Elon musk has "big steel balls” -Justine Musk (Ex-wife)
In order to create on a scale as large as Musk does a person would certainly need them. The courage to lay your finances on the line in 2008, and push forward through seemingly insurmountable odds and self doubt, makes Elon Musk an incredible story of entrepreneurism in the 21st century. Scores of analysts and researchers, writers, and bloggers have commented upon his rise at length over the years. Several naysayers have pointed out that through a series of happy mistakes Elon has managed to hold off investors, consumers, regulators, and pull the blinders over the eyes of the investment community. With a stock price that several financial analysts have called divorced from reality, the story of the rise of Tesla certainly is worth reviewing and combing over. The company history has been well-documented and written about ad nauseam, I however want the focus of this piece to be more about the upcoming "moment of leverage" or the sea-change that Tesla will hit this year, and why this pivotal point is the true moment of the Elon Musk genius that has taken the world auto industry by such surprise, that even BMW is showing their employees propaganda films featuring Musk and Co.
2017 has been a tremendous year of growth for Tesla. Already well on their way to producing 100k cars this year alone, they have gone from a boutique automaker selling cars to the rich, to a mass market auto manufacturer with their first affordable EV the Model 3 due in July. They have increased the number of their stores, Service Centers, level 2 chargers and superchargers by a large percentage in anticipation of this momentous time. For the first time, the market will have access to a sexy, affordable, long-range EV. At last public count, almost 400k people have made a $1000 reservation for the model 3. However, the big moment of leverage will not be with the model 3 arrives later this year, the make or break moment has already happened.
The brilliance of the super charger network has only recently been discovered by the likes of GM. The industry has been watching with bated breath to see what will happen with the first affordable 200+ mile Electric Vehicle. Sales have been lackluster and rollout has been slow. Whether GM is throttling their production of the Bolt, or they simply aren’t selling because a person can’t charge them on a robust charging network remains to be seen. Sales are plateauing and everyone will tell you a different reason. Analysts postulate that its because there is no national charging network with a quality of use like Teslas. The Proprietary Tesla Super-charger network originally deployed in North America and Europe, has been, what some analysts call, the single most important advantage that Tesla holds in the EV market. The ability to turn your electric vehicle into a cross-country capable mode of transportation was really the last limiting factor that kept EV’s from mass adoption. Tesla has plans to deploy an additional 5000 supercharger stalls around the world by the end of this year bringing the total number to over 10k. This is a huge moment of leverage for the business. Not only has Tesla built this network all over the world, they have, starting in the 2nd quarter of this year, monetized it. New Tesla owners will receive about 1000 miles of free charge each year, and then pay for their additional use. This event will take the supercharger network, which was a money loser for Tesla, and turn each station into a cash register for Tesla. Not only will each new Tesla be able to use the charger, the customer will be able to pay online, or via their vehicle Link System. So, unlike a traditional gas station that needs an attendant, Tesla has created a chain of 10,000 autonomous "cash registers." These supercharger stations will soon be located in city centers and you can be sure that Tesla will encourage their customers to use them as often as they like. This event takes this drain on Tesla’s finances and turns it into a net positive. Now Tesla has said that they will not create a profit center around their supercharger network but rest assured, Tesla is not run by a bunch of Nuns. They have to continue their mission, and you can bet that each supercharger station will pencil out in the long run. Elon and Tesla have created a huge “Next Generation Gas station” right under the noses of the fossil Fuel industry, all over the world. And as of April this year, they have been monetized. The cash drain will become a cash gain, and will only pick up steam as more cars are sold. Every car sold before April of 2017 has a shelf life. Older cars that have unlimited supercharging for life, will leave the road over the next several decades, the super charger network will become more and more profitable. Game changed. This is the Facebook story all over again, where the founders didn’t think they should monetize and start ads on the site until the time was right. Tesla waited until the network was robust enough and then monetized it. Brilliant play.
Tesla has been criticized by several analysts for not expanding the service centers quickly enough to keep up with demand. I would postulate that they simply haven’t been able to due to cash constraints. How do you start a successful car company from the ground up, and service all of those cars? Service Centers are no doubt very expensive to open, probably over $500,000 for each center alone, when you factor equipment installation, real estate expenses, and construction costs. Some estimates are much higher. Elon Musk has been quoted as spending several Million dollars on the first Galllery Store in Santa Monica. These service centers are brick and mortar locations which are expensive and rarely contribute to sales of vehicles like a Gallery store would. However, these facilities are going to start to be massive profit centers for Tesla in the near future. As Tesla has been a new car company, with the first Model S deliveries in 2012, most of these cars have been under bumper to bumper warranty since. Each repair that had to be performed has come out of Tesla’s pocket. This Reuters article explains how the accounting works out:
"Last year, according to a Reuters analysis of data provided in the company's annual report, Tesla spent $1,043 per vehicle on actual repairs and set aside $2,036 in warranty accruals to cover future repairs on the vehicles it sold in 2015. It trimmed warranty expenses by 17 percent from 2014 and cut warranty accruals by 34 percent."
