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Tesla Reservations Model and Demand Generation

Discussion in 'TSLA Investor Discussions' started by luvb2b, Apr 6, 2013.

  1. luvb2b

    luvb2b Member

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    #1 luvb2b, Apr 6, 2013
    Last edited: Apr 7, 2013
    i've addressed reservations once or twice in the q1 earnings thread. but now that i'm convinced q1 earnings are going to be quite good, my focus shifts to the future. how will tesla do the rest of the year?

    the shorts seem to be quite keen on the reservations issue. they cite high cancellation rates and quick turnaround times as reasons why the tesla reservations book has dwindled. i've been working on a reservations model, trying to take into account the various facts we know about reservations.

    the cancellation rate is a slippery concept and it could be measured a number of different ways. the simplest is to take the number of cancellations and divide by the start-of-quarter reservation count. that misses some of the cancellations that would happen with people within the quarter. so i use a cancellation rate formula that incorporates the reservations from the current quarter. you can easily rework these numbers yourself using a simple spreadsheet.

    basic formulas
    quarter end reservations = start of quarter reservations + new reservations - sold vehicles - cancelled reservations
    cancellation rate = cancelled reservations / (start of quarter reservations + new reservations - sold vehicles)

    known facts
    1. using the reservation numbers reported by users, it looks like q1 reservations in the eu were about 900.
    2. reservations sequence numbers no longer exist in the us. using the last available data points, then extrapolating out the reservations rate gets you around 2500 q1 reservations in the us. i didn't add in canada because it seems small.
    3. using the above and 100 reservations for the rest of the world (row) i arrive at 3500 reservations total for q1.
    4. at the end of q4, "about 25% of the [15000] reservations were from outside north america".
    5. cancellation rates are expected to remain elevated this quarter.
    6. the tesla website has delivery times for north american customers in the range of 1-3 months, depending on the configuration. elon musk has said the average wait time in north america is down to two months.
    7. unit sales this quarter will be 4750+.
    8. eu production will start around june.
    i have to make a few assumptions. in my initial attempt, i want to be conservative. i want to think like my opponents, the shorts. some of these assumptions might seem silly, but i can always make them more tesla-favorable later. i think i've taken every element of the model at made it go against tesla: cancellation rate skyrocketing, reservations stalling, and production climbing.

    assumptions
    1. cancellation rate will jump 100% above the 2012 q4 rate and then stay high the rest of the year.
    2. reservations increase to around 4,000 per quarter, but tesla can't do any better than that the rest of the year.
    3. production stretches over 5,000 per quarter, consuming reservations at a faster pace.

    even with these horrible assumptions, the reservations model shows that we are clearly sold out through 2013, ending the year with around 2,500 reservations. numbers in bold italic are the estimates.


    prior count+ new- sold- cancel= end countcancel rate
    2012Q3115002900250950132008.3%
    2012Q4132006000240018001500010.7%
    2013Q1150003500495029001065021.4%
    2013Q210650400052002000745021.2%
    2013Q37450400054001300475021.5%
    2013Q4475040005600700245022.2%
    so how can usa production times average 2 months when there are supposedly 10,500+ reservations on the books? in order to make sure the model is logically consistent, i actually had to break out the north american and eu/rest of the world end-of-quarter reservations and track how they evolve.


    n.a. qtr end reservationseu/row q end reservationstotal qtr end reservationsna productioneu/row productiontotal production
    2012Q4 11,600 3,400 15,000 2,400 - 2,400
    2013Q1 6,270 4,380 10,650 4,950 - 4,950
    2013Q2 4,030 3,420 7,450 3,640 1,560 5,200
    2013Q3 3,400 1,350 4,750 2,700 2,700 5,400
    2013Q4 1,395 1,055 2,450 4,200 1,400 5,600
    the first thing to check is internal consistency. you'll see the total reservations and total production line up exactly in both tables. the next thing to check is logical consistency. you can see at the end of 2012 q4 there are 3400/15000 = 22.7% reservations outside north america. the production for 2013 q1 is entirely north america, and then europe gets added to the mix for a few weeks in q2 and more earnestly in q3. total production is kept near or above 5000 for all of 2013. so far, it's all consistent with the stated facts.

