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FX impact potential/scenarios

Discussion in 'TSLA Investor Discussions' started by jhm, Jan 21, 2015.

  1. jhm

    jhm Active Member

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    Good reading. There's alot of FUD tone creeping into to this. It not clear how much of this is coming from Jonas and how much from the journalist writing up Jonas's note. In any case, there's alot of innuendo. This happens when a writer wants to cast something in a negative light, but cannot say exactly what the problem is. Then there's the suggestion that if the reader were perceptive or sufficiently aware they would know for themselves what those unstated problems. This is a form of flattery aimed at getting the reader to nod along that surely they are smart enough to have this all figured out and do not need consider any actual data to substantiate the claim.

    For example, the suggestion that the reader ought to make their own negative FX adjustment. Merely suggests that there may be a problem here, but in stead of working through the assumptions and adjustments, just talks over the head of anyone who might not have the accounting background to make such adjustments. So either you're supposed to pretend that you already know and agree with this or feel humiliated and just take them at their word. The fundamental problem with actually doing the "exposure to a stronger dollar" (more jargon to inflate or put down the reader) is that Tesla bases its international prices on the US price, so that it makes the same margin on a car regardless where it is sold. Granted there can be a time lag between when exchange rates change and when they adjust prices accordingly, but this is a transitory issue entirely within Tesla's timeling and discretion. Moreover, since Tesla remains supply constrained, there is no loss of revenue for Tesla when they price consistently under prevailing exchange rates. So whatever obscenity "exposure to a stronger dollar" may suggest, it really is a small issue for Tesla. Tesla can reset prices anytime it so chooses.

    So anyway the author here is definitely playing mindgames with the reader. Classic FUD rhetoric, you nailed it.
     
  2. Auzie

    Auzie Tree Hugger Member

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    #2 Auzie, Jan 21, 2015
    Last edited: Jan 21, 2015
    jhm, my understanding of AJ concerns are different. The concern about appreciating USD has nothing to do with accounting adjustments in my head and all to do with difficulties of selling much more expensive car in markets whose currency goes down against USD.
     
  3. CHGolferJim

    CHGolferJim Member

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    Do we have a firm idea of the domestic content of an S85, for example? Multiple international manufacturing locations for international markets is a means of reducing the exposure to $/fx fluctuation.
     
  4. mitch672

    mitch672 Active Member

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    not exactly. mostly U.S. content except for:

    Lion Batteries (Panasonic - Japan), eventually the Gigafactory in Nevada
    Driving stalks/steering column (Damler - Germany)
    17" touchscreen & speedometer LCDs - likely Japan or China
    motors wound in Fremont, DC-DC inverter, frunk, battery enclosure,Custom PCBs, glass (windows/wndshield/Pano roof) all likely U.S.
    Tires - multiple sources
    Aluminum roll stock - Alcoa (U.S.?)

    I could be wrong on some of it, there was an info graphic I saw at one point that had the mfr and country of origin...
     
  5. vgrinshpun

    vgrinshpun Active Member

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    We do. According to Elon about half of the car originates at Tesla and another 15 to 20% in US, for a total of 65-70% of US content. The information comes from a video of Elon talking to Michigan owners during this year's NAIAS (time mark 4:12)

    Elon Musk 1/13/2015 at NAIAS - YouTube
     
  6. Auzie

    Auzie Tree Hugger Member

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    If euro and USD reach parity, as some economists predict with coming ECB QE, that will make Tesla almost 20% more expensive in Europe whilst the price of BMW will go down to the same extent in US.
     
  7. gene

    gene Active Member

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    I'd be surprised to see BMW prices come down. Prices go up, they rarely come down. Oh...unless you are talking Chevy Volts and Nissan Leafs.
     
  8. jhm

    jhm Active Member

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    Do you see this as severe enough to cause Tesla to slow down the ramp up of production or to lower their prices valued in USD? Are you worried about demand?

    Might this also be an opportunity to set up manufacturing and other infrastructure in Europe? A 20% discount on a Gigafactory would be pretty nice. Longer term, making a larger portion of the cars in Europe would allow pricing to be built up from local costs.
     
