Published on March 8th, 2019 | by Frugal Moogal
March 8th, 2019 by Frugal Moogal
The goal of this series is to examine current topics being written about Tesla [TSLA] that appear to be stirring up “Fear, Uncertainty and Doubt” (or FUD). The plan is to try to provide reasonable analysis about the validity of the claims. I generally do not link to the articles that “inspire” me to write this, as I do not wish to reward analysis I feel is poor with increased traffic. However, I will freely admit that my analysis may contain incorrect assumptions, and will do my best to acknowledge them in future articles.
It’s been a couple of months since I last wrote an article, and a ton of stuff has happened in that time, but there hadn’t been a lot of changes with regards to the Tesla story until last week. The company was generally trucking along, shipping Model 3s, and doing what everyone was expecting it to do.
Then, one week ago, Tesla announced that the $35,000 Model 3 was made available, and it seems everyone has an opinion on what this means. The followup to that announcement was two more announcements, one to reveal V3 Superchargers (last night), and one to unveil the Model Y (next week). We also heard about Tesla plans to close most of its Tesla Stores.
I don’t pretend to know, but I have some theories to dive into here. Before I do, my usual boilerplate paragraph about my stock: I remain a Tesla shareholder with a whopping 8 shares, with no intention to add to or sell that stake. I’ve mentioned in the past I think Tesla remains a risky stock and the last few weeks have shown why, but one that I still believe has the potential to increase astronomically in the future, which is why I continue to hold a limited number of shares. I would not suggest anyone use the following article as their sole data point to decide to invest nor sell shares in Tesla. With that…
Tesla Screwed Up
Before I go on, I’m going to feed the bears a bit of raw meat and agree that Tesla did some pretty serious botching here, and the announcement of the $35,000 Model 3’s availability — an announcement that should have been met with excitement and positive publicity in the press — instead became an opportunity to question what the company was doing.
I feel like the announcement of the $35,000 Model 3 was rushed not necessarily due to demand, but to try to spike the price ahead of the $920 convertible senior notes. By doing this the day before the convertible senior notes were due, and by explaining that the company could get to this point early by closing a ton of stores, no matter what the real story behind the move, it seemed like a desperation move to not just spike the price of the stock, but also to try to increase demand, especially when it was coupled with massive price decreases across the entire Tesla line up.
The decision to announce both the V3 Superchargers and the Model Y unveiling so soon after this felt even more like Tesla was and is just trying to get attention in whatever way it can.
Now here’s the part that the bears won’t like as much — I don’t think those two announcements signaled any further desperation, and I have a theory of what’s going on with the company even regarding the first one.
My $35,000 Model 3 Theory
There have been a lot of articles debating what the $35,000 Model 3 means, but there is one point I feel may be critical that I haven’t really read anywhere: The start of the production of the $35,000 Model 3 is also the end of Tesla trying to position itself as a “luxury” brand.
Don’t get me wrong — at $35,000, the car is around where the other “entry level” luxury brands fall. The difference, however, is that Tesla likes to build in all the savings, so the “Configurator” shows the cheapest Model 3 as a $26,950 option.
My belief is that the plan all along was that, when the $35,000 Model 3 was revealed, Tesla would need to decrease the pricing for its other vehicles and rethink how it was positioning sales of those vehicles in the market.
While closing the majority of the Tesla Stores seems like a strange option, I can understand this goal if the idea is to transition to more service centers that may have a car or two on display, as well as a furthering of pop-up events to show the cars to people in settings at festivals. This may be the strategy that Tesla still uses.
Having said that, instead of making this transition orderly, I think the temptation to try to spike the stock was too high, so they decided to do it all at once. Usually, the stock market responds positively to announced cuts, and I think Tesla figured that it could combine two announcements and the stock should bump up, allowing the company to cover the positions with cash.
Unfortunately, Tesla did so much at once without warning that no one knew what to think of it. Enhanced Autopilot is gone, replaced with Autopilot and a returning Full Self Driving option that is significantly different and cheaper than before, leaving those who purchased Full Self Driving before confused about what happened. Stores are closing. Sales are moving online. That’s a lot of announcements at one time.
