Tesla financial situation with DOE loan

[Arnold Panz]

---- Addendum to my previous message:

I may have I figured out what you were trying to say when you were talking about the difference between sig premiums and $40k deposits and so forth: That the pricing decision was made end of 2011, whereas the critical time for Tesla's survival was said to be mid-2012 and later, during the ramp up.

While it is of course true that *unexpected* events in mid-2012, and later, were unknown in 2011, their *possibility* was already known end of 2011.

The events in mid-2012, and later, *prove* that *concerns* about their possibility was justified already end of 2011.

Also, those events, as they came closer and then happened, may very well have affected the hiring of delivery specialists. Maybe this answers a misunderstanding.

You've got it -- when they implemented the Sig premium, they weren't planning on a cash crunch, supplier issues etc. From what I can gather, they figured, "People who can put down $40k must have money to burn and won't mind paying a few thousand dollar premium to get a Signature car and first delivery. We expect everything to go perfectly smoothly with the ramp up and delivery process from the get go, and people will be so happy to get their cars they'll forget about the premium in short order."

Obviously I have no idea what they were thinking, and much of this was probably implied/assumed, especially about the ramp up going smoothly. But, it was a bit naive and overly optimistic to assume everything was going to go well, and once things didn't go perfectly smoothly they had zero margin for error with these people who not only were buying a six figure car, but were charged an extra premium for the privilege of being guinea pigs for their new delivery process.

Having sat in numerous of these types of meetings at my company, I can imagine the CFO saying, "Why can't we charge these folks more who want it so bad?" and George B saying, "If we're going to do this, we'd better be able to deliver on time. Can we guarantee things will go smoothly next year during production?" And everyone around the table says "Absolutely!" because who's going to say that things won't go well, especially in their own area (Operations, Logistics etc.)?!

I don't mean to disparage anyone by calling them a "bean counter"; to me it's more of a mentality than identifying any individuals, and it's Finance's job to try to maximize revenue (or at least ask these questions). Being a bean counter means short term thinking about financial matters instead of looking at the bigger picture. I've called the pricing of the Sigs the "original sin" because it is the original bad decision that led to so much dissatisfaction with many Sig owners when things didn't go well the past few months.

I don't disagree that Tesla was on perilous financial footing for a long time, and with $40k unsecured with them, I was definitely rooting for their survival, and still desperately want them to survive and thrive. I got my car three weeks ago and it's met all of my (very high) expectations, and I have had nothing but great experiences with Tesla employees. But, when I read ongoing stories of other Sig owners waiting for their cars, not getting info, frustrations mounting, I refer back to this issue because I firmly believe that but for the Sig premium, all of these folks would have been much more patient with everything, and hindsight has shown that Tesla would have been much better off foregoing the Sig premium if it would have largely prevented these frustrating experiences that too many have had.

 

[ckessel]

However, they might not have anticipated the additional need for communication staff caused by the delays. (Which is what this thread is about).

They were either going to need more staff to communicate with angry customers or more staff to deliver cars to happy customers. Either way, they were going to need staff.

You seem to outline nearly prescient management of just covering the necessary long term spending with impressive insight into future delay issues, but then giving them a wide grace on failing to be prescient on communication and/or delivery staff required.

I would think the simple scenario that Tesla screwed hiring timelines would be a better fit for Occam's razor.

 

[Arnold Panz]

I would think the simple scenario that Tesla screwed hiring timelines would be a better fit for Occam's razor.

Right, and that they assumed ramp up of production would go off without a hitch, so they wouldn't need all those extra staff to communicate with customers.

 

[jerry33]

And even if they only had $5000 deposit for everyone and no Sigs, the first bunch of people who waited three years would have complained just as bitterly. That's just how human nature is.

 

[Norbert]

Having sat in numerous of these types of meetings at my company, I can imagine the CFO saying, "Why can't we charge these folks more who want it so bad?" and George B saying, "If we're going to do this, we'd better be able to deliver on time. Can we guarantee things will go smoothly next year during production?" And everyone around the table says "Absolutely!" because who's going to say that things won't go well, especially in their own area (Operations, Logistics etc.)?!

We are discussing two questions across several threads: The sig premium and the problem communications/number of delivery specialists.

Regarding the end of 2011 decision about sig premiums, I'm imagining that it might have been (for example) more like this: "The Model S turns out to really be a wonderful car, and the first 1000 owners will get a lot of mileage out of being their first proud owners. However our financials are OK if everything goes well, yet could become critically low if not. Therefore we remain optimistic, yet need to keep all costs at the minimum in each area, while production costs during ramp-up remain unavoidably high. Since the value, quality, and the current demand for Model S turns out to be higher than expected, we'd like to raise prices. However we can't raise the price for the regular version without breaking promises which we already made (perhaps even to the DOE). So we position the Sig price a little higher than the regular version, which shouldn't be a big problem since they will be the first to get a great new car including first class bragging rights."

 

[ckessel]

Since the value, quality, and the current demand for Model S turns out to be higher than expected, we'd like to raise prices.