  9. Auzie

    Auzie Tree Hugger Member

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    #9 Auzie, Jan 22, 2015
    Last edited: Jan 22, 2015
    The best Tesla could do if US $ appreciates is to saturate US market to its limit and not export as much. Elon mentioned building a factory in Europe but that might take time. There is a strong pressure on US $ to appreciate, now. It already appreciated.

    Pressure on US $ to appreciate:
    - Fed hike
    - US economy strength
    - strong demand worldwide for safe currency
    - stock market confidence

    Pressure on Euro to go down:
    - SNB unpegging franc
    - sluggish (depressed?) Euro zone economy
    - ECB QE easing
    - Eurozone periphery drag
    - Potential new flash points in Europe (?)

    It seems likely that US $ and Euro exchange rate will come close to parity, if Fed does not act to prevent it.

    Sp of businesses that rely on export are extremely sensitive to exchange rate movements.

    Recent unpegging of Franc and appreciation against Euro provides an excellent illustration of the effects of currency appreciation on local businesses and markets. Swiss index dropped 8.7% in biggest single day loss, whilst Eu stocks rose few percents. I have some shares of Australian businesses which export their products. Any currency fluctuation immediately flows directly into sp corresponding move.

    US $ appreciation might cause similar pressure on US based export businesses. Tesla sp will be sensitive to US $ fluctuation if it derives revenue from overseas.

    If Tesla does not adjust its product pricing overseas with US $ exchange rate movements, it's revenue will fluctuate with exchange rate movements, in an uncontrolled way. No investor will welcome that.

    Lets imagine that US $ and Euro reach parity.

    If that happens, and Tesla does not adjust the price in Europe (unlikely) then Tesla will suffer losses as it is selling in Euro market for less than it sells in US market.

    If Tesla adjusts the price then Europeans will get significant price increase of Tesla car. European cars imported to US will in turn become much cheaper than they are now.

    Currency appreciation is not good for local export businesses. My bet is that US Fed will not let US $ appreciate too much, it might act to prevent it. Fed might delay rate hike.
     
  10. jhm

    jhm Active Member

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    #10 jhm, Jan 22, 2015
    Last edited: Jan 22, 2015
    Auzie, so your concern is more about the share price than about any impact on Tesla's top and bottom line. Am I reading your response correctly? It's a similar kind of issue as the oil crash where the damage happens to shareprice but actually has no impact on sales and profitability.

    Within the realm of market perception and shareprice, we might easily conflate cheap oil and strong dollar, but they don't impact all markets in the same way. In the US, we have cheap oil in USD prices which decreases the savings for US Tesla buyers, but a strong dollar is not a problem for US sales. However, in Europe, oil prices are not cheap in local currencies that have lost value to the USD. So Tesla buyers in Europe still enjoy substantial fuel cost savings while Tesla may need to adjust prices for current exchange rates. So these two issues are not additive. They are inversely related and complementary. Shareprices, however, are often overdetermined where the market corrects for too many issues with too much weight attributed to each issue. The nature of the game is that as issues like cheap oil or a strong dollar emerge in market consciousness, they are understood with little precision and much fear, then later the market gets a little more perspective and realizes its not such a big issue after all. It took several weeks for the news narrative to go from "OMG, cheap oil is going to destroy Tesla" to recognizing that Tesla buyers might not be so gas price sensitive after all.

    The common misperception to all of this is the belief that Tesla is demand constrained. So macro issues are always filtered through the lens of how might this reduce demand for Tesla. But fundamentally, if Tesla has sufficient demand for its limited supply, then it will continue to grow on a supply constrained basis. So while the market may overreact to percieved macro threats, the Tesla investor should not be worried. The first test for any sort of macro threat is whether it is big enough to overcome the demand-supply gap and actually impact sales. If it's not that big, then the Tesla investor wants to buy on any weakness in the stock price. The second test is how will this issue impact supply. So in the case of cheap oil, it actually lowers Teslas productikn costs and could be beneficial to growing Teslas supply. In the case of a weak Euro, Tesla has the opportunity to expand production and distribution in Europe at a discount. Naturally, the cost of expansion is a longterm issue, but we have no way of knowing how long current exchange rates may last. So if a weak Euro is a longterm phenomena, then Tesla has options to make good on that opportunity. On the other hand, if this is just a transitory issue, then it will have very little impact on Tesla's fundamentals. That said, volatility in exchange rates will always be a concern, so developing regional manufacturing is a natural way to hedge currency risk. So there are enduring advantages to building plants in both Europe and China regardless of exchage rates. The point is that the Tesla investor will want to understand macro issues can create both challenges and opportunities for longterm expansion. To me, a strong dollar signals an opportunity to grow manufactuing where currencies are weaker. Can we trust Tesla to be able to move opportunistically?