There is a chance that demand for the Model 3 has peaked, and this announcement may have been to counteract that. Without advertising or promotion, Tesla is stuck selling cars only with word of mouth. In the past month, I have had people tell me they expected my Model 3 cost at least $100,000, that it’s a great idea but you can’t take it far, and that it’s cool I got a car where the waiting list is more than three years long still.
As everyone here knows, none of that is true, but unless Tesla thinks about changing its strategy a bit for sales, misinformation does limit its market, a problem I do think the elimination of stores will exacerbate unless Tesla can somehow increase consumer education.
Now that I got all of that out of the way, it’s time to go back to me disagreeing completely with the bears. The bear theory for the Supercharger announcement is that the $35,000 Model 3 didn’t get people excited about the stock, so they are grasping at straws here to try to get some more publicity.
And you know what? Maybe Supercharger V3 is that, but here’s the thing — if this technology is ready for prime time, there is no reason at all for Tesla to hold it back. The announcement that a Model 3 can now charge at 1,000 miles per hour is astounding and may be critical for making more people consider an electric car, as Tesla has both the vehicles and the charging infrastructure in place, and increased speed just makes it better.
But you know what else? If the technology is ready, there is no reason to hold back testing and deployment of this. Supercharger V3 isn’t a desperation ploy to get more attention, it’s a legitimate upgrade that Tesla will want to deploy as quickly as possible to stay at or ahead of the new vehicles coming on the market.
Will it increase demand for the cars? It may. If you take into account fueling and using the restroom on a long-distance trip, charging speeds will now nearly equal pumping gas. Until we see more of them rolled out, though, that benefit is theoretical.
Having said that, Tesla needed people to start beta testing it. It’s something that those beta testers would talk about, so Tesla had to announce it. This one wasn’t desperation. It just made sense.
The third big Tesla announcement, the unveiling of the Model Y, is the final announcement that the bears have decided clearly shows Tesla’s desperation. Why, other than to increase demand for their current products, would Tesla be pushing the unveil of the Model Y so suddenly?
I’ve noted in earlier articles that, last year, Elon Musk threw out March 15th as the unveil date for the Model Y, and I speculated that it was because the convertible senior notes were probably due shortly after that. I now know that I was wrong on this, but Tesla’s essentially keeping the date that was said way back when.
As for why Tesla is keeping this date, the bears have noted that unveiling Model Y could easily cut into sales for the Model 3 if people decide to wait for the “next big thing.” And that absolutely could happen. (But then why announce the Y if you are concerned about demand for the 3?)
If we take a step back and look at the Model Y unveiling in context, however, it is part of a trend. Tesla announced the Model 3 on March 31, 2016 — not expecting to produce the car in large numbers until the end of 2017 in the best case scenario. The Tesla Semi and new Roadster were revealed in November of 2017, with mass production of either not slated until 2019 and 2020, respectively.
Unveiling the Model Y in March of 2019, when production isn’t currently slated until the end of 2020, is perfectly in line with what else Tesla has done.
Could the Osbourne effect limit the sales market for the Model 3? Absolutely. But I think the reason that Tesla is making this announcement now is best summed up by the company’s mission statement — Tesla’s mission is to accelerate the world’s transition to sustainable energy.
Tesla reveals its plans early specifically to challenge others to follow its lead. The unveiling of the Model 3 is believed to be directly responsible for Chevrolet rushing the Bolt into production. The Model Y might be what inspires Nissan to make an electric Nissan Rouge, or GM to push a Buick SUV into the all-electric category cheaper, quicker. And to Musk, that goal is worth pursuing even if it means potentially losing some current sales.
More Layoffs & Missing Rivets!
As I was writing this, a story broke that stated that Tesla doesn’t know where it is making the Model Y, had employee headcount drop by 8 percent since the $35,000 Model 3 announcement, has yet to fully inform its sales staff of what stores are closing, and is not yet making 7,000 vehicle batteries a week consistently at the Nevada Gigafactory. I’m not going to link to the article because I think it was poorly researched, but I’ve already seen it used in other bearish articles, so here are my responses:
The article stated that according to six current and former employees, Tesla doesn’t yet have a plan about where it is going to make the Model Y. Then, two people who work for Tesla vendors said that Tesla didn’t contact them about Model Y production until after the announcement, so they think that Tesla has barely begun planning.