How would they have known that (value/quality/demand) last December?

 

[Norbert]

You seem to outline nearly prescient management of just covering the necessary long term spending with impressive insight into future delay issues, but then giving them a wide grace on failing to be prescient on communication and/or delivery staff required.

No. I don't think they predicted the necessity of a capital raise either, and that's substantial. I think they have less stores, less service centers, less Superchargers, less solar panels on them, and less delivery specialists than they would like to have. For example, Texas has zero Superchargers, even though there are perfect locations for at least three. They also had fewer engineers for interior design, and hired additional ones, probably because of the complaints. They probably have fewer software engineers than they would like, and so on. I'd rather stop here, but the list is probably much longer. Since that sounds quite negative, actually, and I've been accused of cheerleading (what, me?), I'll add something positive: I think they did a really good job of distributing resources, given that they almost ran out of them.

- - - Updated - - -

How would they have known that (value/quality/demand) last December?

They were able to test drive (and crash test) their own prototypes, and knew the number of reservations (sigs almost sold out). So how would they not know those things? (EDIT: And they had the responses from the OCtober 2011 event.)

 

[dsm363]

If someone could suggest a better title for this thread, that would be great. I just put something down when everything was moved.

 

[Norbert]

One more thing: Also they probably haven't been able to hire two full factory shifts yet (if they'd like to).

 

[ahimberg]

one comment on the 'sig premium'. The majority of the S sales reported so far (q3) were SSL's which had a 10k discount (roadster owners getting a sig program) which meant those initial margins weren't as good as they'll have in q4, and again once everything is fully ramped up.

 

[ckessel]

They were able to test drive (and crash test) their own prototypes, and knew the number of reservations (sigs almost sold out). So how would they not know those things? (EDIT: And they had the responses from the OCtober 2011 event.)

You mentioned demand, quality, and value:

Demand: A year ago they had little insight into long term demand, so raising the Sig prices assuming they could gouge was putting an awfully big risk on the good will driving long term reservations. And you've been pretty clear with the money that Tesla spent on stores and super chargers, that long term was a huge factor in spending priority. You words were that there was no point in the short term without a long term, yet clearly the Sig pricing was a short term money grab.

Either Tesla didn't hire and raised Sig prices to prioritize the short term cash or they prioritized against short term cash with long term super chargers and stores. Pick one, but you can't play both sides of that ball.

Quality: The interior quality was pretty terrible at the October event. The production delays have been partly attributed to quality issues. Seems it'd have been a pretty generous eye to assume in 2011 that the quality was going to be up to snuff.

Value: Every manufacturer hopes they have a value proposition.

Does any manufacturer drive their car 6 months from production, go into a meeting, then say "It's a crap car, low quality, poor value, and will have little demand." ?

 

[rcc]

You've got it -- when they implemented the Sig premium, they weren't planning on a cash crunch, supplier issues etc. From what I can gather, they figured, "People who can put down $40k must have money to burn and won't mind paying a few thousand dollar premium to get a Signature car and first delivery. We expect everything to go perfectly smoothly with the ramp up and delivery process from the get go, and people will be so happy to get their cars they'll forget about the premium in short order."

Obviously I have no idea what they were thinking, and much of this was probably implied/assumed, especially about the ramp up going smoothly. But, it was a bit naive and overly optimistic to assume everything was going to go well, and once things didn't go perfectly smoothly they had zero margin for error with these people who not only were buying a six figure car, but were charged an extra premium for the privilege of being guinea pigs for their new delivery process.

Having sat in numerous of these types of meetings at my company, I can imagine the CFO saying, "Why can't we charge these folks more who want it so bad?" and George B saying, "If we're going to do this, we'd better be able to deliver on time. Can we guarantee things will go smoothly next year during production?" And everyone around the table says "Absolutely!" because who's going to say that things won't go well, especially in their own area (Operations, Logistics etc.)?!

I don't mean to disparage anyone by calling them a "bean counter"; to me it's more of a mentality than identifying any individuals, and it's Finance's job to try to maximize revenue (or at least ask these questions). Being a bean counter means short term thinking about financial matters instead of looking at the bigger picture. I've called the pricing of the Sigs the "original sin" because it is the original bad decision that led to so much dissatisfaction with many Sig owners when things didn't go well the past few months.

I don't disagree that Tesla was on perilous financial footing for a long time, and with $40k unsecured with them, I was definitely rooting for their survival, and still desperately want them to survive and thrive. I got my car three weeks ago and it's met all of my (very high) expectations, and I have had nothing but great experiences with Tesla employees. But, when I read ongoing stories of other Sig owners waiting for their cars, not getting info, frustrations mounting, I refer back to this issue because I firmly believe that but for the Sig premium, all of these folks would have been much more patient with everything, and hindsight has shown that Tesla would have been much better off foregoing the Sig premium if it would have largely prevented these frustrating experiences that too many have had.

I'm an engineer but I know bean counters and CFO's can think long-term too. Long-term vs. short-term thinking and trade-offs is about attitude and corporate culture.