    Note that Jonas' DCF model suppoerting his $280 PT goes out 15 years and derives half of its value in the residual value. So if more than half the value is derived from where Tesla sits 15 years from now, we really need to keep our eye on longterm business development. So when an issue like FX risk comes along, we should be asking how does Tesla address this for long term growth. Naturally, the stock price will overreact to lots of transitory issues and Tesla investors will want to have the perspective to buy on weakness while the longterm prospects are strong.
     
  11. breser

    breser AutoPilot Nostradamus

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    Just thought I'd point out that there is a larger time lag between the price being set and Tesla actually getting paid than you seem to be implying. Tesla sets price when you order the car. If they change their pricing by the time you receive and pay for the car it doesn't matter, you pay what the pricing was when you ordered. For international orders there can be a significant lag in there. This of course can benefit Tesla if conditions (price, FX) move against the customer. But it can also hurt Tesla.

    They could of course change this behavior, but it wouldn't be something they can do quickly because it's specified in their contracts with purchasers.
     
  12. jhm

    jhm Active Member

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    Agreed, and for such short term risks there are financial hedges Tesla could use. Perhaps someone more knowledgeable on Tesla's balance sheet could tell us what hedges Tesla is actually using if any.

    I wonder how many on-the-fence buyers in the Euro Zone are placing orders for the Model S now before the prices go up. If I were in that situation, I'd want to lock it in ASAP.
     
  13. chickensevil

    chickensevil Active Member

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    Given their comments from the last ER about this very subject, it sounded like they aren't hedging currency at all. They just adjust the price as they need to. There was a good 6 months where they were making money on the exchange rates, they lowered the price, then a good 6 months where they were losing money on the exchange rates, so they raised the price. I am sure it will be a bit of back and forth like that going forward.
     
  14. Auzie

    Auzie Tree Hugger Member

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    jhm, sorry for a late reply that comes after a few pages, that is due to a time difference, makes for an awkward discussion.

    My main concern regarding $ appreciation is a loss of revenue for Tesla. As Breser correctly pointed out, there is a long lag between car orders and delivery. People that ordered months ago will pay in their local currency which is now worth less in $. This effect will become more and more pronounced as Tesla derives more revenue from exports. $ exchange rate did not matter in 2013 when most cars were sold for $.

    In cases of currency appreciation, market recognizes this loss of export revenue and reacts accordingly. That has not happened with Tesla yet as Tesla was not large exporter in the past.

    Going forward, the $ appreciation and Euro weakening can not be ignored by Tesla. This issue is very simply resolved by selling cars in $, however that is not a practice when selling cars. Hedging is expensive and cumbersome. The solution may be, as you pointed out, to make cars in markets that buy them.

    Regarding demand for Tesla cars, I think that if Tesla keeps up their impeccable brand by making great cars, they will always have enough customers.
     
  15. eepic

    eepic Member

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    I recall looking into why the Model S didn't qualify for NAFTA exemptions for Canada, it's something like 45% North American made by value (I think this was as of late 2013), just missing the 50% threshold for exemption. I recall a large line item was the battery cells imported from Japan. If there is anything in the MS from Canada or Mexico, then the US content would be just below that.

    If there's a discrepancy between this number and Elon's recent comments in Detroit with regards to parts from Michigan, it could due to any of these:
    - Elon meant number of parts, not value (or some other metric difference)
    - the breakdown has changed over time
     
  16. jhm

    jhm Active Member

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    No worries. Perhaps all this discussion of FX risk belongs in another another thread, but I'd like to toss out one more hedging idea.