    but how about the 2 month average wait time in north america? currently the model shows 6,270 north american reservations at the end of 2013 q1. since i am using a jump to a 20+% cancellation rate this is effectively only about 4,925 reservations. of those 4,925 i'd guess there are a bunch of deferrals, maybe 1,000 or so? that means only about 3,925 units of the remaining 6,270 north american reservations will be in queue for production. with production at 500 per week, that works out to around 8 weeks of production. so yes, it looks like this model is consistent with the 2 month average wait time for north american customers.

    and no, the model shows that the shortened wait time isn't a major problem. as long as new demand generation keeps chugging along even barely above the q1 level, everything will be just fine because europe/row production will fill in the holes for a couple quarters. by the time we reach the 4th quarter, there will still be about 2500 reservations left even under these adverse assumptions. hopefully by then the tesla demand generation machine has reservations pushing well over 5,000 a quarter.

    on the next earnings call i would expect to hear:
    1. ended quarter with something more than 10,500 reservations with about 60% in the usa.
    2. tesla affirming forecast of over 20,000 units during 2013 based on the existing reservations and pace of reservations.
    3. european deliveries starting soon.
    4. focus on demand generation, especially for 2014.
    5. projecting q2 production of 5000 or more units.

    i've just presented one approach for trying to reconcile all the information on reservations and production. hopefully someone else has some insights or thoughts regarding the latest decline in wait times? later i'll try to update with some more realistic numbers for the rest of the year. recent trends in european reservations indicate some pickup after a seasonally slow q1.

    in conclusion, i agree with elon.

    "tesla doesn't have a demand problem."
     
  2. hcsharp

    hcsharp Active Member

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    luvb2b thanks for your analysis. Have you thought about the possibility of a highly publicized safety recall that's basically a non-issue but the press goes on a feeding frenzy? Have you factored the likelihood of this and the potential effect on reservation rates? The Volt lost a lot of sales for a few months due to the press spewing out FUD over one of the safest cars on the road. Tesla is still suffering from the Broder fabrication and the NYT automotive editor still has it out for Elon.
     
  3. Norbert

    Norbert TSLA will win

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    Where did the "2 month" info come from?
     
  4. Right_Said_Fred

    Right_Said_Fred Model S - Sig. 283 EU

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    Great analysis! If there were any worries, it puts them to rest (barring a major event).

    I like the fact that you take a conservative approach. There is definitely some upside, like extra NA orders from the 'leasing' program, extra European orders when cars hit the street there / get extensive press reviews, and a lower cancellation rate as the time between reserving and finalizing will shrink to a few days (a few days' waiting will result in a much lower cancellation rate than two years of waiting).

    I like that European reservations seem to be picking up pace, especially in Norway.
     
  5. erha

    erha Member

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    luvb2b, I just want to thank you for all your great posts on this forum. You're doing an amazing job. Please keep posting your analysis! They seem very accurate and I understand them without any knowledge about how businesses operate. Thanks
     
  6. luvb2b

    luvb2b Member

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    ya i think about a recall all the time. it would be bad. every estimate would have to get tossed out the window. every car maker has recalls. it's just with a new company that has only one product, the impact would be disproportionate. even for what you might see as a non-issue. since there's no way to predict when or if a recall would happen, if it happens i'll have to adjust depending on what it is.

    i think that's the average wait. some configurations are down to 1 month, some are at 3 months. sources: a recent bloomberg article, log on to the tesla website and start configuring, or just look at the model above. they all point you the same way: the north american backlog should be down to a quarter or so.
     
  7. K Hall

    K Hall Member

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    Elon stated in the last investor conference call that they are seeing 3 new orders with every delivery. This statement was in response to a "early adopter" demand discussion. The demand is growing exponentially.

    They have expanded production 25% this quarter and I would expect another 25% in the near future. I hope you have you seat belts on.

    Nice analysis Luvb.
     
