Near-future quarterly financial projections

[graphilwar]

Balance is 1462m as of 6/30/20. The 741m was 12/31/19. The China Loan Agreements include a RMB 9b Fixed Asset Facility, RMB 6.75b of Working Capital Facilities and a RMB 5b facility that finances vehicles in transit to China. They don't really have vehicles in transit to China at EOQ, so that last facility's balance should be near zero.

They don't disclose the split between Fixed Asset and Working Capital borrowing. China was 1/3 of Q2 deliveries and 1/4 of revenue, I'd guess it has 1b+ of the 4b inventory plus a little AR, etc. So maybe they have 800m drawn on the Working Capital facility and 650m against the factory? That 650m would include both Phase I and progress payments on the new construction.

Thanks for the help! So let’s say the “super crazy” over estimate for the cost to build Giga Shanghai to the current level of production is 1.5B. Mathematically, its gotta be less than that because as you mentioned, it appears the loans are funding working capital needs as well as construction, and also they already started building the Model Y phase II portion, but whatever, let’s just say 1.5B.

So where I was pondering was that in Q2 2020, Tesla’s China revenues were $1.5B. Now if let’s say, the Model 3 margins there are roughly the same as Fremont Model 3 margins, let’s say 20%(?) to be conservative, that’s $300M per quarter in gross margins, or 1.2B annualized in gross margin contribution China Model 3. That’s like...1.2B / 1.5B = an 80% return on the invested capital. And I think I’m being conservative and sandbagging these numbers so I’m kind of tantalized by what I’m seeing here.

Now if your guess is correct about the capex being 650M, and I just do the same math, that’s 1.2B in gross margin contribution over 650M, that’s like 200% returns on that capex. Which seems even more insane.

If I’m drinking the spike Kool-Aid here, please someone slap me in the face and show me the error in my ways. Am I wrong in being amazed by this?

The crazy thing is that I think they’re going to plan to grow Model 3 lines, so it’s not yet at full scale for that product. Also Model Y at scale in China is going to be even more fantastic, given localization, the extent of parts sharing with the Model 3, and its higher price point.

Musk also said that the real manufacturing revolution is in the Berlin Gigafactory...

 

[Doggydogworld]

Thanks for the help! So let’s say the “super crazy” over estimate for the cost to build Giga Shanghai to the current level of production is 1.5B. Mathematically, its gotta be less than that because as you mentioned, it appears the loans are funding working capital needs as well as construction, and also they already started building the Model Y phase II portion, but whatever, let’s just say 1.5B.

So where I was pondering was that in Q2 2020, Tesla’s China revenues were $1.5B. Now if let’s say, the Model 3 margins there are roughly the same as Fremont Model 3 margins, let’s say 20%(?) to be conservative, that’s $300M per quarter in gross margins, or 1.2B annualized in gross margin contribution China Model 3. That’s like...1.2B / 1.5B = an 80% return on the invested capital. And I think I’m being conservative and sandbagging these numbers so I’m kind of tantalized by what I’m seeing here.

Now if your guess is correct about the capex being 650M, and I just do the same math, that’s 1.2B in gross margin contribution over 650M, that’s like 200% returns on that capex. Which seems even more insane.

If I’m drinking the spike Kool-Aid here, please someone slap me in the face and show me the error in my ways. Am I wrong in being amazed by this?

The crazy thing is that I think they’re going to plan to grow Model 3 lines, so it’s not yet at full scale for that product. Also Model Y at scale in China is going to be even more fantastic, given localization, the extent of parts sharing with the Model 3, and its higher price point.

Musk also said that the real manufacturing revolution is in the Berlin Gigafactory...

1.5b is reasonable for Phase I, but I don't think Tesla paid anywhere near that. I don't know who paid the rest. Shanghai gov't officially paid something like 85m. Beyond that it's another China mystery. There's nothing special about GF3, and Tesla in general is an inefficient manufacturer. Their real advantage is in sales and marketing.

