jhm
Well-Known Member
Thank you. You are correct that mathematical models really only set out plausible scenarios. There are a lot of twists and turns along the way.
You are definitely correct that a lot of demand has got to be created along the way. One of my frustrations is that many people seem to think about demand as some sort of fixed quantity that people are willing to buy. This is wrong in two ways. First, at a given point in time, demand is a relationship between prices and willingness to pay. Demand is not a single quantity. If Tesla were to cut all their prices by 10%, would demand go up? No, the willingness to buy would go up, but this is at a lower price point. Demand is a curve, a function of price. (Being supply constrained means that lowering prices will not increase sales despite the fact the more people are willing to buy at a lower price) What constitutes a demand increase is when buyers are willing to spend more than was the previous case. So this gets us to the second way that demand is not fixed willingness to buy at any particular price can go up or down over time. I can use myself as an example. Over a year ago I first test drove a Model S. I l was very impressed with the car, but felt is was much more car than I needed and was not willing to spend $80k for it. Had a standard 85 been priced at $45k I would have easily bought it. So my price point was somewhere between $45k and $70k. Well today I have an order $90k order for a Model S 85 to be delivered in March. What happened? If my pricepoint was less than $70k a year ago, why is it over $90k today? Several things: the Supercharger network is much better developed in my region and continues to expand into locations that matter alot to me. Tesla added Autopilot and the D option. A Tesla store opened just a few miles from my home. I've observed how Tesla treats customers and enhances existing products over time and so have greater confidence buying from them. My personal finances have improved and I feel better about my employment. Our existing cars are aging so that annual repair bills are going up. And finally, I'm tired of waiting for Model 3 to come out. I want a Tesla now. So all of these factors have conspired to add at least $20k to what I was once willing to pay. I point this out in detail because these are the sorts of things that contribute to demand creation. Some of these things are within Tesla's power to enhance like building out more superchargers and treating customers well. Other things are beyond their control like my personal finances and employment situation. So it behooves Tesla to focus on the things it can control and target prospects who have the means to buy their product. So as Tesla builds out sales, service and charging infrastructure, it is in fact creating demand. Consumers in proximity to those resources become more willing to pay higher sums for Tesla products. As consumers become willing to pay more, some of them cross a tipping point where they actually decide to make an order. Launching new products is also critical for creating demand. For example their are consumers who are willing to spend over $70k for an SUV who would not spend $40k on a sedan. So such a person may be willing to spend $90k (before incentives) on a Model X but would never sink that cash into the Model S. From Tesla's perspective, they are just as willing to sell one or the other and to price them comparably, but to the consumer the choice increases what the are willing to pay.
So let's be clear, launching the Model X is not going to relax supply constraints, but it will create incremental demand. Similarly, launching the Model 3 will not relieve supply constaints, but it will create demand. Most of what Tesla does is ultimately about creating demand. Of course, creating demand is not sufficient. Tesla actually must build out produtive capacity, cultivate a strong supply chain, and manufacture products. The idea that they will remain supply constrained for ten years or more is simply that they will create incremental demand faster than they can ramp up production. I do not think they can consistently ramp up production more than about 50% per year. Their supply chain cannot support higher rate year in and year out. But I do think they could double demand every year. Over the next 15 years: They can double their footprint 2 times. They double their product offerings (number of models) 3 times. Well developed charging infratructure can double quantities demanded 2 more times. Word of mouth can double quantities demanded 3 more times. Brand recognition and loyal can double 2 more times. So with all these things driving up demand and placing products, prices and service within reach can double the quantity demanded more than 12 times in 15 years, if supply were no contraint. Thats enough demand to blanket the whole auto market. However, production constraints even constrain the potential for demand. Delays in filling orders kills demand. Lack of supply give opportunities to competitors to fill the gap so that things like word of mouth and loyalty goes to the benefit of competitors. Slowness to market new products allows competitors some catch up time. In any given year, demand could go up by 100%, whle supply only goes up 50%. So 50% of the demand potential goelws unrealized. So if production grows by 50% per year, in 15 years Tesla is making 15 million cars. Most of the demand potential was lost to lroduction constraints. Think about this as an illustration. Suppose that Tesla was not currently production constrained so that it could make as many Model X and S as it wants in 2015. It made 33k last year, so would there be enough buyer at current prices to buy 66k cars of their choice. And if ramping up production was no problem, Tesla could make unlimited quantities of Model 3 in 2017 allowing Tesla to sell four times as many cars, 264k in 2 years. So without production constraint quantities demended could doule every year. But squeezing out more than 60k this year will be a challenge, and the Model 3 is not on a fast track for a robust 2017 launch, rather delayed until 2018. Roduction constraints not only slows the pace of filling orders, it deprives Tesla the cash flow and motivation it needs to engage in activities that create demand. It slows the entry into new geographical markets. It slows the design cycle of new products. And it slows the experience curve learning necessary to drive down manufacturing and operational costs so that less expensive products can be offered. Supply constraints inhibit demand creation.
Also consider this. Families that buy new cars typically buy new car once every 3 to 5 years. So if such a family is unable to buy the Tesla of their choice when they need their next new car, they'll buy something else. Then it will be another 3 to 5 years before they're in the market again. The point is, this is a really long sales cycle. A family might be quite willing tonthrow down $45k on a Model 3 today, but they come into the market in 2017 and it's not there. Next time around it's 2021. So I am not so concerned about whether people will be ready to adopt EVs fast enough. Plenty of people are ready right now, but the timing is not right. I think consumers will be ready long before the products become available. Naturally some will be early adopters and others late adopters, but the sooner Tesla gets a product to market the sooner enough experience happens that late adopter are waiting for. When the Model S has been on the road for ten years and all the worried about expensive battery replacements and car repairs are laid to rest, late adopters will start to think, "Maybe I should get one of those Model S. They really hold their value and are quite nice cars." Some bunnies are a little slower than others. But the important thing is that the foundation for long-term demand creation is set now. In ten years, range anxiety will be a thing of the past. Fast, free charging will be everywhere. (Ask me how.) Batteries will be half the cost and half the weight. And Teslas will be a proven technology. Late entrants to the EV market will be desperate and trying out all sorts of gimmicks to attract buyers, but Tesla will have the proven track record. So the kind of conservative shoppers who may hold back early on, right now, will find a lot of what they're looking for in Tesla ten years from now. It will be clear that EVs are superior, and they will be cost competitive. Late adopters will love Tesla.
