Long-Term Fundamentals of Tesla Motors (TSLA)

[pz1975]

Tesla: The Origin Story - Business Insider

Very interesting article describing the origin of Tesla. Lots of cool stuff I hadn't heard before.

 

[AudubonB]

I could post this either here or in the "General Macro" thread. I'll put it here.

(Happy Thanksgiving, all you other USA folks....)

Today's (yesterday's?) announcement by the EU has the potential of being nicely important for Tesla Motors. Here are the two salient paragraphs from the AP, emboldeneds are mine:

The European Union's executive has proposed a plan to boost investment in the bloc's flagging economy by 315 billion euros ($380 billion) by attracting reluctant private investors with guarantees and seed money. Experts warn, however, it alone will not be enough to restart growth.
European Commission President Jean-Claude Juncker said Wednesday that the long-awaited plan will use 21 billion euros in money from EU institutions to entice spending on projects in education, transport, the digital economy and the environment.

This would play directly into Tesla's quasi-formally announced plans (1) to build a vehicular factory in Europe (adding to Tilburg, possibly?), and (2) to construct a gigafactory in Germany. Either or both of these projects fit the Commission's proposal to a tee (cue in Tesla "T" here.... )

 

[Jack6591]

European Union unveils $380-billion investment plan to kickstart growth - Economic Times

 

[32no]

So I sent a question to Jeff Evanson of Investor relations a question about European expansion and financial reporting. Here was the body of the question:

In Europe, Tesla seems to be undergoing rapid expansion. For example, Tesla has recently moved into a new assembly plant in Tilburg, Netherlands that is almost triple the size of the old one. Moreover, Tesla has built 10 superchargers in 7 days. Finally, 20/27 stores that are labeled "coming soon" are in Europe, and 13/37 service centers labeled "coming soon" are in Europe as well. So three questions about this:

1. Is this due to high demand for the All Wheel Drive Model S?
2. Is this European expansion happening in order to fill demand or create it?
3. Why isn't this happening in China, where Tesla has said that it will have a lot of growth?
Next, I would like to ask about how Tesla reports earnings. Most other car companies report their R&D as a Cost of Goods Sold (COGS) which results in less gross profit. Tesla reports their earnings as an operating expense in the same line as SG&A which is after gross profits. What is the main reason for this difference, and what does Tesla do differently that allows this kind of reporting?"

​

I did get a response that clarifies what we have conjectured here on TMC, although it was a bit vague:

"We develop geographic markets to expand and support the market for our products and we are doing this globally as our resources permit.

Tech companies like Tesla invest heavily in RD and for a broader set of reasons than incremental product development, thus classifying as opex is more accurately reflects the purpose of this spending."

 

[pGo]

Marc Andreessen talks about Disruption in 17 tweets. I tried applying it with Tesla and it makes a lot of sense.

Marc Andreessen teaches startups what disruption is really about (in 17 tweets) | VentureBeat | Entrepreneur | by Jordan Novet

 

[Derek Vinyard]

Northland and Stifel reiterated their price targets

Northland Securites' Colin Rush reiterated his "outperform" and PT of $298.
Stifel his "buy" recommendation and PT of $400.