If you define gross margin as retail sale price minus manufacturing cost, as Tesla does, mainstream carmakers come in around 40% vs. Tesla's 20% (ex emissions credits). But there are big differences in business model and accounting:

1. Wholesale vs. Retail - about 10 percentage points
2. R&D in opex vs. COGS - another 5 points or so
3. Cheap marketing vs. expensive advertising - a couple more points
4. Net profits vs. net losses (ex-credits) - ~5 more points

Tesla's goal is to capture the ~10% wholesale vs. retail gap while spending much less than 10% extra on SG&A. They fell far short before Model 3, but slashed per car SG&A remarkably as volumes rose. Bulls say this proves Tesla's business model is infinitely scalable. Bears say they slashed way too much and point to Tesla's catastrophic loss of market share in Norway. I think there are also other factors at play in Norway, but it's true that Tesla "gets away" with worse fit, finish and service than typical at their price points. Early S/X customers claim a dramatic worsening in customer experience after Model 3 launched. Tesla customers are famously forgiving, though, so maybe this won't ever be a problem.

TL;DR - If Tesla can keep selling all new factory output without scaling opex, they will indeed be very profitable. The jury is still out, though.

 

[graphilwar]

1.5b is reasonable for Phase I, but I don't think Tesla paid anywhere near that. I don't know who paid the rest. Shanghai gov't officially paid something like 85m. Beyond that it's another China mystery. There's nothing special about GF3, and Tesla in general is an inefficient manufacturer. Their real advantage is in sales and marketing.

If you define gross margin as retail sale price minus manufacturing cost, as Tesla does, mainstream carmakers come in around 40% vs. Tesla's 20% (ex emissions credits). But there are big differences in business model and accounting:

1. Wholesale vs. Retail - about 10 percentage points
2. R&D in opex vs. COGS - another 5 points or so
3. Cheap marketing vs. expensive advertising - a couple more points
4. Net profits vs. net losses (ex-credits) - ~5 more points

Tesla's goal is to capture the ~10% wholesale vs. retail gap while spending much less than 10% extra on SG&A. They fell far short before Model 3, but slashed per car SG&A remarkably as volumes rose. Bulls say this proves Tesla's business model is infinitely scalable. Bears say they slashed way too much and point to Tesla's catastrophic loss of market share in Norway. I think there are also other factors at play in Norway, but it's true that Tesla "gets away" with worse fit, finish and service than typical at their price points. Early S/X customers claim a dramatic worsening in customer experience after Model 3 launched. Tesla customers are famously forgiving, though, so maybe this won't ever be a problem.

TL;DR - If Tesla can keep selling all new factory output without scaling opex, they will indeed be very profitable. The jury is still out, though.

Thanks for this, very helpful perspective.The next thing I really want to do is understand more of the ICE automaker financials.

I think the challenge is that Tesla’s vertical integration approach vs normal industry approach (outsource everything, focus on engine, power train, assembly) should result in the return on capex for Tesla’s new factories to be much worse than the return on capex for a new ICE factory.

Also on the accounting side, I think ICE factories count shipping cars from the factory as revenue already, when they’re just heading to the dealership and technically haven’t gotten to the end customer yet. Does the cash hit the balance sheet for OEMs when the car arrives at the dealer? Or is cash flow later, like when the car is actually sold.

When I started thinking about the question of return on capex, I also wanted to see the trend over time for Tesla.

So I’m thinking about:

1. How much to invested to get the S/X lines running? What kind of return there? On a separate note, how does the R&D program spending for those two vehicles compare to standard OEM costs for a new platform?

2. How much invested to get the Fremont Model 3 line? How much invested to get the Shanghai Model 3 line? What were the relative returns on capex for each? Does it show a good trend?

3. How much for Model Y line in Fremont? And how much for Model Y in Shanghai? And their relative returns on investment?

And if the trends are good, how does that apply to projecting future returns from the Berlin and Austin factories, which are not space/legacy constrained like Fremont and built from scratch with an open field, taking the learnings (and mistakes) of all past ramp ups in mind.

 

[Artful Dodger]

From the Tesla 10-Q, pg 13:

Income Taxes

"There are transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. As of June 30, 2020 and December 31, 2019, the aggregate balances of our gross unrecognized tax benefits were $276 million and $273 million, respectively, of which $250 million and $247 million, respectively, would not give rise to changes in our effective tax rate since these tax benefits would increase a deferred tax asset that is currently fully offset by a valuation allowance."​

How does this statement relate to the previous VA on Tesla books of $1.95B and does this indicate that Tesla is now using its VA?

tia.

