TSLA Market Action: 2018 Investor Roundtable

[bdy0627]

I'm still expecting 5000/w by end of August.

6000/w constant I'd say around September-October. Which would be basically " a few months later".

I thought so previously but I've now been persuaded by the ramp progress and Elon's email that the 5,000/week production will be maintained at some point in July or August at the latest. I think 6,000/week is a few months later as you said.

 

[dc_h]

Another angle of this: Did Tesla ever mention before that they were planning on targeting 6K on this line? It was originally supposed to be 5K, then duplicate the line to get to 10K/week right?

If we're going to see an additional 1K cars/week with the same line, we should expect gross margins to be perhaps even higher than initially predicted.

No. They would duplicate parts of the line that could not support 10k per week. The 6000 and 10k number will be hit with overtime and 3 shifts 24x7. I expect overtime will drop as process improves and they will cut back to 6 days per week. They did a lot of overtime to get the S going and cut that back as productivity increased. Only 400 added jobs, so maybe the third *sugar* is cleanup and prep for the next day.

 

[kbM3]

Another angle of this: Did Tesla ever mention before that they were planning on targeting 6K on this line? It was originally supposed to be 5K, then duplicate the line to get to 10K/week right?

If we're going to see an additional 1K cars/week with the same line, we should expect gross margins to be perhaps even higher than initially predicted.

Elon mentioned 6k indirectly in his earlier email. He said that Tesla had doubled production when they hit 2k/week of Model 3 (meaning 2017 was 2k/week (mostly s & x ) and they were now 4K/week with s3x), He then stated a goal of doubling again which would mean Model 3 hitting 6k/week or 8k all models combined.

 

[Todd Burch]

Elon mentioned 6k indirectly in his earlier email. He said that Tesla had doubled production when they hit 2k/week of Model 3 (meaning 2017 was 2k/week (mostly s & x ) and they were now 4K/week with s3x), He then stated a goal of doubling again which would mean Model 3 hitting 6k/week or 8k all models combined.

I meant in reference to gross margin estimates. In the Q4 2016 conference call (I believe it was), Tesla released gross margin estimates for once they hit 5k/week and were looking in the 20+% range. With a higher volume output and fixed capital cost for the same line, I would expect higher GM (even though it mean mean marginally more labor hours).

 

[srius]

Another angle of this: Did Tesla ever mention before that they were planning on targeting 6K on this line? It was originally supposed to be 5K, then duplicate the line to get to 10K/week right?

Yes, at the last conference call (1q18) - possible Fremont production 700k/yr - 600k M3 & 100k S/X. Elon in the past (?2016) even mentioned that Tesla could produce up to 1 million/yr in Fremont.

 

[Reciprocity]

Elon's email confirms the 2 to 3 shift change (so a 33% increase in hours for a 20% production increase). The 5 day is my recollection and I will try to find where I heard it.

It's pretty clear they have been running 7 days a week. That is where we were multiplying 200 and 300 cars per day by 7 and not 5.

 

[Todd Burch]

Yes, at the last conference call (1q18) - possible Fremont production 700k/yr - 600k M3 & 100k S/X. Elon in the past (?2016) even mentioned that Tesla could produce up to 1 million/yr in Fremont.

Yes but I'm talking about them saying 6k/week on the first Model 3 line.

 

[srius]

Yes but I'm talking about them saying 6k/week on the first Model 3 line.

600k/yr ~= 600k/wk-line * 2 lines

 

[Todd Burch]

No. They would duplicate parts of the line that could not support 10k per week. The 6000 and 10k number will be hit with overtime and 3 shifts 24x7. I expect overtime will drop as process improves and they will cut back to 6 days per week. They did a lot of overtime to get the S going and cut that back as productivity increased. Only 400 added jobs, so maybe the third *sugar* is cleanup and prep for the next day.

I highly doubt they'll handle this with overtime. First, it's not sustainable. And second, paying overtime is an unnecessary extra cost. After all, that's why they're hiring those 1200-1600 people.

 

[Vinny809]

I wonder how much overnight production gets paid. I wouldn’t mind per diem shifts on top of my full time job to help them out.

 

[bdy0627]

Not sure that was ever the case... 5,000 on two shifts were each 10 hours a day, but I think they were 6 days a week. That's 120 production hours a week. On a 3 shift schedule, the number of employees on the 3rd shift might not be the same on the 3rd shift. As it stands, the Tesla Master Plan has 2 shifts with the day shift at 2,980 employees and the night shift is 2,030 employees. (illustration with 6,000 employees). Taken from their 2016 Master Plan as presented to the City of Fremont. In a 3 shift schedule, I am not sure the number of employee hours goes up all that much per car.

In any case, Model 3 production is very different from S/X where the GA is almost all human labor. So the extra employee count and production hours don't really divide in as cleanly.

From the email, there does appear to be a sudden need to hire more employees in order to increase the production rate. That seems like a new development. Perhaps shifting the approach to a little less automation at this point? Did anyone else think this seems like a shift in approach to more manual and less automation? That would be expected to have some negative effect on gross margins, but I don't know how much.