StreetInsider: Northland Capital Markets analyst Colin Rusch reiterated an Outperform rating and $298 price target on Tesla Motors (NASDAQ: TSLA) after he re-evaluated his thesis on TSLA amid the recent drop in oil prices. Rusch view Tesla's prospects as more diverse and robust than they had previously considered. This view in part because they see Tesla as a value-added battery company. Also, Tesla vehicle sales are driven by performance, user experience, and environmental concerns - not gas prices.On the value-added battery business, Rusch commented, "In considering the potential for energy storage to be a disruptive technology in the 600GW diesel generation market, reach 5%-10% (or 250GW-500GW) penetration of the global 5TW grid, and be instrumental in electrifying areas for the 1.3B people globally who do not have electricity, we believe TSLA’s opportunity is substantial in this arena and certainly could consume more than the 15GWh annually it has targeted by 2020, especially when considering that most batteries for this application are sized energy to power ratios of 2:1 or 4:1."
He added, "In looking at the margin potential for energy storage based on cost-out trajectory and current value proposition, we believe stationary energy storage may prove to be as profitable if not more so than the transportation business. We note that stationary storage solutions are selling for $0.65-$2.00/Wh presently with adoption curves showing dramatic market opportunity growth at prices <$1.00/Wh. With its gigafactory fully ramped, we believe pack costs can reach $0.30/Wh or less. Comparing the potential profit pool for vehicles vs. stationary storage, we see a somewhat similar GM/Wh metric which approximately reaches $0.25-$0.30/Wh. If we take
TSLA’s target for 50GWh of sales by 2020, such margins would imply $12.5B-$15B of gross profit, well ahead of our current estimate for $8.9B. Further, by diversifying the company’s end markets, we believe its ability to reach such gaudy numbers is somewhat de-risked as the company will have multiple options for monetizing its energy storage production."
Commenting on Tesla in the context of lower oil prices, the analyst said, " As we assess the fuel efficiency of TSLA at ~3miles/kWh in the context of lower oil prices we are reminded that Tesla vehicle sales are driven by performance, user experience, and environmental concerns. Based on our estimates, annual savings versus a comparable vehicle at $60/bbl oil comes to $1,100/year while at $100/bbl oil annual savings come to $2,160."

 

[jhm]

Colin Rusch is making two very important points. First, he is identifying the target for disruption in the stationary market as specifically diesel power generation. That is, Tesla is going after ICE using transport fuels. This is where Tesla has an energy arbitrage advange. This enables him to size the market. It would be helpful if he specifically price diesel power prices for comparability batteries. Instead he goes round about to say that current storage alternatives start at $650/kWh.

Second, he introduces a very important metric, GM/kWh. (Note I am translating from Wh to kWh because this is more conventional at TMC.) He speculate quite conservatively that Tesla can produce a pack at $300/kWh cost, whence selling at a price of $600/kWh yields a GM of $300/kWh. While many of us here belive the Gigafactory can produce at half that cost or lower, the essential point is the GM/kWh that can be realized.

GM of $300/kWh is a critical value for Tesla. It is the return that puts stationary at parity with automotive. Consider that Tesla sells the average MS 85 at about $100,000 with a GM of about $25,000 / car. This works out to $294 GM/kWh (= 25000/85). So at $300 GM/kWh, Tesla is pretty indifferent to selling packs into the automotive or stationary markets. Either way, Tesla is making the same money by displacing ICE burning diesel to make power or displacing ICE burning gasoline to propel cars.

So long as there are not yet enough Gigafactories in the world, it makes sense for Tesla to price all products roughly at GM/kWh parity and let competing markets determine the product mix. An application of this is to consider the Model 3 with a 50 kWh pack. This should be priced so that GM/car is $15,000. If the ASP $50,000, this would imply pricing at a 30% markup. At such a price, Tesla becomes indifferent to selling more MS, MX, M3 or stationary and will be content to allow consumer demand to decide the product mix. I think Tesla leadership may be inclined to price this way. Currently, Tesla prices the Model S internationally on a GM/car parity basis. They could, for example, price their cars higher in China where that market is more willing to accept a premium for imported cars. From a customer relations point of view, they speak of pricing fairness, but from a GM point of view this approach means Tesla values each order the same regardless of which national market it comes from. This gives Tesla the freedom to more or less fill orders as they are recieved and not worry about the profit margin implications of which orders get filled first. So the relative consumer demand in each national market determines the allocation. If the Chinese place twice as many orders as the Amaricans, then twice as many deliveries will go to China. Of course, there are ramp up issues for the whole support network that presently constrain China deliveries, but my point is about a longer term equilibrium. Eventually, the support network in China will be built up so that the Chinese will be just as well served as the Americans at which point the allocation of deliveries will reflect the frequency of orders. As as Tesla moves new products into new markets, there will always be short term ramp up issues. Pricing on a GM/kWh parity basis simplifies the situation by removing certain product profitability considerations as drivers of logistical complexity.