 

[mongo]

From the Tesla 10-Q, pg 13:

Income Taxes

"There are transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. As of June 30, 2020 and December 31, 2019, the aggregate balances of our gross unrecognized tax benefits were $276 million and $273 million, respectively, of which $250 million and $247 million, respectively, would not give rise to changes in our effective tax rate since these tax benefits would increase a deferred tax asset that is currently fully offset by a valuation allowance."​

How does this statement relate to the previous VA on Tesla books of $1.95B and does this indicate that Tesla is now using its VA?

tia.

Similar statements have been in the 10Q going back to at least Q2 2015. I read it as a different class of potential benefits that may or may not be realized.
These blurbs from SolarCity (value bumped up after acquistion) may provide color:

Q3 2016:

12. Income Taxes
SolarCity Corporation Notes to Condensed Consolidated Financial Statements (continued)
The Company accounts for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based on the differences between the carrying amounts and the tax bases of assets and liabilities and are measured using the enacted tax rate expected to apply to the taxable income in the periods in which the differences are expected to be reversed. The Company has applied a valuation allowance against its deferred tax assets net of the expected income from the reversal of its deferred tax liabilities. The valuation allowance is determined in accordance with the provisions of ASC 740, Income Taxes, which requires an assessment of both negative and positive evidence when measuring the need for a valuation allowance. Based on the available objective evidence and the Company’s history of losses, the Company believes it is more likely than not that its net deferred tax assets will not be realized. The income tax provision for the three months ended September 30, 2016 and 2015 was determined based on the Company’s estimated consolidated effective income tax rates of negative 0.11% and 0%, respectively. The income tax provision for the nine months ended September 30, 2016 and 2015 was determined based on the Company’s estimated consolidated effective income tax rates of negative 0.12% and 0.21%, respectively. The differences between the estimated consolidated effective income tax rates and the U.S. federal statutory rates were primarily attributable to the valuation allowance, the amortization of the prepaid tax expense, a true-up of the prepaid tax expense amortization and additional prepaid tax expense due to intra-entity sales. As part of its asset monetization strategy, the Company has agreements to sell solar energy systems to its financing funds. The gains on the sales are eliminated in the condensed consolidated financial statements because the sales are treated as intra-entity sales. As such, income taxes are not recognized on the sales until the Company no longer benefits from the underlying assets. Specifically, the Company defers the income tax expense and amortizes it over the estimated useful life of the underlying assets, which has been estimated to be 30 to 35 years. The deferral of the income tax expense results in the recognition of a prepaid tax expense that is included in the consolidated balance sheets as other assets. The amortization of the prepaid tax expense makes-up the major component of the income tax provision for each period.

Q3 2015

Uncertain Tax Positions The Company applies a two-step approach with respect to uncertain tax positions. This approach involves recognizing any uncertain tax positions that are more-likely-than-not of being ultimately realized and then measuring those positions to determine the amounts to be recognized.

The Company is subject to taxation and files income tax returns in the U.S., various state, local and foreign jurisdictions. Due to the Company’s net losses,substantially all of its federal, state, local and foreign income tax returns since inception are still subject to audit.

 

[The Accountant]

From the Tesla 10-Q, pg 13:

Income Taxes

"There are transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. As of June 30, 2020 and December 31, 2019, the aggregate balances of our gross unrecognized tax benefits were $276 million and $273 million, respectively, of which $250 million and $247 million, respectively, would not give rise to changes in our effective tax rate since these tax benefits would increase a deferred tax asset that is currently fully offset by a valuation allowance."​

How does this statement relate to the previous VA on Tesla books of $1.95B and does this indicate that Tesla is now using its VA?

tia.

Tesla does not provide enough information to answer your question with certainty. But if I had to guess, I think they are saying that they have additional Deferred Tax Assets of $273m (as Dec 2019) not on the balance sheet. To recognize them would be a moot point as this Deferred tax asset would have a valuation against it anyway of $247m.

See this table (I use Dec 2019 as data is more robust in the 10K)

I believe total Deferred Taxes not taken as a benefit in the P&L is $2,203m ($1,956 on the balance sheet and $247m off the balance sheet).
Taxes are complex and disclosure in the 10K is minimal....so this is an educated guess on my part.

EDIT: corrected the table

 

[Doggydogworld]

Anyone have thoughts on this odd report that Tesla sold 22k+ cars in South Korea in the first half of 2020? I'd seen 4k for Q1 and a similar number for Q2 would be consistent with ship count. If they really sold 22k+ in Korea my US estimates US are too high (and so are everyone else's that I've seen).