And I don't believe for a moment that the first people in line would have behaved any differently. These are folks who got in line early, waited for years and (mostly) aren't used to the operational challenges faced by a startup. Many were expecting an operationally mature company because that's what they're used to dealing with.

The first people in line were going to have a very frustrating, unpredictable and non-transparent experience. The ramp-up made that inevitable. There was no way that the supply chain, manufacturing floor and delivery operations were all going to ramp up smoothly and on schedule. You can't predict what the issues were going to be nor what it would take to get past them but you could easily predict that there would be issues. So you do what every successful startup does and probably what Tesla did: communicate a reasonable schedule externally, set an aggressive schedule internally and go for it.

Charging a premium for a Signature version probably made that a little worse. But the problems were going to be there no matter what. A quarter from now when the Sigs all have their cars, this will all be water under the bridge.

Personally, I think the Sig premium was a fine move. People will pay more to get a hot product early.

 

[Norbert]

Demand: A year ago they had little insight into long term demand, so raising the Sig prices assuming they could gouge was putting an awfully big risk on the good will driving long term reservations. And you've been pretty clear with the money that Tesla spent on stores and super chargers, that long term was a huge factor in spending priority. You words were that there was no point in the short term without a long term, yet clearly the Sig pricing was a short term money grab.

Either Tesla didn't hire and raised Sig prices to prioritize the short term cash or they prioritized against short term cash with long term super chargers and stores. Pick one, but you can't play both sides of that ball.

They had a long reservation list (and the sig list almost sold out), as information pointing in the upwards direction. And no information (that I know of) point downwards. So it was reasonable to assume demand was upwards.

Regarding short term vs long term, Tesla obviously needs to survive (and be successful) *both* short term and long term. I don't see any reason to distinguish the two. Both are necessary. And cash does not have an expiration date.

Quality: The interior quality was pretty terrible at the October event. The production delays have been partly attributed to quality issues. Seems it'd have been a pretty generous eye to assume in 2011 that the quality was going to be up to snuff.

In regard to the interior quality, the October event was mostly irrelevant, since those interiors were hand-built and not representative of production quality. I mention the October event because obviously almost everyone liked the car a lot (other than those temporary issues and for some, for example, the interior design).

Maybe quality wasn't quite the right word, though. I was for example thinking of the expected 5-star ratings, the great air suspension, and other such things which make the car a great car (as opposed to one that only functions acceptably).

Value: Every manufacturer hopes they have a value proposition.

Enough to soon raise regular prices as well.

Does any manufacturer drive their car 6 months from production, go into a meeting, then say "It's a crap car, low quality, poor value, and will have little demand." ?

Tesla must have some of the world's best engineers. They know if things worked out the way they were meant to, given the design, production and cost constraints, or not. A few things still may have changed in 2012, but most must have been quite finished in 2011. Including many crash tests, for example.

So the qualities which led to the MotorTrend Car of the Year evaluation, must already have been present, mostly.

 

[ckessel]

So, they knew everything back in 2011, knew they had the perfect car, had the perfect balance of long and short term....and somehow managed to run short on cash, failed their long touted 5k target, and even despite production delays failed to get enough delivery specialists. The dichotomy of those two views is impressive.

Part of me would be interested in delving farther into the discussion, but this way lies madness. Tesla needs short term focus by not hiring, they have to survive. No wait, it was long term with stores. No wait, it was both in a perfect balance. They've had unexpected issues, but wait, they really expected them already back in 2011. They had the Sig surcharge for short term need. No, wait, it's because they knew in 2011 the car would be awesome.

It's like trying to catch smoke.

 

[Norbert]

So, they knew everything back in 2011, knew they had the perfect car, had the perfect balance of long and short term....and somehow managed to run short on cash, failed their long touted 5k target, and even despite production delays failed to get enough delivery specialists. The dichotomy of those two views is impressive.

Your rhetoric is astounding. They knew (mostly) how the car turned out, but they didn't know yet how production was going to turn out. Very simple.

Part of me would be interested in delving farther into the discussion, but this way lies madness.

If you say so.

Tesla needs short term focus by not hiring, they have to survive. No wait, it was long term with stores. No wait, it was both in a perfect balance. They've had unexpected issues, but wait, they really expected them already back in 2011. They had the Sig surcharge for short term need. No, wait, it's because they knew in 2011 the car would be awesome.

It was always both. Not necessarily in "perfect balance", though.

It's like trying to catch smoke.

It is like saying "1 + 2" in one case, and saying "3" in the other case. Like saying something about "1", and then something about "2", and then adding it, and saying "3".

 

[Brian H]

Kruggerrand;
My POV about the Nummi plant is that they got it for free, and experienced a major boost from that. Toyota sold it for $40M, and bought $40M worth of shares. In effect, TM swapped treasury shares for the plant. Toyota got a white elephant off its hands (who but an idiot was going to buy a CA auto plant?). Issuing the shares cost TM nothing, and they used the $40M cash to refurbish it.

It was a coup of staggering proportions, under the circumstances.