 

[jhm]

EV sales robust in declining oil price environment

Latest figures from EVObsession.com reveal that November BEV sales (excluding Tesla which refuses to report monthly sales) are 4616, up 87% from a year ago and up 5.4% from October. This shows little suggestion that declining oil prices inhibit demand for BEVs. The story for PHEVs is different. Sales in November were 3609, down 26% from a year ago and down 3.4% from the prior month. The longer term trend is that consumers are choosing pure electrics over plug-in hybrids, and oil price declines over recent months is not impairing electrics.


One theory is that hybrids of all sorts will take a bigger hit from declining oil prices than will pure electrics owing to the fact that electricity is much cheaper than oil. So the fuel savings for electrics is much bigger than for hybrids. As gas prices come down the spread for hybrids becomes negligible while it remains substantial for electrics. So for all the FUD about cheap gas putting the brakes on Tesla it may be the hybrid makers that need to worry.


Nissan LEAF Breaks November EV Sales Record
Nissan LEAF, Chevy Volt, BMW i3 Electruc Car Sales

 

[jhm]

According to Clayton Christiansen, Tesla is not a disruptive innovator. He sees the electic car as a sustaining technology, and his theory presumes that disruption is always from the low end of the market. I've read his book, but I think he's off the mark here. When the iPhone came out, he thought it was not a disruptive technology, but later he amended his view when he realized that the target of the disruption was not Nokia, but rather the PC. I think he is making the same mistake. Tesla is not disrupting BMW by making high end cars. That is the wrong target. Tesla is disrupting the internal combustion engine with laptop batteries. Batteries are the low end technology from another market that was never intended to replace high end automobile engines. To the extent that automakers tie their business model to the ICE, they will be disrupted by EVs. I just do not think Clayton has looked deeply enough into what Tesla is actually doing to make such pronouncements, even if he is the originator of the concept of disruptive technology. Someday when it becomes clear that nobody wants a gas engine anymore because batteries are cheaper and have better performance, he will have to recognize that a major disruption has taken place.

Innovator's Dilemma: Clayton Christensen on Truly Disruptive Ideas - Businessweek

Another disruption that is going on is that as ICE is displaced by battery packs, this enables cheap electricity to displace relatively more expensive transportation fuels. So this disrupts the whole oil industry. While I can see Clayton arguing that the EV is just an enabling technology for BMW, I can't see the EV as enabling Exxon. Cheap, mobile, and high performance battery packs just do not fit neatly in to the business model of an oil producer.

 

[Citizen-T]

While we are discussing the Innovator's Dilemma, I think there is a core principle in that book that people seem to forget when they try to identify a disruptive technology. Christensen takes great pain to show how the incumbents are held hostage by their customers. The new technology always sells to a new set of customers with different needs.

You might think in the case of Tesla that the customers are the same, but the truth is that the incumbents don't sell to car buyers, they sell to dealers. And, in classic fashion, the dealers don't want the disruptive technology. This is at the core of why Tesla has succeeded where other EVs have failed. The big auto companies are held hostage by their customers: the dealers.

 

[Tasmanian Devil]

Hold fast guys. If You want to go long, now is a good time to add. I will buy some more on monday.

 

[daniel Ox9EFD]

Latest figures from EVObsession.com reveal that November BEV sales (excluding Tesla which refuses to report monthly sales) are 4616, up 87% from a year ago and up 5.4% from October. This shows little suggestion that declining oil prices inhibit demand for BEVs. The story for PHEVs is different. Sales in November were 3609, down 26% from a year ago and down 3.4% from the prior month. The longer term trend is that consumers are choosing pure electrics over plug-in hybrids, and oil price declines over recent months is not impairing electrics.


One theory is that hybrids of all sorts will take a bigger hit from declining oil prices than will pure electrics owing to the fact that electricity is much cheaper than oil. So the fuel savings for electrics is much bigger than for hybrids. As gas prices come down the spread for hybrids becomes negligible while it remains substantial for electrics. So for all the FUD about cheap gas putting the brakes on Tesla it may be the hybrid makers that need to worry.