Thanks for this, very helpful perspective.The next thing I really want to do is understand more of the ICE automaker financials.

I think the challenge is that Tesla’s vertical integration approach vs normal industry approach (outsource everything, focus on engine, power train, assembly) should result in the return on capex for Tesla’s new factories to be much worse than the return on capex for a new ICE factory.

Also on the accounting side, I think ICE factories count shipping cars from the factory as revenue already, when they’re just heading to the dealership and technically haven’t gotten to the end customer yet. Does the cash hit the balance sheet for OEMs when the car arrives at the dealer? Or is cash flow later, like when the car is actually sold.

When I started thinking about the question of return on capex, I also wanted to see the trend over time for Tesla.

So I’m thinking about:

1. How much to invested to get the S/X lines running? What kind of return there? On a separate note, how does the R&D program spending for those two vehicles compare to standard OEM costs for a new platform?

2. How much invested to get the Fremont Model 3 line? How much invested to get the Shanghai Model 3 line? What were the relative returns on capex for each? Does it show a good trend?

3. How much for Model Y line in Fremont? And how much for Model Y in Shanghai? And their relative returns on investment?

And if the trends are good, how does that apply to projecting future returns from the Berlin and Austin factories, which are not space/legacy constrained like Fremont and built from scratch with an open field, taking the learnings (and mistakes) of all past ramp ups in mind.

I don't follow ICE makers that closely, but I'm pretty sure they recognize revenue when the car is loaded on a truck headed to the dealer. The dealer "buys" the car at that point and finances it through his floorplan lender (often coordinated by the OEM). The OEM gets the cash from the floorplan lender immediately. I think the dealer gets a week or so to pay his portion, but don't quote me on that. Donn Bailey who just posted a Seeking Alpha article on Tesla inventory formerly owned and/or ran car dealerships, he might reply if you ask politely (he's a cantankerous bear, ha).

1. S/X investment is tough to pin down because they kept rebuilding the lines and by 2015 GF1 capex muddied the waters. GM/F R&D is much less per car, but BMW looks fairly close.

2. Model 3 line should have been 1.5-2.0b, but once again the GF1 numbers cloud the waters. Tesla wasted money building and then dismantling the "Dreadnought".

3. Model Y was cheap. They had to buy costly high polish body dies, of course, since it doesn't share body parts with Model 3. But most of the other tooling is shared. They re-used the existing paint shop and stamping presses (apparently another large press is being installed to grow capacity from 400k to 500k/year). Tesla's final assembly lines are pretty crude, so not much cost there. Musk said Model Y had a separate body line (all those spark shower photo op robots), but that doesn't really make sense so I assume it was a couple stages or something. So maybe 500m total, with a couple 100m more in H2? Just guesses, really.

I don't see return on factory capital as all that meaningful. Carmaker building and equipment depreciation is in the $1k/car range. Tooling adds to that, but is similar for all high volume cars. Besides, capital is free here in Zirplandia. Especially for Tesla with it's million dollar per car market cap.

 

[jbcarioca]

