The total amount of Customer Deposits at the end of each quarter indicates the demand

[Benz]

The total amount of Customer Deposits at the end of each quarter indicates the demand for Tesla EV's.

A reservation and a deposit is required before one can buy a Tesla EV (except in the case of a loaner car). Therefore, we can say that the total amount of Customer Deposits at the end of each quarter gives a pretty good indication of how the demand for Tesla EV's is developing as the quarters and years go by. The past three Shareholder Letters showed this trend:

Q4 2013 - December 31st, 2013: $163M+
Q1 2014 - March 31st, 2014: $198M+
Q2 2014 - June 30th, 2014: $228M+

This total amount (at the end of each quarter) decreases with all the deposits that were already made prior to the last day of the previous quarter, for the cars that get delivered in that concerning quarter.

This total amount at the end of each quarter increases with all the deposits made in the concerning quarter for the cars that still have to be delivered in the next quarter (or even later).

Future development of the total amount of Customer Deposits at the end of each quarter will depend on a few factors, and the four most important factors are:
- primarily, the number of different Tesla EV's that people can choose from (currently that is Model S and Model X);
- and secondly, the geographical expansion (more countries = more reservations) of Tesla Motors;
- and thirdly, the period of time inbetween making a reservation and getting the Tesla EV delivered.
- and finally, the amounts that will be invested in the coming years in expansion of the production capacity, the Supercharger network, the Service Centers, and the Stores.

I firmly do believe that the demand for Tesla EV's is going to go viral at some point in the near future. And we surely can get a clear indication for when this will happen. We will just have to keep an eye on the future development of the total amount of Customer Deposits (at the end of each quarter).

I am pretty sure that the total amount of Customer Deposits (at the end of each quarter) will increase to about $1B at some point in time during the current decade (before 2020).

Please share your thoughts/opinions/arguments/expectations/guesses.

Thanks

 

[Benz]

Following reply/quote is from Mark B. Spiegel (on Inside EV's):

"Once a Model S is destined for China (after it’s built but before it’s shipped) Tesla requires an additional $40,000 deposit to pay shipping, taxes and import duties. Thus, if there were (say) 1000 cars en route to Chinese delivery as of June 30th the deposits would have been inflated by $40 million, and thus would have actually been $10 million LOWER than they were at the end of the previous quarter (despite the supposed increase in Model X deposits over that time)."

Is this true?
Can anyone confirm this?

 

[jhm]

I think this is a really solid way to look at demand. Basically, it shows the willingness of customers to forego interest income to hold a place in line. Anyone paying say 12% on consumer debt while they have cash on deposit with Tesla is essentially paying 1% per month on their deposit for the privilige. So this is not just a token of interest, but in aggregate it represents a real and substantial economic cost to customers. This is the essence of demand, willingness to pay for something.

Moreover, the economic price paid is proportional to the length of time they wait. So as the backlog increases, the price goes up. The longer the waiting time the fewer potential buyers will be willing to pay the high cost. So this is a demand curve. The lager the customer deposits grow relative to delivery rates, the further out on the demand curve is the marginal customer.

It is also worth noting that deposits increased by 40% over 6 months. This means demand is doubling annually. This lends some insight into why Tesla needs to double production from 2014 to 2015.

Let's see if we can pull together more data points to see how stable this growth in demand has been. We may even try to correlate it to the stock price.

 

[daniel Ox9EFD]

I came up with this premise in a thread I opened a few days ago - Can Tesla hit the 35000 a year target in 2014?
but it was disputed based on the idea, mentioned by Elon that they can lever demand just by opening more stores.
Even though stores is probably not linear with demand, as there are factors such as superchargers and service centers in the particular area, plus this is an online product. I take from Elon that opening stores is an effective driver of demand.

The fact they are slow to open new stores as they self indicate they are saying they are currently suppressing demand. So the number of deposits is only an indication of demand given the number of stores, meaning it tells us current demand but not much about potential demand.

 

[eepic]

As a suggestion, one could estimate the Model X reservation dollars from the Model X tally thread at the end of these quarters and try to get a more isolated picture of Model S demand. It would vary quite a bit depending on how you estimate deposit amount split (Sig vs non-Sig), but may be insightful nonetheless. I may do it over the weekend if no one else does!

 

[dalalsid]

eepic I tried that here - Tesla's Order Backlog And Why It Is Worth More Than Porsche - Tesla Motors (NASDAQ:TSLA) | Seeking Alpha - essentially ~150M for Model X, ~75M for S but the S breakdown is hard. I just assumed all at 2500 in the article but there are pending signatures in some markets.

 

[erha]

Should be fairly easy to compute number of reservations, right?

With about 2000 Model X Signature models reserved at $40,000 each that leaves 148 million. Which means there are 29,600 reservations at $5,000. A total of more than 30,000 (29,600+2,000) reserved cars is a lot. I don't really care if they have model s or model x reservations as it seems they will be able to produce both on the same production line.

 

[adiggs]

Should be fairly easy to compute number of reservations, right?

