Model 3 Cashflow

[Frank99]

Well, back to your initial question, I think I listened to the same thing you were watching about the Model 3 being a cash generator...

My take was that, up til the Model 3, Tesla couldn't get terms from their suppliers. This is easy to understand when you look at the history of startup car companies. When they wanted to build a batch of cars, they'd have to go through a sequence something like:
Order parts - pay for parts - receive parts - build car - deliver car - get paid
<Next Batch>--------------------Order parts - pay for parts - receive parts - build car - deliver car - get paid
<Next Batch>--------------------------------------------------------Order parts - pay for parts - receive parts - build car - deliver car - get paid
In this example, they'd have to pay for three batches of parts before they got paid for the first car. As production ramped up, the amount of money they had to have on hand to pay suppliers would ramp up also.

What Elon said was that suppliers were eager to get designed into the Model 3, so eager that they were willing to sign up to (IIRC) 60 day terms - meaning that the suppliers wouldn't require payment until 60 days after delivering parts. That means that the production process for the Model 3 could be:
Order parts - receive parts - build car - deliver car - get paid - hold on to money - pay supplier 60 days after receiving parts.
<Next Batch> Order parts - receive parts - build car - deliver car - get paid - hold on to money - pay supplier 60 days after receiving parts.
<Next Batch> ----------------- Order parts - receive parts - build car - deliver car - get paid - hold on to money - pay supplier 60 days after receiving parts.

You can see that, assuming it takes less than 60 days to build and deliver a car, you could be sitting on a pretty good pile of money (from Customers) before you have to pay your suppliers, and that this continues as you ramp up to high production - you collect money from customer at the higher production rate before you have to pay for the ramp up.

 

[Red Sage]

I wonder if TSLA would ever consider selling it's self-driving technology for a per car fee once they've perfected it.

Say out of the 70+ million cars sold every year 10 million have TSLA technology for $1-2K royalty per car.

That's $10-20 billion right to the bottom line!

The problem with becoming a third party supplier in the traditional automobile industry is that you must be 'OK' with your products being used for 'anything' as long as the check clears. Tesla isn't willing to allow their technology to be used on a short range compliance EV, ICE, Hybrid, or HFCEV. I'm certain that position contributed to both Daimler and Toyota divesting themselves of TSLA. Tesla doesn't want to improve or extend the life cycle of dumb technologies. Instead, they act as both the carrot and the stick to lead or prod traditional automobile manufacturers to move toward sustainable transportation.

 

[PKINOC]

Well, back to your initial question, I think I listened to the same thing you were watching about the Model 3 being a cash generator...

My take was that, up til the Model 3, Tesla couldn't get terms from their suppliers. This is easy to understand when you look at the history of startup car companies. When they wanted to build a batch of cars, they'd have to go through a sequence something like:
Order parts - pay for parts - receive parts - build car - deliver car - get paid
<Next Batch>--------------------Order parts - pay for parts - receive parts - build car - deliver car - get paid
<Next Batch>--------------------------------------------------------Order parts - pay for parts - receive parts - build car - deliver car - get paid
In this example, they'd have to pay for three batches of parts before they got paid for the first car. As production ramped up, the amount of money they had to have on hand to pay suppliers would ramp up also.

What Elon said was that suppliers were eager to get designed into the Model 3, so eager that they were willing to sign up to (IIRC) 60 day terms - meaning that the suppliers wouldn't require payment until 60 days after delivering parts. That means that the production process for the Model 3 could be:
Order parts - receive parts - build car - deliver car - get paid - hold on to money - pay supplier 60 days after receiving parts.
<Next Batch> Order parts - receive parts - build car - deliver car - get paid - hold on to money - pay supplier 60 days after receiving parts.
<Next Batch> ----------------- Order parts - receive parts - build car - deliver car - get paid - hold on to money - pay supplier 60 days after receiving parts.

You can see that, assuming it takes less than 60 days to build and deliver a car, you could be sitting on a pretty good pile of money (from Customers) before you have to pay your suppliers, and that this continues as you ramp up to high production - you collect money from customer at the higher production rate before you have to pay for the ramp up.

Yeah, good point on the suppliers contributing to what Elon was referring to.

If you ever come across that video again please post a link!

Thanks,
Peter

 

[neroden]

I realize the M3 will be a cash generator.

I'm talking about the M3 cash flow funding it's own production rampup.

He clarified. Tesla is now getting terms from suppliers where they don't have to pay for the parts until 45 or 60 days after the parts are delivered. But the car only takes a few days to manufacture, and maybe a week to deliver. Maybe 4 weeks if things are going slowly. Tesla receives the parts, manufactures the car, takes it to the customer, receives the customer's payment for the car, and *still hasn't been required to pay for the parts*.

Tesla is effectively getting interest-free loans from its suppliers; they're receiving payments for the car anywhere from two weeks to six weeks before they have to pay the suppliers.

This is how the M3 cash flow funds its own production rampup.

On Model S in 2012, Tesla had to pay for parts *before* delivery. This required cash.

Tesla still has to pay for the capital equipment before they can start manufacturing the cars, obviously. That will basically be financed by their Asset-Backed Loan revolving fund. They buy some expensive piece of equipment; that's an asset, they can immediately borrow against it (probably 90% of its original purchase price, depending on depreciation valuation).

 

[neroden]

You make a good comparison, but the key component you're missing is the price. The price changes the outcome. At the right price, people including Warren Buffett bought Enron/Worldcom securities and saw 200-300% returns despite the findings of lots of accounting fraud. Investing is not a question about what you think will happen, but whether it's already priced into the security. My argument is simply that TSLA is already priced for a lot to go well.

Actually, my calculations say that TSLA is priced for success with Model 3, success selling Powerpacks from the existing Gigafactory, zero profits from SolarCity or the Solar Roof, and *zero further expansion*. Add it up, model it. See what your own model shows. Since I believe that Powerpacks are guaranteed to be a success, Model 3 demand is not in question, and I believe Model 3 will be successfully manufactured on time, this means the stock is fairly conservatively priced from my POV. Not *cheap* per se, but I just don't see the stock crashing way down. And there are definitely people betting that it will crash way down, and I can make money betting against them.