For the revenue treatments of TSLA vs all other auto manufacturers there are several specific differences. These have been discussed in other threads, but not here:
1. Revenue recognition- All others recognize revenue when the vehicle is shipped to dealer or distributor. That means all others have anywhere from ten days to six weeks or so earlier recognition.
2. Sales price- TSLA recognizes the actual selling price of the vehicle to the end consumer. All others recognize wholesale price to the dealer or distributor. The specific revenue recognized is very different depending on the role of the dealer or distributor. Some distributors directly manage warranty, most don't. Obviously that changes the sales price recognized as revenue by the manufacturer. here differences are consequential but usually are very obscure and never are easy to find.
3. Warranty reserves- TSLA has among the most conservative industry treatments, partly because their accountants still are risk averse on BEV actuarial treatment. That tends to produce lower charges to reserve in future periods, so TSLA is rapidly drifting down. Warranty Week has details for anybody who's anal enough to delve deeply. I think it si fascinating. Almost everyone I know thinks it is Boring!
4. Vehicle Leases and securitization- these I treat together because both are deeply influences by resave values of vehicles. The FASB on this subject were written mostly with dealers in mind but they essentially forced deferred income for all leases that had ANY risk to the manufacturer. Thus all manufacturers account for leases they sponsor essentially on a cash basis, but the precise mechanics are so arcane that it is safe to assume there is roughly similar treatment between TSLA and all others. However the residual values are often determined by the seller, and often are 'subvened'. Tesla does not do that, ever. The residual values established for Tesla leases are determined by the lessor, and usually are lower than other manufacturers. Others tend to subvent 'money factors' too. That combination explains why Tesla leases are often more expensive than are those for other manufacturers. Tesla resale values tend to be higher than are others, so Tesla often ends out with gains on lease terminations. Securitizations are very similar. Rating agencies have generally assumed poorer Tesla resale values and also poorer credit performance so the first Tesla securitization were VERY expensive to Tesla. The most recent ones have reflected two elements. First, Tesla buyers/lessees have the highest FICO scores in the industry. Second, Tesla resale values have been higher than assumed while early lease terminations have tended to be higher than normal so further reducing residual value risk.
5. Vertical integration- I will not even try to describe this in detail. Overall this makes TSLA have higher fixed assets and R&D and lower marginal cost of parts than do there. Even in the case of Panasonic production at GF-1, TSLA carries the factory fixed assets on their books. In effect that makes the contract 'take or pay'. Nearly all the perpetual reporting about Tesla production inefficiency relates to a misconception about the fixed vs variable cost mix between Tesla and all others.

There are others differences but these are the largest ones. People like @The Accountant will, I hope, correct errors I may be making in this post.

 

[mongo]

3. Warranty reserves- TSLA has among the most conservative industry treatments, partly because their accountants still are risk averse on BEV actuarial treatment. That tends to produce lower charges to reserve in future periods, so TSLA is rapidly drifting down. Warranty Week has details for anybody who's anal enough to delve deeply. I think it si fascinating. Almost everyone I know thinks it is Boring!

Along with this is the interviews that say Elon/ Tesla's approach is/was to launch vehicles before long term testing was completed and fix whatever needed corrected as it was found. This could lead to higher than average warranty rates, but the exact amount would not be known ahead of time, so a conservative approach was reasonable. Drive unit milling sound being an example of this process.

 

[jbcarioca]

Along with this is the interviews that say Elon/ Tesla's approach is/was to launch vehicles before long term testing was completed and fix whatever needed corrected as it was found. This could lead to higher than average warranty rates, but the exact amount would not be known ahead of time, so a conservative approach was reasonable. Drive unit milling sound being an example of this process.

Yes, but in the end even on the early Model S the warranty costs per vehicle were lower than were those of Gm and Ford (there is a Warranty Week chart showing that. I think a major factor, perhaps the largest is that OEM's are strongly encouraged to generate warranty work for their dealers. In the US warranty work tends to be ~20% or so of dealer net profits, only exceeded by F&I income. neither of those happens with TSLA. Those may well be larger influences than actual repair under warranty would suggest. Also outside suppliers often bear the warranty costs. Famously so, Takata airbags. Tesla motor components and some other parts could have been such also. I do not know.

 

[jbcarioca]

Tesla warranty accrual and claims:

 

[jbcarioca]

Figure 1
American Auto Manufacturers
Claims Paid per Year
(in millions of dollars, 2003-2019)

 

[jbcarioca]

Warranty Claims Rates

 

[jbcarioca]

Claims vs. Reserves
In Figure 3, we're making use of all three warranty metrics: claims paid, accruals made, and reserves held. The horizontal axis tracks the ratio between accruals and sales, while the vertical axis tracks the ratio between reserves and claims. The units along the vertical express the number of months reserves would last at current levels of claims payments.

For Ford and GM, there are 68 data points apiece, representing the readings at the ends of the past 68 quarters, or 17 years. For Tesla, the data points begin in 2008. As is clear from the chart below, Ford's data points are among the lowest on both axes, while GM's are in the middle and Tesla's are highest.


Figure 3
American Auto Manufacturers
Claims Rate & Reserves Held by U.S.-based Companies
(as % of sales & months of coverage, 2003-2019)

At the end of 2019, GM was spending about $266 per month on warranty claims, so its warranty reserve capacity stood at 29 months. Ford was paying about $389 million a month in claims, so its capacity was around 15 months. Tesla was paying about $25 million per month, so its warranty reserve capacity was up around 43 months.