-High warranty costs reflect Tesla’s struggle with quality
If those estimates are to be believed, Tesla is doing a whole lot to improve their warranty repair costs. But additionally, the other huge sea change in Tesla’s favor is that a large portion of the fleet will now start to exit their warranty windows. With 2400 vehicles delivered in 2012, 22,450 in 2013, 31,655 in 2014, and up from their, a greater and greater number of vehicles are starting to need uncovered maintenance work. While the average American car is driven 13,500 miles per year, a tsunami of non-warranty repairs, and driver’s maintenance costs are coming the way of the Tesla Service centers. This will obviously help the bottom line of Tesla in a major way at least enough to be a game changer for this segment of their business. Each day a greater and greater number of cars passes that 50k bumper to bumper warranty, and goes into the land of black for Tesla. Nobody is talking about this! Bob Lutz who was the former GM Vice-Chairman, and pusher of the GM volt, has famously gone on record about how insane it was for Tesla to try and own their own stores. GM tried it and it didn’t work. But for ICE dealerships, the greatest profit center is the service center. Why wouldn’t Tesla want to be in that business as well? Reading several internet forums, the cost of maintenance on an EV is less than an ICE car, however, there are still costs associated with owning ANY car. Again, the huge sea-change here is that for the first time, the aging Tesla fleet is going to be putting dollar bills into the cash register and not take money out on warranty repairs. Tesla has created a HUGE “dealership” network right under the noses of the existing car manufacturers, and now for the first time, they have profitable repairs to make en masse. Tesla was forced to wait until the fleet aged, but now, short of a massive recall, each quarter should see the service centers be a larger and larger profit center. Elon has sworn on conference calls that they don’t want to make any money off of their service centers, but looking at the cost of the preferred maintenance plans it is easy to see how Tesla can and will.
These two factors are going to be the greatest contributors to the bottom line going forward for Tesla. We will continue to watch with great anticipation as this teenage company continues its incredible year-over-year growth. Starting a car company from scratch is a monumental feat. Starting a profitable car company is a greater one. These two factors will be the game changer that takes Tesla to profitability sooner than you think!
In order to create on a scale as large as Musk does a person would certainly need them. The courage to lay your finances on the line in 2008, and push forward through seemingly insurmountable odds and self doubt, makes Elon Musk an incredible story of entrepreneurism in the 21st century. Scores of analysts and researchers, writers, and bloggers have commented upon his rise at length over the years. Several naysayers have pointed out that through a series of happy mistakes Elon has managed to hold off investors, consumers, regulators, and pull the blinders over the eyes of the investment community. With a stock price that several financial analysts have called divorced from reality, the story of the rise of Tesla certainly is worth reviewing and combing over. The company history has been well-documented and written about ad nauseam, I however want the focus of this piece to be more about the upcoming "moment of leverage" or the sea-change that Tesla will hit this year, and why this pivotal point is the true moment of the Elon Musk genius that has taken the world auto industry by such surprise, that even BMW is showing their employees propaganda films featuring Musk and Co.
2017 has been a tremendous year of growth for Tesla. Already well on their way to producing 100k cars this year alone, they have gone from a boutique automaker selling cars to the rich, to a mass market auto manufacturer with their first affordable EV the Model 3 due in July. They have increased the number of their stores, Service Centers, level 2 chargers and superchargers by a large percentage in anticipation of this momentous time. For the first time, the market will have access to a sexy, affordable, long-range EV. At last public count, almost 400k people have made a $1000 reservation for the model 3. However, the big moment of leverage will not be with the model 3 arrives later this year, the make or break moment has already happened.
