.)

More important points:
...Car fleet managers also prefer to do business with car companies which offer a broad range of cars for different segments. Tesla has only one model on offer.
...Private individuals who are able to afford a 80k+ car, usually get a fleet/company car (MB, Audi, BMW) which they normally use for their private purposes as well

To sum up, because Tesla Motors...
...is primarily targeting the BEV early-adopter private customer who's able and willing to drop 80k+ private money for a car and is not provided with a fleet/company car by the employer (=total German market size is 1,000 units per quarter)
...is not (yet) in the position to conquer the car fleet market
and
...has to withstand FUD and national car brand bias... it is facing troubles to sell more Model S in Germany.

But I'm still very optimistic about TM in Germany, because middle and upper-middle class segments (35-65k €, i.e. MB C-/E-Class; BMW 3,4,5, Audi A4,A5,A6) are HUGE over here. Personally, I'd never spend 80k or more on a car, but I'll be first in line for Model 3. Plus, Model S is way too big for many parking lots and garages.

MX will do better than MS, too, because luxury SUVs are much more popular than luxury sedans among private customers (competitors: Porsche Macan/Cayenne; MB ML/GLE Class; Audi Q5/Q7, BMW X5/X6).

 

[Auzie]

Basically correct on the second part, the majority of cars from middle class up are registered as company cars, with some luxury cars like Ferraris that number can go up as high as 100%. (Although no one has yet convinced me why a Ferrari should be eligable as a company car - unless you own a luxury car hire service).

And yes, Tesla should be willing to negotiate on prices. Germans aren't generally well known to haggle a lot, but the more expensive the product, the higher the willingness to not accept the price shown at face value. And as apart from a house a car is the most expensive thing that most people over here ever buy in their lives, the willingness to negotiate the price is very high. Of course some people buy cars at the sticker price, but they seem to be a small minority. Especially as it is well known that one can easily get discounts of at least around 10 percent, with some more unpopular models discounts can go up as high as 40 percent, expecially on foreign cars or those that a nearing a model change (and by that I don't mean new model year, but "mark x+1" model, like with the current VW Touran that is soon to be replaced by the Mark II model, which is not just a facelift but a completely new Touran).

Negotiation does not have to focus on price. I would much prefer to see Tesla negotiate some creative service deals with fleet managers, like installing superchargers at agreed locations and keep the principle of no haggling on price intact.

 

[Newb]

I've updated some numbers in the wiki for European registrations in Q1. The final number should be around 3,500 units.

Demand for Model S is increasing throughout Europe (record registration numbers everywhere you look),
and popularity in Scandinavia and Benelux is really impressive:

->In Norway, Sweden, Denmark, Belgium and Netherlands Tesla Model S outsold all competitors in its class. (MB S/CLS, Audi A7/A8, BMW 6/7 series, Porsche Panamera).
->In Norway the MS outsold all other BEVs (except for the e-golf). In Denmark and Netherlands, the MS outsold all other BEVs.

 

[AustinPowers]

This means, in turn, that each quarter just about 1,000 cars of the luxury sedan segment are bought by private customers here in Germany. This is a tiny market.

Exactly my point. Under those circumstances, current Model S sales numbers seem quite good actually. Especially when considering that it sold more than formerly popular luxury cars like the BMW 7 series or Audi's A8/S8 - that fact actually surprised me a bit to be honest.

By the way, thanks for that excellent and informative post.

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That's because by law prices for consumers have to include VAT (21%) in the Netherlands (actually I believe the same is true for Germany, no?) while US prices are generally listed without applicable sales taxes. Taxes obviously don't contribute to gross margins so that's why no32 used those in his comparison.

Ah, ok. I thought as we were talking about why Tesla has a hard time selling its cars in Germany and because price including VAT is what matters to (private) customers, we were comparing prices incl. VAT.

 

[hobbes]

I've updated some numbers in the wiki for European registrations in Q1. The final number should be around 3,500 units.

Great, thanks. - We are still missing numbers from Switzerland, anyone got them?