Among all manufacturers in all industries, the historical average has been around 18 months over the past 17 years. So Ford has been the closest to average over time, though its warranty reserve capacity is most recently below average. GM has been above average, with numerous data points between 24 and 36 months. And Tesla, at times, has kept its warranty reserve balance at two, three, or even four years, as befits a company with extra-long electric car battery warranties.

 

[jbcarioca]

The last three posts pretty much tell the story of Tesla warranty reserves. In my opinion similar analogies are evident in everything from securitization to most aspects of expense and revenue recognition. When I delve deeply in any given area I end out concluding that Tesla accounting is very conservative. That even seems to extend to capital equipment policies if I am receiving correctly. Tesla appears to assume shorter service lives in depreciation (Not for tax purposes, where aggressive policies have been made to encourage capital investment), probably because they tend to assume obsolescence even in traditional areas like presses. That is logical only if one makes technical advances a cornerstone of industrial policy.

This subject is not ordinarily near term. However, Tesla has just deployed a ~410 ton new aluminum die-casting machine to manufacture the Model Y and presumably Model 3 rear underbody:
Tesla Model Y giga-press aluminum casting

If the estimates of people like Munro are accurate, the Capex will end out reducing the entire Model Y and X building cost by ~15%.
If anywhere near true we should be assuming Fremont total cost for Model Y and 3 will reduce beginning in Q4 by a minimum of 10%. We can safely assume that the Shanghai cost per vehicle will drop by at least 20% by the combination of parts count reduction and local sourcing. There is no doubt at all that CATL batteries for the SR Model 3 will be at least 35% cheaper than were the Nevada supplied ones, probably >50% cheaper.

I believe we are all underestimating Tesla productivity due to these factors.

I also think we are overestimating costs for things such as warranty, which will be substantially reduced by lowering the parts counts. A major component of that is the Octovalve which replaced hundreds of parts while improving efficiency, longevity and performance. We are seeing serious virtuous cycles happening and thus far we are not accounting for them.

 

[graphilwar]

The last three posts pretty much tell the story of Tesla warranty reserves. In my opinion similar analogies are evident in everything from securitization to most aspects of expense and revenue recognition. When I delve deeply in any given area I end out concluding that Tesla accounting is very conservative. That even seems to extend to capital equipment policies if I am receiving correctly. Tesla appears to assume shorter service lives in depreciation (Not for tax purposes, where aggressive policies have been made to encourage capital investment), probably because they tend to assume obsolescence even in traditional areas like presses. That is logical only if one makes technical advances a cornerstone of industrial policy.

This subject is not ordinarily near term. However, Tesla has just deployed a ~410 ton new aluminum die-casting machine to manufacture the Model Y and presumably Model 3 rear underbody:
Tesla Model Y giga-press aluminum casting

If the estimates of people like Munro are accurate, the Capex will end out reducing the entire Model Y and X building cost by ~15%.
If anywhere near true we should be assuming Fremont total cost for Model Y and 3 will reduce beginning in Q4 by a minimum of 10%. We can safely assume that the Shanghai cost per vehicle will drop by at least 20% by the combination of parts count reduction and local sourcing. There is no doubt at all that CATL batteries for the SR Model 3 will be at least 35% cheaper than were the Nevada supplied ones, probably >50% cheaper.

I believe we are all underestimating Tesla productivity due to these factors.

I also think we are overestimating costs for things such as warranty, which will be substantially reduced by lowering the parts counts. A major component of that is the Octovalve which replaced hundreds of parts while improving efficiency, longevity and performance. We are seeing serious virtuous cycles happening and thus far we are not accounting for them.

Yeah this is the kind of stuff I’m thinking about, you nailed it right on the head. I mean for many years people have been saying Tesla can’t make a profit or they are terrible at manufacturing. But I think those were growing pains and they’re rapidly evolving. My hypothesis is that their capex for new lines is going to be surprisingly low, they’re going to achieve margins on that new capex that is surprisingly very high. and that double whammy is going to surprise even the most bullish of investors. I think many people modeling TSLA are afraid to go out on a limb and give them more than 20-25% gross margins, but yeah I think it can surprise. Bullish.

Another thing we should mention is that by building more Gigafactories (one on every continent) that:

1. creates efficiencies in Fremont, which has been juggling worldwide production and logistics out of one of the most improbable places for major manufacturing, like, ever.