  8. hcsharp

    hcsharp Active Member

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    If that's true then why has the avg wait time shortened to 2.5 mo? I agree that there's a good chance this could, or is happening. But the math doesn't prove this out.

    Well, OK, the formula does have an unknown variable - time. I'm responsible for several reservations since taking delivery but it took a long time. Most of my friends and neighbors wanted to wait several months to see how it worked out.

    Regardless, I'm not yet convinced of the "3 new orders per delivery" statement.
     
  9. Bardlebee

    Bardlebee Member

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    Long term wise, I think demand will increase just due to their store front presence. Even in Austin the store reported that many people have not heard of Tesla before, but bought the cars the same day just by walking by. So there certainly a lot of brand realization to cover. Their stores are doing a lot of that work.

    Short term, I am also unsure how they are fairing right now. We will probably hear more in the Q1 call.
     
  10. DonPedro

    DonPedro Member

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    Fundamentally, the main point is not this year. Yes, it would be bad if they were able to produce 20k+ cars in 2013 and could not sell them. However, to be a "buy" at a $5bn valuation, there needs to be a long term demand that is far greater than that.

    The question is whether historic demand tells us anything about the future. It is possible to make a good case for both answers - "yes" and "no". The negative answer would go something like this: "The demand we have seen so far is fully consistent with the Model S being a niche product that hits a small group of enthusiasts hard. When this entire group gets hyped about the car at the same time, demand looks OK for a year or maybe two. However, serving this niche at it's natural replacement rate of cars is simply not a big, viable business for a car company."

    The positive answer would go something like this: "The current demand, that has outgrown even a very successful rampup of production, is just the 'early adopters' end of the adoption curve. This demand has been generated despite a huge marketing disadvantage as compared to other cars, since Tesla has a less-known brand, a fraction of the marketing spending, less of a dealer network and has almost not been seen on the roads at all. Going forward, there will be more and more Teslas on the streets, stronger and stronger brand recognition, and probably increasing marketing spending by the company. This points to a healthy growth in demand in the coming years. As additional models are launched, even more demand can be generated in new segments of the market."

    It is crucial to appreciate both these answers fully, in order to make a good decision about the stock. What I like is that choosing between those answers is not something a whiz kid will get out of his spreadsheet. This is about really understanding the product and its value to customers, about getting a feel for who is buying Teslas (my mother is, which sort of weakens the "enthusiasts" argument from my perspective), and about having a vision about the future of road travel on our planet.

    When I invest, I always ask myself how on earth I can imagine beating "the machine" - the institutionals with their superior information collection, with more time to spend on analyses than I can ever do myself, and frequently with special access to lunches with execs etc. Most of the time I end up just putting my money in index funds. But I feel Tesla is a company that the institutional guys are going to ne awefully wrong about most of the time. Also there are many amateurs dabbling in the stock (such as myself). That is why I feel it is possible for me to profitably invest/trade in the stock.
     
  11. Bardlebee

    Bardlebee Member

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    Hey Don,

    On that note of being out of the niche market, as I said above there are quite a few people who didn't even consider buying the car before the model S. I have a few friends that weren't even considered car people before seeing the model S, me included. There are a few people at my business who have one now and they drove very low end practical cars such as myself and did a 360 spin and got a very expensive vehicle, not totally due to the pluses of it being electric, but because it was great car.

    I guess you could say I am on the optimistic side, but the negative side have many viable points. "Time will tell" is something we can probably tell will be the theme here.
     
  12. Norbert

    Norbert TSLA will win

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    I haven't been following deliveries very closely lately, however I only remember Elon talking about something like 2 months for fully-optioned 85 kWh orders.

    This post is from someone who reserved in Nov 2012, a 60 kWh, and is expecting delivery end of this month:
    Model S Delivery Update - Page 480

    This would be 5 months. On Bloomberg TV was someone who ordered a 85 kWh in Dec 2012 and got it in March, I think, which is 3 months. If those were representative numbers, they would point to an average of 4 months between 85 kWh and 60 kWh, but there are obviously a lot of variations. (All of these numbers are excluding european orders, of course, and specific options such as red body color.)