Nissan LEAF Breaks November EV Sales Record
Nissan LEAF, Chevy Volt, BMW i3 Electruc Car Sales

I have a theory on why this is - BEV buyers are still early adopters, while PHEVs and hybrids sell to people who buy to save money. If this is true, it will unlikely affect Tesla any time soon (except the stock price), but it will limit the potential market if / when Tesla will want to introduce a 25k $ EV, that is, if oil prices are not back up by then. To check this theory, it will be worthwhile looking at what models took the most hit.

 

[Auzie]

Disruptor today, likely to be disrupted in the future (very distant I hope)

While we are discussing the Innovator's Dilemma, I think there is a core principle in that book that people seem to forget when they try to identify a disruptive technology. Christensen takes great pain to show how the incumbents are held hostage by their customers. The new technology always sells to a new set of customers with different needs.

You might think in the case of Tesla that the customers are the same, but the truth is that the incumbents don't sell to car buyers, they sell to dealers. And, in classic fashion, the dealers don't want the disruptive technology. This is at the core of why Tesla has succeeded where other EVs have failed. The big auto companies are held hostage by their customers: the dealers.

Agree with you that dealers do not welcome disruption in their business. No one does.

I disagree that car makers are held hostage by their dealers. Imo they are in a self inflicted hostage situation, being held hostages by the profitability of their current business models.

That is a self inflicted trap that is too familiar to many individuals on a personal level. Choosing a secure career path rather than a risky venture is quite common choice on a personal level.

Profitable businesses are even more risk averse than individuals, stakes might be higher and constraints much tighter.

One distant day Tesla is likely to find itself trapped in its own business model and size, unable to move and change quick enough to stop disruptive newcomer from taking its customers away with a better offering.

It is very difficult hence unlikely to build a profitable capital intensive business whilst simultaneously developing technologies that will disrupt the same business within the same organization.

 

[Citizen-T]

Agree with you that dealers do not welcome disruption in their business. No one does.

I disagree that car makers are held hostage by their dealers. Imo they are in a self inflicted hostage situation, being held hostages by the profitability of their current business models.

That is a self inflicted trap that is too familiar to many individuals on a personal level. Choosing a secure career path rather than a risky venture is quite common choice on a personal level.

Profitable businesses are even more risk averse than individuals, stakes might be higher and constraints much tighter.

One distant day Tesla is likely to find itself trapped in its own business model and size, unable to move and change quick enough to stop disruptive newcomer from taking its customers away with a better offering.

It is very difficult hence unlikely to build a profitable capital intensive business whilst simultaneously developing technologies that will disrupt the same business within the same organization.

Everything you've said is discussed at length in the book.

I didn't say that being held hostage by your customers is the only reason that the Innovator's Dilemma is so hard to beat. There are a number of aspects to the theory and being held hostage is only one. I pointed it out only because we were talking about why people that are well aware of the Innovator's Dilemma (such as Clayton Christensen himself) mistake Tesla for a business with a sustaining technology rather than a disrupter. Many people miss the subtlety that traditional automakers (in the U.S. at least) sell to dealers, not to drivers. It is so telling that in order for Tesla to find success they had to find a new customer for their product. Elon has said, this would never work if they had to sell to the dealers. That is classic Innovator's Dilemma.

The traditional manufacturers are absolutely being held hostage by their customers as it is described in the book. That doesn't mean it is their only challenge. You pointed out some others. There are even more layed out in the book.

As for Tesla's future, I agree that it will eventually be on the wrong side of the Innovator's Dilemma. I just hope that they have the vision to see it happening, and that, either Elon is still there and has the ability to strong arm his company through the change (like a Steve Jobs). Or, if he is not there, that management has the presence of mind to take the easy road and spin of an entirely separate entity which is sized appropriately for the new market and made up of the best and brightest from the company with the intention that one day this new entity will overcome Tesla and that Tesla's shareholders will profit handsomely from it.