With about 2000 Model X Signature models reserved at $40,000 each that leaves 148 million. Which means there are 29,600 reservations at $5,000. A total of more than 30,000 (29,600+2,000) reserved cars is a lot. I don't really care if they have model s or model x reservations as it seems they will be able to produce both on the same production line.

That methodology does have the benefit of being simple, but at least in the US, Model S deposits are $2,500 rather than $5,000. Assuming that's consistent around the world, then your methodology erha is also exceptionally pessimistic about the number of reserved cars.

 

[jhm]

It is important to keep in mind that demand is more about the willingness to pay than the quantity desired. For example, I am sure that overestimate 100 million people would like to buy a Model S. That's a huge quantity, but not nearly that many are willing or even able to buy one for $70,000 or more.

So it is really important that customer deposits are denominated in dollars, not quantities of vehicles. Simply put, someone who pays $105,000 for an S is exhibiting 50% more demand than someone who pays only $70,000 for an S. Likewise someone willing to put $40,000 on deposit for an X is demonstrating 8 times more demand than someone who only puts down $5000. Moreover, a $5000 deposit on an X, which will not be available for another 12 months demonstrates more than twice the demand as a $2500 deposit on an S to be delivered in just a few months. So while it is tempting to try to break down customer deposits into specific quantities desired for specific products this does not lead to a better measure of demand. It is superior to measure demand, the willingness to pay, in dollars, not quantities desired.

It is also important to understand that demand cannot be created by slowing down production or delaying new products. Part of the reason that customer deposits are doubling is the expectation that Tesla will deliver these vehicles in a reasonable time. To understand why, consider what would happen if Tesla announced that the X would be delayed for another year. This additional delay would discourage new potential reservationists and some existing registrationists would give up in frustration. Basically, Tesla would be asking buyers to lend them money for an extra year for nothing in return. Depositing money without interest has a real economic cost. Only as Tesla demonstrates that it can deliver desirable products in a timely manner (and timely is quite relative) will it be able to grow total customer deposits. If Tesla does not double production over the next year and start delivery of Model X, then we should not see customer deposits double over the next year.

From this perspective, it should be clear why the analyses of the likes of Paul Santos make no economic sense at all. He is trying to equate quantities delivered with demand. Quantities are not denominated in dollars. When Tesla moves into a new country it begins with a backorder with customer deposits to back them up. Those who have deposited more and for a longer period of time have exhibited more economic demand, and it is right for Tesla to honor this and seek to alleviate back orders as quickly as possible. So yes, for the time being, China has more demand than the US. Big deal, that does not mean that demand in the US is in decline. It just means that it is relatively lower than that in China and that Tesla is right to reduce deliveries in the US to satisfy greater demand elsewhere. So when we get into debates with the likes of Paul Santos, we really ought to insist that demand be denominated in dollars or some currency, and not in mere quantity of vehicles. Likewise when detractors like to point out that Nissan sells more Leafs than EVs sold by Tesla, we should point out that consumers are willing to pay about 3 times as much for an S than a Leaf. In economic terms, there is about 3 times as much demand for a Tesla than a Leaf. This is why in most industries sales are measured in dollars, not quantity of items. On a dollar sales basis, Tesla has a much bigger share of the automotive market than many give them credit for when measured by quantity of vehicles. Clearly not all vehicles are of equal value. The ones Tesla makes are worth more than five times as much as the average car.

As they say, follow the money. Customer deposits is real economic demand.

 

[erha]

That methodology does have the benefit of being simple, but at least in the US, Model S deposits are $2,500 rather than $5,000. Assuming that's consistent around the world, then your methodology erha is also exceptionally pessimistic about the number of reserved cars.

Thanks for reminding me! I also think there are only 1,800 signature models. A semi-qualified guess from me would be almost 40,000 reservations, which means that Tesla could run production for about a year without receiving one single new reservation; which is really, really impressive .... (not counting cancellations of course)

Thanks for enlightening me, jhm. When speaking of demand related to reservations made we should probably refer to "quantity demanded", right? Good point about Tesla having a bigger share of the automotive marked than what they are given credit for!

 

[adiggs]

Well said 'jhm. I hadn't thought of demand in the terms you're describing, but I like the way you're thinking and I appreciate you sharing it with the rest of us.

 

[jhm]

Thanks for enlightening me, jhm. When speaking of demand related to reservations made we should probably refer to "quantity demanded", right? Good point about Tesla having a bigger share of the automotive marked than what they are given credit for!

Certainly. I did neglect to mention, however, that for the purpose of determine how long it will take Tesla to satisfy existing orders you do in fact need to estimate the number of vehicles in backlog. Then you can divide by the production rate to determine how long it will take. But the size of the backlog is not the same as demand. "Quantity demanded" only is a meaningful concept if you specify at what price the quantity is demanded, as in a demand curve. So for example, a backlog of 10,000 S60 is not worth as much as a backlog 10,000 P85. In both cases, one might be tempted to say that the quantity demanded is 10,000, but this is ambiguous. It could be worth from $750M to $1.1B. That's a big difference in demand, but it would take about 10 weeks now to work through either backorder.