2. quicker deliveries in every region has huge implications for their working capital and cash flows. growth doesn’t tied up cash in inventory and on cars on boats trying to cross oceans, they can start trying to deliver cars into customers hands and get cash BEFORE they have to pay vendors.

 

[Doggydogworld]

Warranty Claims Rates

Does this chart show all warranty claims or current year only? Including all claims favors a fast grower like Tesla. For every 100k cars F/GM sell this year they have initial claims from those 100k cars plus continuing claims from 100k cars that are 1 year old, 100k that are 2 years old, etc. Tesla only has continuing claims from ~70k cars that are 1 year old, 50k 2 years old, 35k 3 years old and 25k 4 years old.

 

[bkp_duke]

Yeah this is the kind of stuff I’m thinking about, you nailed it right on the head. I mean for many years people have been saying Tesla can’t make a profit or they are terrible at manufacturing. But I think those were growing pains and they’re rapidly evolving. My hypothesis is that their capex for new lines is going to be surprisingly low, they’re going to achieve margins on that new capex that is surprisingly very high. and that double whammy is going to surprise even the most bullish of investors. I think many people modeling TSLA are afraid to go out on a limb and give them more than 20-25% gross margins, but yeah I think it can surprise. Bullish.

Another thing we should mention is that by building more Gigafactories (one on every continent) that:

1. creates efficiencies in Fremont, which has been juggling worldwide production and logistics out of one of the most improbable places for major manufacturing, like, ever.

2. quicker deliveries in every region has huge implications for their working capital and cash flows. growth doesn’t tied up cash in inventory and on cars on boats trying to cross oceans, they can start trying to deliver cars into customers hands and get cash BEFORE they have to pay vendors.

As an aside, after the recent report about the exceptionally HIGH quality of Model 3 cars coming out of Shanghai, compared to the fit and finish problems we see out of Freemont, I wonder if there is a process flaw in Freemont that was corrected in Shanghai, that they cannot implement without a major retooling. The alternative explanation is not comforting (quality of workmanship between the two work forces).

 

[jbcarioca]

Does this chart show all warranty claims or current year only? Including all claims favors a fast grower like Tesla. For every 100k cars F/GM sell this year they have initial claims from those 100k cars plus continuing claims from 100k cars that are 1 year old, 100k that are 2 years old, etc. Tesla only has continuing claims from ~70k cars that are 1 year old, 50k 2 years old, 35k 3 years old and 25k 4 years old.

That is a weakness in reporting consistency. Generally speaking the reserves are directly charged to cost of sales per vehicle when sold. The expenses are charged as incurred to the reserve, so are also directly per vehicle. Adjustments to the reserve are 'periodically' made, so are not precisely per vehicle, but reflect over or under reserving. The adjustments are somewhat arbitrary in timing, and usually are the result of actuarial audits.

In sum: the growth rate pretty much balances out on an annual basis. Usually.

 

[jbcarioca]

As an aside, after the recent report about the exceptionally HIGH quality of Model 3 cars coming out of Shanghai, compared to the fit and finish problems we see out of Freemont, I wonder if there is a process flaw in Freemont that was corrected in Shanghai, that they cannot implement without a major retooling. The alternative explanation is not comforting (quality of workmanship between the two work forces).

I have a preliminary opinion about that, subject to revision when we get better data.
First, Fremont is just opening a new paint shop, so that for the first time S and X are in one paint shop while 3 and Y are in another. Thus, paint quality should show major improvements in all Fremont production.
Second, There have been huge improvements in manufacturing process for Model Y that almost certainly are being applied to Fremont Model 3 in conjunction with the reorganization connected with the new paint shop as well as other time.
Third, Shanghai Model 3 (and later, Y) has been and is being built taking advantage of all the learning from Fremont and Nevada.

Thus, Shanghai production certainly should be higher quality than has been Fremont. Fremont today is certainly much better than it was in 2018. As an aside it seems likely that the obsessively reported Model 3 problems might be over-reported to some degree because of the attention being placed to the issues. We have anecdotes rather than valid data. Even so there are absolutely unquestioned problems in paint at Fremont, and panel gaps have been inconsistent. There are other issues too, fo course.
However, of these problems have been consequential they would appear in warranty data. They do not.

The 2010/2011 spike pretty obviously reflected factual early production problems exacerbated by the actuarial problem of setting reserving policy for a totally unknown product. In general TSLA has been reserving in quite conservative fashion.