We can see both of these strategies at work today with Carlos Ghosn playing the role of the strong willed chief executive that has the vision and through pure will tries to force his company to follow him to the future, the whole time under fire from the media, the shareholders, the board, and his own employees. Unfortunately for him, I don't think he has the power to do it. It is an incredibly rare power. I think Elon could do it, Steve Jobs certainly could. I wish Goshen the best, but (as Elon would say) I don't know that success is one of the possible outcomes. On the other hand, we see Toyota and Daimler taking one of the easier routes by investing in a completely separate entity (Tesla). Though, both invested far too little and have recently pulled back or out of those investments and decided to address this new market from the within the main company (history says that won't end well).

 

[Auzie]

Everything you've said is discussed at length in the book.

I didn't say that being held hostage by your customers is the only reason that the Innovator's Dilemma is so hard to beat. There are a number of aspects to the theory and being held hostage is only one. I pointed it out only because we were talking about why people that are well aware of the Innovator's Dilemma (such as Clayton Christensen himself) mistake Tesla for a business with a sustaining technology rather than a disrupter. Many people miss the subtlety that traditional automakers (in the U.S. at least) sell to dealers, not to drivers. It is so telling that in order for Tesla to find success they had to find a new customer for their product. Elon has said, this would never work if they had to sell to the dealers. That is classic Innovator's Dilemma.

The traditional manufacturers are absolutely being held hostage by their customers as it is described in the book. That doesn't mean it is their only challenge. You pointed out some others. There are even more layed out in the book.

As for Tesla's future, I agree that it will eventually be on the wrong side of the Innovator's Dilemma. I just hope that they have the vision to see it happening, and that, either Elon is still there and has the ability to strong arm his company through the change (like a Steve Jobs). Or, if he is not there, that management has the presence of mind to take the easy road and spin of an entirely separate entity which is sized appropriately for the new market and made up of the best and brightest from the company with the intention that one day this new entity will overcome Tesla and that Tesla's shareholders will profit handsomely from it.

We can see both of these strategies at work today with Carl Goshen playing the role of the strong willed chief executive that has the vision and through pure will tries to force his company to follow him to the future, the whole time under fire from the media, the shareholders, the board, and his own employees. Unfortunately for him, I don't think he has the power to do it. It is an incredibly rare power. I think Elon could do it, Steve Jobs certainly could. I wish Goshen the best, but I don't know that success is one of the possible outcomes. On the other hand, we see Toyota and Daimler taking one of the easier routes by investing in a completely separate entity (Tesla). Though, both invested far too little and have recently pulled back or out of those investments and decided to address this new market from the within the main company (history says that won't end well).

Regarding Tesla or any other business trying too hard to change to accommodate non fitting disruption, I am not sure that the fight for survival is worth it.

It might be a better business choice to fold off as a business and let the new businesses emerge unencumbered with unfitting structures and legacy costs. When a business realizes that some parts of it might be on a dead end track, then they wrap up the dead end bits and sell off or 'divest'. If such choice truly makes better business sense, then ice car makers current choices are easier to understand.

Business disruptions and transformations may be undesirable to affected businesses but we as consumers greatly benefit from the changes.

 

[Robert.Boston]

The cycle of disruption/growth/mature has different rhythms in different industries. In the restaurant scene, it's measured in seasons; software, years. The auto industry? At a minimum, the cycles in the auto industry are measured in decades. We have a sample size of one, since the last "disruptor" was Henry Ford. It's taken a century for the situation to be set up for disruption, and the rare combination of talent, vision, and wealth that Elon brought. Whilst I'm sure that Tesla will itself be disrupted, I think there's a reasonable chance that it will take another century.

 

[Cattledog]

The cycle of disruption/growth/mature has different rhythms in different industries. In the restaurant scene, it's measured in seasons; software, years. The auto industry? At a minimum, the cycles in the auto industry are measured in decades. We have a sample size of one, since the last "disruptor" was Henry Ford. It's taken a century for the situation to be set up for disruption, and the rare combination of talent, vision, and wealth that Elon brought. Whilst I'm sure that Tesla will itself be disrupted, I think there's a reasonable chance that it will take another century.