The brilliance of the super charger network has only recently been discovered by the likes of GM. The industry has been watching with bated breath to see what will happen with the first affordable 200+ mile Electric Vehicle. Sales have been lackluster and rollout has been slow. Whether GM is throttling their production of the Bolt, or they simply aren’t selling because a person can’t charge them on a robust charging network remains to be seen. Sales are plateauing and everyone will tell you a different reason. Analysts postulate that its because there is no national charging network with a quality of use like Teslas. The Proprietary Tesla Super-charger network originally deployed in North America and Europe, has been, what some analysts call, the single most important advantage that Tesla holds in the EV market. The ability to turn your electric vehicle into a cross-country capable mode of transportation was really the last limiting factor that kept EV’s from mass adoption. Tesla has plans to deploy an additional 5000 supercharger stalls around the world by the end of this year bringing the total number to over 10k. This is a huge moment of leverage for the business. Not only has Tesla built this network all over the world, they have, starting in the 2nd quarter of this year, monetized it. New Tesla owners will receive about 1000 miles of free charge each year, and then pay for their additional use. This event will take the supercharger network, which was a money loser for Tesla, and turn each station into a cash register for Tesla. Not only will each new Tesla be able to use the charger, the customer will be able to pay online, or via their vehicle Link System. So, unlike a traditional gas station that needs an attendant, Tesla has created a chain of 10,000 autonomous "cash registers." These supercharger stations will soon be located in city centers and you can be sure that Tesla will encourage their customers to use them as often as they like. This event takes this drain on Tesla’s finances and turns it into a net positive. Now Tesla has said that they will not create a profit center around their supercharger network but rest assured, Tesla is not run by a bunch of Nuns. They have to continue their mission, and you can bet that each supercharger station will pencil out in the long run. Elon and Tesla have created a huge “Next Generation Gas station” right under the noses of the fossil Fuel industry, all over the world. And as of April this year, they have been monetized. The cash drain will become a cash gain, and will only pick up steam as more cars are sold. Every car sold before April of 2017 has a shelf life. Older cars that have unlimited supercharging for life, will leave the road over the next several decades, the super charger network will become more and more profitable. Game changed. This is the Facebook story all over again, where the founders didn’t think they should monetize and start ads on the site until the time was right. Tesla waited until the network was robust enough and then monetized it. Brilliant play.
Tesla has been criticized by several analysts for not expanding the service centers quickly enough to keep up with demand. I would postulate that they simply haven’t been able to due to cash constraints. How do you start a successful car company from the ground up, and service all of those cars? Service Centers are no doubt very expensive to open, probably over $500,000 for each center alone, when you factor equipment installation, real estate expenses, and construction costs. Some estimates are much higher. Elon Musk has been quoted as spending several Million dollars on the first Galllery Store in Santa Monica. These service centers are brick and mortar locations which are expensive and rarely contribute to sales of vehicles like a Gallery store would. However, these facilities are going to start to be massive profit centers for Tesla in the near future. As Tesla has been a new car company, with the first Model S deliveries in 2012, most of these cars have been under bumper to bumper warranty since. Each repair that had to be performed has come out of Tesla’s pocket. This Reuters article explains how the accounting works out:
"Last year, according to a Reuters analysis of data provided in the company's annual report, Tesla spent $1,043 per vehicle on actual repairs and set aside $2,036 in warranty accruals to cover future repairs on the vehicles it sold in 2015. It trimmed warranty expenses by 17 percent from 2014 and cut warranty accruals by 34 percent."
-High warranty costs reflect Tesla’s struggle with quality
If those estimates are to be believed, Tesla is doing a whole lot to improve their warranty repair costs. But additionally, the other huge sea change in Tesla’s favor is that a large portion of the fleet will now start to exit their warranty windows. With 2400 vehicles delivered in 2012, 22,450 in 2013, 31,655 in 2014, and up from their, a greater and greater number of vehicles are starting to need uncovered maintenance work. While the average American car is driven 13,500 miles per year, a tsunami of non-warranty repairs, and driver’s maintenance costs are coming the way of the Tesla Service centers. This will obviously help the bottom line of Tesla in a major way at least enough to be a game changer for this segment of their business. Each day a greater and greater number of cars passes that 50k bumper to bumper warranty, and goes into the land of black for Tesla. Nobody is talking about this! Bob Lutz who was the former GM Vice-Chairman, and pusher of the GM volt, has famously gone on record about how insane it was for Tesla to try and own their own stores. GM tried it and it didn’t work. But for ICE dealerships, the greatest profit center is the service center. Why wouldn’t Tesla want to be in that business as well? Reading several internet forums, the cost of maintenance on an EV is less than an ICE car, however, there are still costs associated with owning ANY car. Again, the huge sea-change here is that for the first time, the aging Tesla fleet is going to be putting dollar bills into the cash register and not take money out on warranty repairs. Tesla has created a HUGE “dealership” network right under the noses of the existing car manufacturers, and now for the first time, they have profitable repairs to make en masse. Tesla was forced to wait until the fleet aged, but now, short of a massive recall, each quarter should see the service centers be a larger and larger profit center. Elon has sworn on conference calls that they don’t want to make any money off of their service centers, but looking at the cost of the preferred maintenance plans it is easy to see how Tesla can and will.
These two factors are going to be the greatest contributors to the bottom line going forward for Tesla. We will continue to watch with great anticipation as this teenage company continues its incredible year-over-year growth. Starting a car company from scratch is a monumental feat. Starting a profitable car company is a greater one. These two factors will be the game changer that takes Tesla to profitability sooner than you think!