    In any case, it is very interesting to see where you get even with these worst-case assumptions.

    You are assuming steady reservation rates, which is fine for the kind of calculation you are doing here.

    Nevertheless, here some thoughts about future reservation rate: (Unfortunately, we don't have numbers to quantify these things.) While there might be some saturation in the market of EV enthusiasts who have been waiting for an EV like this, Tesla's strategy was always built on going past this, from the get-go. Something which lately seems to find little attention is that there will be a number of new stores in 2013. New stores always generate reservations due to their newness, however also add to the growing number of stores with continuous generation. Then, Tesla is still very little known, and this is changing. Model S owners still have little experience for others to rely on when making a decision, and their numbers have been increasing into the thousands just in the last few months. As someone wrote above, buying a car is often a longer term process, and this may be true even more so for an electric car. So the effects of word-of-mouth should be increasing. Superchargers will be added, financing was just added, service will apparently be improved, software features will be added and improved. So the product altogether keeps improving, and people will get used to the fact that the Model S is a valid choice as a great car.

    Then, the shortening of waiting time itself will have a positive effect. I think it was both GeorgeB and Elon who said that one of the larger factors keeping some from making a reservation, is the waiting time itself. And while it will reduce the number of those who make a reservation "just in case", a shorter waiting time will also reduce the cancellation rate, as you don't need to buy the car twice, at different points in time, so to speak.
     
  13. brianman

    brianman Burrito Founder

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    Regarding demand...

    Lance (Bellevue store manager) mentioned today that "only" 22% of the orders are placed in stores these days (the rest are online, triggered by word of mouth, etc.). That number was much higher months ago (he offered the number but I didn't remember it).
     
  14. Norbert

    Norbert TSLA will win

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    Yet, how many of those ordering online have been in a store before?
     
  15. Bardlebee

    Bardlebee Member

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    Many states don't allow the sale to happen in store. Texas surprisingly, is a large customer of Tesla's and they can't sell in store. Hopefully legislation changes soon, but Norbert has a solid point here.
     
  16. luvb2b

    luvb2b Member

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    the exact quote: "North American customers are waiting as little as “two to three months” for their cars, Musk said. That’s less than the current average of five months, including international customers, he said" from bloomberg.

    i agree there is plenty of upside. the main point i was trying to make is that model s will likely sell out all available 2013 production. elon and crew have until next year to bring the average reservations up over 6000 per quarter. that's a long time!
     
  17. Norbert

    Norbert TSLA will win

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    While the term "as little as" suggests that even the North American average is higher than that, it does mean that you'd have to pick '2 month' if you want to be sure to consider the lowest possible number, so to speak. However, most likely, of course, this is only for the top version. BTW, my impression was that for some time in summer they want to focus on the european version, and once european productions starts, US orders at that time will have to wait until they shipped a larger quantity to Europe.

    It's a long time, and they have been planning for this exact development (in so far as we can tell), recently anticipating a demand of 30k to 39k /year, eventually, including Europe and Asia. (Asia starting later this year, I think.)
     
  18. Futurist

    Futurist Member

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    Impact on the industry

    I am wondering how the competitors in the luxury car segment will react to to success of the Model S when the official sales figures and numbers for market share for Q1/2013 will come out over the next weeks.

    In Germany, Tesla Motors and their Model S still seems to be "under the radar" for most car makers. I have been talking to marketing and sales managers of two major German premium brands, and they had no clue, how many cars they sell in the US. They both guessed their market share "unter 0,1%". Well the fact is, that if Tesla will sell 20.000 Model S in the US in 2013, they will outsell the Mercedes S-Class and BMW 7-Series combined! In California, their market share in the "luxury car" segment in Q1 will be around 20%. In the entire US they will end up selling 1/3 of 5-Series BMWs or E-Class Mercedes or as many cars as Audi with the A6.

    This will be pretty shocking for the guys here, because they believe that it would take another 10 years at least, before electric cars will cross the 5%-barrier in any market.