 

[Yggdrasill]

Just to come with some observations on the S70D:

The introduction of the S70D will likely lead to significantly increased demand in Norway. Without the S70D, we would likely have seen a lull in reservations and deliveries until the Model X becomes available, due to the NOK/USD situation and that the initial early adopter demand has been met. I consider the S70D an *excellent* alternative for the Norwegian customer. From the viewpoint of a typical Norwegian customer, I can see no major downside to the S70D compared to the S85D, yet the S70D is almost 10k USD cheaper. This wipes out the NOK/USD changes over the past few months, and brings a lot of potential customers back to the table.

The S60 on the other hand was compromised in a bunch of ways that would put off Norwegian customers, and hence why they sold almost none of them. I think it's realistic that Tesla in Norway could achieve a 30% share of S70D, with almost none of these buyers jumping down from the S85D. That should amount to around 300-400 sales each quarter that they otherwise wouldn't have had.

Now, that's not to say we will see Tesla soar to new sales heights. This may just fill the gap between the P85D/S85D and the Model X, sustaining sales at near current levels. (Though when the Model X comes, with these sales added on top of the Model X sales and the other Model S sales, this might result in some superb sales numbers for a while.)

 

[Johann Koeber]

That's because by law prices for consumers have to include VAT (21%) in the Netherlands (actually I believe the same is true for Germany, no?) while US prices are generally listed without applicable sales taxes. Taxes obviously don't contribute to gross margins so that's why no32 used those in his comparison.

Yes in Germany the prices must include the VAT, which is 19 % on cars.

 

[techmaven]

The S60 on the other hand was compromised in a bunch of ways that would put off Norwegian customers, and hence why they sold almost none of them. I think it's realistic that Tesla in Norway could achieve a 30% share of S70D, with almost none of these buyers jumping down from the S85D. That should amount to around 300-400 sales each quarter that they otherwise wouldn't have had.

Interesting perspective. The S70D has the potentially to dramatically lower the ASP globally. It will be interesting to see what customers opt for in the next couple of quarters. Even a year ago, the Supercharger network was not as extensive in many places and buying a 85 kWh battery was considered a necessity. Now, maybe not so much, although northern places like Norway will likely always opt for bigger battery sizes due to far stronger cold weather effects. Therefore, the ASP mix in Norway is going to be very interesting.

 

[daniel Ox9EFD]

Interesting perspective. The S70D has the potentially to dramatically lower the ASP globally. It will be interesting to see what customers opt for in the next couple of quarters. Even a year ago, the Supercharger network was not as extensive in many places and buying a 85 kWh battery was considered a necessity. Now, maybe not so much, although northern places like Norway will likely always opt for bigger battery sizes due to far stronger cold weather effects. Therefore, the ASP mix in Norway is going to be very interesting.

Another take on this - Let me explain: In Norway there is a larger proportion on the population that can afford a Tesla than in the US (it is effectively half priced, equivalent to being ~$35k in US). In the US more Tesla buyers are from a small subset of the population - wealthy first movers. And wealthy first movers are more accepting to a shorter range car.
In Norway people who are not in the wealthy first mover subset also buy Tesla's, people who are upper middle class.

So
1. Tesla can sell to a broader audience than wealthy first movers, if the price is right. Which is good for model 3.
2. People who are not of that subset expect a larger range.

 

[Johan]

Another take on this - Let me explain: In Norway there is a larger proportion on the population that can afford a Tesla than in the US (it is effectively half priced, equivalent to being ~$35k in US). In the US more Tesla buyers are from a small subset of the population - wealthy first movers. And wealthy first movers are more accepting to a shorter range car.
In Norway people who are not in the wealthy first mover subset also buy Tesla's, people who are upper middle class.

So
1. Tesla can sell to a broader audience than wealthy first movers, if the price is right. Which is good for model 3.
2. People who are not of that subset expect a larger range.

I think you are correct in this analysis, and as Yggdrasil was saying too: with the 70D Tesla will expand their customer base in Norway, rather than cannibalize their own sales.

Figures came out just now showing that 23% of new cars sold in March 2015 in Norway where plugin cars, most of these pure BEVs. So the addressable market is large, even for a small country.

 

[mostapasta]

Getting back to sales... Switzerland was posted. Looks like this will be the best month and quarter for Europe so far (even without my UK guess)!

 

[slcuervo]

One per month in Spain, not bad, LOL

 

[Robert.Boston]

Moderator's Note

I moved a set of posts about the 70D announcement that did not pertain to the EU over to S70D investor implications