Here’s the simple problem with all of that: Tesla expects more than 75% of the Model Y to use the same parts as the Model 3. I expect the parts that would be different would mostly be parts that Tesla would make in house and not source. Along with that, Tesla has stated time and time again that investment to bring its Model 3 lines up to 10,000+ cars a week shouldn’t be that much.
Seems to me pretty obvious where the Model Y is going to be built, and why the vendors haven’t been told yet.
Employee headcount dropping by 8 percent since the announcement according to “internal data?” If Tesla said it would be closing these stores, and we have seen that already begin to happen, is this news? Supposedly, Tesla closed 23 stores already.
While any time someone loses a job, it sucks, as someone who used to be tasked with finding efficiencies, every time I was at a Tesla store, I was fascinated by how many employees there were there. If they cut this staff in a quarter, ran the stores as galleries, and told everyone to order online, I think it is a really positive move. If they then can increase “pop-up” events to introduce more people to the cars, I think this could be a great move in the long run.
Next is the battery thing. The article said that Tesla wasn’t yet consistently producing 7,000 batteries a week, although they were striving for 8,000. Tesla guided for 360,000 to 400,000 vehicles this year according to recent guidance (which the article even references). If Tesla averages 7,000 battery packs a week, it achieves the 360,000 number. If the company makes 8,000 a week, it would be 16,000 vehicles above guidance, so … I don’t get the problem here?
Finally, the article brings up some weird stuff to try to paint the company poorly. One employee (ONE) stated that rivets and fasteners that the company used to have a surplus of are now limited. Okay — a surplus means you’ve spent money you don’t need to spend, so holding back until there is a limited supply before you order more is exactly how I would run my business. [Editor’s note: Three of us at CleanTechnica took a tour of the Fremont factory on Wednesday, spoke to numerous staff members, and saw absolutely no indication of low supplies, slowed production, or any of the turmoil you read about in much of the press. In fact, top engineers seemed a bit bewildered about what some of these stories claim and where the writers get their information/ideas. — Zach]
The article referenced above also stated that management cut some hourly workers mid-shift, asked them to take personal time, or volunteer for unpaid time in recent weeks, leaving them with less income than they had planned. It was noted that some of these shifts were canceled due to snow-related closures on Donner Pass, interrupting their flow of supplies. Honestly, how is this news? Where I live, we have had tons of snow this year, forcing regular closures of many things. And when those things close, the hourly employees are in the same situation. In one case, a relative of mine who works as a nurse drove to work in the blizzard only to be told that the surgeries she assists with were canceled for the day, and she either needed to take personal time for it or take the day as unpaid.
That sucks, and doesn’t make you feel great about your job, but it’s definitely not something unique to Tesla.
The current turbulence in Tesla stock is a fair reaction to how things have gone over the past few months. Tesla is a completely different company, with a mission unlike any other major automaker in the world, and it is extremely difficult to price exactly what that means. The introduction of the $35,000 Model 3 is a watershed moment in the transition to electric mobility, but one that also requires significant changes to how Tesla runs its business. I don’t know that the company’s plan for that transition is perfect, and it definitely started with a rocky announcement of the change.
Supercharger V3 is another watershed moment in the adoption of electric vehicles, but one that it seems the rocky Model 3 announcement overshadowed and created questions about it when the news should in fact be celebrated.
The Model Y announcement is Elon Musk making good on his promise, and fits right in with the other product announcements that Tesla has made. Again, thanks to the botched $35,000 Model 3 announcement, this now has people questioning it instead of celebrating it.
Finally, the article today that I picked apart was poorly sourced and contains information that shouldn’t take anyone as a surprise.
Tesla may have some issues going on right now. And, as a company attempting to transition from being a niche luxury automaker into a large-scale automaker, I’m not surprised. I’ve been questioned as to why I always state that I feel like Tesla stock is a risky proposition, and the last few weeks have borne out exactly why I have felt that.
Tesla is operating like a Silicon Valley startup that is trying to move its way into a dominant position, except the position it’s trying to move into is dominated by an entire different industry, and multiple different players. I personally still feel the positive signs greatly outweighs the negative, but Tesla is navigating a battlefield filled with landmines, and it isn’t in the clear yet by a long shot.
This was my longest Tesla FUD article yet. If you made it all the way to the bottom, kudos to you, and I’ll see you next time — hopefully in about a week, after the unveiling of the Model Y!
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