 

[bdy0627]

Elon's said expanding from 2 shifts to 3, so it's a 50% increase. This expansion will happen over several weeks, the way I read is it will take Apr/May, then in June we will have complete 3 shifts, and it will produce 5-6k/wk. So a 50% increase in labor will produce 2.5-3x more cars, this will help the margin significantly.

I suspect the reason that Tesla is starting to add this 3rd shift now is that the Grohmann line was just installed, and now they have enough battery packs to start running the Fremont line at full tilt.

This will have a negative effect on gross margins compared with what was planned to achieve 5,000/week if it was not originally planned for that much manual labor. Unless I'm missing something?

 

[bdy0627]

I think the point here is to reduce automation as per Elon's recent comments. That's why they're hiring 400 people per week for the next "several weeks".

That's my impression here as well. More labor with less automation.

 

[CuriousSunbird]

On the positive side, at least the email mentions the desirability of profits.

 

[Waiting4M3]

This will have a negative effect on gross margins compared with what was planned to achieve 5,000/week if it was not originally planned for that much manual labor. Unless I'm missing something?

I don't have any reason to suspect that 3 shifts wasn't originally planned when the volume approaches 5k/wk. Do you?

IIRC there was some rumbling that Tesla was holding off hiring people in Q4, maybe it had to do with the delay from hitting 5k/wk. Now that they're closing in on 5k they can finally start hiring.

 

[bdy0627]

The "several weeks" should end in June, so adding this 3rd shift (50% increase in labor) will allow them to produce 5k-6k cars (2.5-3x)

The exact quote from Elon's letter:
As part of the drive towards 6k, all Model 3 production at Fremont will move to 24/7operations. This means that we will be adding another shift to general assembly, body and paint. Please refer anyone you know who you think meets the Tesla bar for talent, drive and trust. Between Fremont and Giga, Tesla will be adding about 400 people per week for several weeks.

Elon's wording here seems interesting if this was a planned workforce expansion on the path to 5,000+/week. The suggestion is that they had not anticipated the need for this labor previously. Otherwise, wouldn't they have already had a plan in place to hire people for this stage? That doesn't seem to be the case with the need to have employees now refer anyone they know to help get this immediate labor force hired. My read is that this is part of Elon's tweaking of the production line after living on the production line for a couple of weeks now. Bottom line is that they need to hit 5,000/week by end of Q2 per guidance. Elon is taking that extremely seriously as is Moodys. This is how they are going to ensure they do that, even at the increased labor cost. Improved margins will come in time. Given the change in China's stance, Tesla will need lots of capital for another factory fairly soon.

 

[Waiting4M3]

Elon's wording here seems interesting if this was a planned workforce expansion on the path to 5,000+/week. The suggestion is that they had not anticipated the need for this labor previously. Otherwise, wouldn't they have already had a plan in place to hire people for this stage? That doesn't seem to be the case with the need to have employees now refer anyone they know to help get this immediate labor force hired. My read is that this is part of Elon's tweaking of the production line after living on the production line for a couple of weeks now. Bottom line is that they need to hit 5,000/week by end of Q2 per guidance. Elon is taking that extremely seriously as is Moodys. This is how they are going to ensure they do that, even at the increased labor cost. Improved margins will come in time. Given the change in China's stance, Tesla will need lots of capital for another factory fairly soon.

Here is a post from me a while ago showing surprisingly low hire in Q4:

This is the reason I think the hiring now is making up for the dip in Nov/Dec, due to the push-out of the 5k/wk target.

Also there was a batch of firing in Oct 2017, it may be a related downsizing in Q4 to save cost, and now they're making up for it.

 

[Waiting4M3]

Here is a post from me a while ago showing surprisingly low hire in Q4:

This is the reason I think the hiring now is making up for the dip in Nov/Dec, due to the push-out of the 5k/wk target.

Also there was a batch of firing in Oct 2017, it may be a related downsizing in Q4 to save cost, and now they're making up for it.

In the worst case the 3rd shift was not originally planned, and will eat into the margins, lets do the math

400 people hire for say 7 weeks (now till early June) * 100K annual wages = $280m

Model 3 at 5k/wk * 50wks * $50K ASP = $12.5b

The added wages is 2.2% of M3 margin. This is the worst case scenario. As we've seen with MS/X, the efficiency and margin continues to improve over several years. So even if the added shift is a short term over-reaction now, Tesla will continue to improve and get more efficient.

 

[Todd Burch]

600k/yr ~= 600k/wk-line * 2 lines

Math is fun. (But I have no idea what you're trying to say).

 

[ZsoZso]

I love this comment about Precision in Elon's email:

Our car needs to be designed and built with such accuracy and precision that, if an owner measures dimensions, panel gaps and flushness, and their measurements don’t match the Model 3 specs, it just means that their measuring tape is wrong.

Another pet peeve of the mass media journalists to complain about Model3 panel gaps, now they are being hunted down.