I'm not sure. Tesla's biggest disruption is probably how the car is propelled (electricity). Second tier would be how it's fueled, how it's sold, how it's updated, how it's internally controlled (screen), etc.

But right on the horizon is a big one - how it's controlled, meaning autopilot or self-driving cars. Tesla might get there first and best as it makes sense that an electric car is more precisely controlled than an ICE car, but it may not. It might be disrupted by a legacy company but I highly doubt it. It will more likely be disrupted by a company (Google, others?) that doesn't deal as much on a day to day with the actual pains of making cars. That was Tesla's model to get to electric cars. I think self-driving cars will be a bigger innovation than electric vs. gas, and I think they are coming in the next 5-20 years, not a century.

But I've been wrong a lot on these forums...

 

[Auzie]

I'm not sure. Tesla's biggest disruption is probably how the car is propelled (electricity). Second tier would be how it's fueled, how it's sold, how it's updated, how it's internally controlled (screen), etc.

But right on the horizon is a big one - how it's controlled, meaning autopilot or self-driving cars. Tesla might get there first and best as it makes sense that an electric car is more precisely controlled than an ICE car, but it may not. It might be disrupted by a legacy company but I highly doubt it. It will more likely be disrupted by a company (Google, others?) that doesn't deal as much on a day to day with the actual pains of making cars. That was Tesla's model to get to electric cars. I think self-driving cars will be a bigger innovation than electric vs. gas, and I think they are coming in the next 5-20 years, not a century.

But I've been wrong a lot on these forums...

We are all looking at a crystal ball here when talking, all equally wrong...:smile:

My crystal ball disruption predictions:

Car wireless recharge
Car ownership restructuring, away from private ownership
Car control system advancements

Timeframe perhaps in decades

 

[woof]

The auto industry? At a minimum, the cycles in the auto industry are measured in decades. We have a sample size of one, since the last "disruptor" was Henry Ford.

Perhaps for the industry as a whole, but for American manufacturers the Japanese entry into the USA market in the 70s was certainly disruptive. The Honda Civic, being a very small fuel efficient car hit at exactly the same time as the 1973 Oil embargo. And it didn't rust into dust after 3 years like most American cars at the time.

 

[chickensevil]

I have a theory on why this is - BEV buyers are still early adopters, while PHEVs and hybrids sell to people who buy to save money. If this is true, it will unlikely affect Tesla any time soon (except the stock price), but it will limit the potential market if / when Tesla will want to introduce a 25k $ EV, that is, if oil prices are not back up by then. To check this theory, it will be worthwhile looking at what models took the most hit.

I was talking with a fellow EV enthusiast who was a Volt owner and I think his description of why he is adimant that he will never drive a non EV again should help with this discussion.

To frame this, this is a guy who has put something like 26000 mi on his volt with like 22000 of them being all electric miles. He says he doesn't have range anxiety, he has gasoline anxiety, because it pains him to have to put fuel in his car.

The reason he goes to such pains to stick to EV only mode? Because it is just an all around better driving experience. Even with the slower volt it still gives him that giddy feeling and there is still some of that pure torque and drive even in the volt.

I have talked to Leaf owners who have expressed similar comments. Tis counters to his very own conversation about owning a Prius. He hated it. Every minute of it. Drove it to save money, but that was the only reason. It wasn't a fun ride at all. And that is the problem with most straight hybrids. This experience is even more transcendent on pure EVs as opposed to the Plugins but I think it is there all the same. When Tesla pushes their 35k car it is not just going to be cheap to own, and also look fantastic, but it is going to be a blast to drive.

Why do people loath after and sink tons of money into big gas guzzling trucks or flashy sports cars? Because they are a blast to drive. So what if I told you you could have both? Of course you would instantly go for the EV every time. As long as Tesla refuses to make a golf cart EV, I don't see there ever being a demand problem for them.