    But on the other hand, this does not leave very much room for further expansion with only one Model in one segment. The key question is the adoption of the car in Europe and Asia, which accounts for about 70% of the car sales in this category worldwide.

    And the other factor is the ability to bring another category of cars to the market quickly - the High-End-SUV-Market and the "Smal Luxury Car" market, which is about 4-5 times that volume.
     
  19. luvb2b

    luvb2b Member

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    i follow twitter feeds on model s pretty closely, and from what i see they are cannibalizing sales from other segments too. i mean, logically how can one car with limited market reach and brand awareness suddenly become the #1 large luxury car in america? it has happened, but it's not logical. they have to be reaching outside their segment.

    of course the luxury sedan segment is the natural segment where model s fits, and of course they try to sell directly to the panamera, bmw-7, or benz-s customers. but i see buyers coming from:

    1. mid-range luxury buyers with either high-mileage or green tendencies
    2. performance car enthusiasts
    3. higher income hybrid (i.e. prius/volt) buyers
    4. smaller suv buyers

    there's more stories over at the tesla forum, here's a quick sample:

    "Personally, I'm not particularly rich nor green. The most expensive car I've ever purchased was a GMC Yukon XL for $42K, and that was out of necessity (I have 5 kids). My wife has been begging me to consider Solar Panels for years, but we never pulled the trigger until, well, after we reserved our MS. But after driving my Prius for 2.5 years, I realized how much I enjoyed saving money, especially when running the A/C while waiting to pick up my kids for basically no cost (unless they took >10 minutes, in which case the engine would kick on. I hate that!). In fact, I realized that most of my arguments with my kids were about wastefulness -- wasting their food, wasting their money, wasting their time, wasting their lives! So when I started looking around for a mid-life crisis car, I considered the Audi TT (wife's idea), Porsche Cayman, BMW 3 or 5, Nissan 370Z, and even the Subaru BRZ. We got a vacation home about 100 miles away last year, and I realized that I would never drive any of those there because, once again, I'm too cheap! I'd still drive the Prius, in spite of a total lack of any driving dynamics whatsoever. Then came the Model S. Ooooooh......"

    "
    how did i decide to buy a tesla? it sort of went like this:Conversation with a friend on 04/15/11 -
    Me: "So I'm trying to decide what car to buy. I really want an Audi S4 but then I feel bad for the environment so maybe I should get a Prius..."
    My Friend: "Why don't you get both?"
    Me: "Wait, what?"
    My Friend: "Check out the Tesla Model S. Tesla is making an electric sedan!"
    ** google search interlude **
    Me: "Holy $&@#!" I reserved one 2 days later on 04/17/11."

    "Then a friend got a Volt, which he loved (and has since dumped for a Model S...)

    My wife and I went to test drive a Volt, and we both walked away saying that considering the price, we'd rather start thinking about the base-model Tesla for "only" 20k more. Of course, as we know now, that rarely remains the final decision. We upgraded to the 60, got pearl white, Supercharger capability, air suspension, leather seats, and ultimately spent almost two Volt's worth.
    And we're ecstatic about it."

    the other interesting thing here is that tesla is mostly going after the urban markets. but as they get further along i think you'll find a pretty good pool of buyers in the rural markets as well. gas stations are a bit further apart in the rural markets, and sometimes the drive to a town could be inconvenient or expensive. one facebook photo had shown a guy who parked his john deere and used a model s for a tractor (hee-haw!). :eek:

    http://www.facebook.com/virginiacleancities/posts/245511588925879

    i think this is why tesla has catapulted to the #1 large luxury car in america. it's large luxury but it is captivating buyers from other segments. it changes the modeling substantially when you are no longer limited to that segment.
     
  20. Volker.Berlin

    Volker.Berlin Member

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    #20 Volker.Berlin, Apr 8, 2013
    Last edited: Apr 8, 2013
    Basically, i agree, but it's slowly changing (German):
    Konkurrenz für BMW und Co.: Wie gefährlich ist Tesla? - manager magazin - Unternehmen

    My favorite paragraph in that article:
    Which is pretty much what you said:
    They'd better start taking Tesla seriously... :)
     

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