    Suppose Tesla recieves an order in the EU for a car priced at 125,000EUR to be delivered in 4 months. With this contract, Tesla becomes obligated to produce a car that costs, let's say 75,000USD to produce and ship while it become long on 125,000EUR available in 4 months. This does two things it requires Tesla to come up with about 75,000USD in working capital to make fill the order, and it exposes Tesla to changes in the EUR to USD exchange rate. A convenient way to handle both issues is to borrow, say 100,000EUR from an EUR line of credit when the order is confirmed. The borrow money is immediated exchanged for about 88,000USD at current rates. This provides Tesla with working capital at say 6% for easy math and some margin (13,000USD). Four months later, the car is delivered and Tesla recieves $125,000EUR from the customer. It then pays back the 100,000EUR plus 2000EUR interest on the credit line, and retains 23,000EUR to fund operations in the EU. The exposure to FX risk is virtually eliminated so long as the full 23,000EUR proceeds are fully used within the EU.

    ECB QE should help keep the credit in the EU down. So long as credits from all foreign markets do not exceed working capital required for all cars made, then there is no unnecessary borrowing going on.

    This approach also extends to longterm debt. Suppose Tesla acquires a factory in the EU. It could finance a portion of it in debt denominated in Euros so that payments can be made from the proceeds in EU sales. Any sort of obligation in Euros can offset FX risk. Thus, if they began a building project this year, it could start hedging Euros years before the plant ramps up production.

    Of course, forward contracts and swaps can also be used to avoid currency translation adjustments to P&L as a result of holding foreign denominated debt, but that's largely just a concern for accounting.
     
  17. Auzie

    Auzie Tree Hugger Member

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    Agree that this might go to some other thread, maybe mods will move us to appropriate location.

    The TSLA Fx exposure risk and sensitivity to $ fluctuations will grow as Tesla export grows. As $ appreciates, that'll put downward pressure on TSLA.

    Some businesses hedge exactly as you described. The cost of hedge may be passed onto customers. It may be cheap to hedge now as interest rates are low, but that could change and the cost of hedging might go up.
     
  18. NigelM

    NigelM Recovering Member

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    Moved. This is the new location. :)
     
  19. jhm

    jhm Active Member

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    Thanks, Nigel.
     
  20. Auzie

    Auzie Tree Hugger Member

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    #20 Auzie, Jan 23, 2015
    Last edited: Jan 23, 2015
    Tesla raised prices in overseas markets.

    • Today, 11:34 AM
      #1

      Mark E
      user-offline.png
      Member reputation_pos.png Join DateJun 2012LocationSydney NSWPosts257

      Price Increase

      Looks to me like the replacement price for my config has gone up a bit. Good news for resale, bad news for insurance cover if something happens to it!
      I noticed this after looking to configure what a base car would cost to compare against the BM etc after a chat with a colleague. Anyone else notice this?

      attachment.php?attachmentid=70092&d=1422059689.jpg

      S85, Pearl White, Pano, Tech, package, Black Leather/Lacewood, Air suspension , UHD Sound, dual chargers.




    • Today, 12:19 PM
      #2

      Daemon
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      Junior Member reputation_pos.png Join DateJan 2015LocationSydney, NSWPosts1
      Bugger! I guess its due to the AUD continuing to drop? I we end up back at about $0.75US I guess they'll add on another $5k or so to the base price.

      I was hoping to order one in the ACT in a few months - I need to wait for the supercharger to be built as I'm in an apartment at the moment.​







    Today, 01:46 PM
    #1

    hingisfan
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    Member reputation_pos.png Join DateOct 2013LocationKingston, OntarioPosts225

    Price Jump!!!

    Prices just went up!

    Base price up $3300 and tech up $300!

    SOOOOOO glad I locked in my order yesterday!

    US pricing unchanged, so definitely because of the falling loonie.​

    Model X reservation 391....CANCELLED
    ​Model S - Bought loaner Jan 22/2015, 12,000kms, Standard White, Textile, Piano Black, Standard Audio, Supercharging, no Tech






    Today, 10:52 AM
    All Your Bases
    user-offline.png
    Junior Member reputation_pos.png [​IMG]Join DateOct 2014LocationDenmarkPosts14
    Price for the Model S just vent significant up, here in Europe.​



     

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