Model 3 production lagging by orders of magnitude
On Friday, American carmakers reported their monthly sales figures for November: the number of new vehicles their dealers delivered to customers and the number of new vehicles the manufacturers shipped directly to large fleet customers. At least most American carmakers did: Tesla still does not report its monthly deliveries, instead waiting to disclose those statistics in its quarterly reports, so some of the following numbers are industry estimates.
There are three big stories here: overall, in November 2017 Tesla delivered 3,590 vehicles in the United States, down 18% from November 2016; the Chevrolet Bolt EV has outsold the Tesla Model S for the past two months; and Tesla Model 3 production is still two orders of magnitude below where Tesla said it would be (Inside EVs estimates Tesla delivered 345 Model 3s, far short of the 20,000 they projected earlier this year). Our infographic below summarizes some of Tesla’s current and longstanding issues.
Tesla’s struggle to mass produce the downmarket Model 3 is a bad omen for its plans to disrupt the heavy duty truck market in 2019, when the company is scheduled to introduce its Semi. Tesla already needs enormous infusions of cash to produce three Model 3s a day, and it is difficult to see how it will raise the capital to begin building trucks in significant numbers. Because the company’s last debt issuance has been performing worse and worse, bond analysts say that subsequent debt sales will require Tesla to offer higher premiums.
So far Tesla lacks the dealer and service networks that trucking carriers depend on to minimize costly downtime, and the company has no experience competing in a commercial market where total cost of ownership (TCO) is more important than aesthetics, status, or virtue signalling. While the Semi received a few token orders from JB Hunt, Walmart, and DHL, no one knows when—or even whether—Tesla will be able to produce heavy duty vehicles en masse. Tesla’s ambitious promises for its trucks’ performance break the laws of batteries and Musk suggested that the truck’s drivetrain will have a 1 million mile lifespan: neither of those features would be a simple task for an experienced, efficiently-ran truckmaker to achieve, and Tesla is far from that.
“They will face many, many challenges. The design, production, and testing of commercial vehicles is a completely different ballgame. You’re talking about transcontinental routes across different climates and terrain, and very complex driving conditions that change with different kinds of loads,” wrote Sandeep Kar, chief strategy officer at FleetComplete, in an email to FreightWaves last month. Indeed, Tesla has become known for shoddy build quality even in its ‘luxury’ Model S sedan—one angry Model S owner’s video documenting the 6 service visits his car needed in its first 10 months went viral. The owner listed problems from malfunctioning mirrors, a crooked steering wheel, rattling doors, two defective windshields, misaligned chrome, and interior panels falling off.
FreightWaves has already reported on Tesla’s historic Q3 losses and mounting skepticism about the new Semi unveiled last month. The latest car industry sales numbers illustrate additional challenges facing Tesla, namely the increasingly crowded EV market and the competitiveness of incumbent OEMs with established manufacturing infrastructures.
Inside EVs currently tracks U.S. sales data for 41 different electric car models; six of those models have moved more than 10,000 units in 2017 so far—Tesla Model S (22,085 cars), Chevrolet Bolt EV (20,070), Toyota Prius Prime (18,516), Chevrolet Volt (18,412), Tesla Model X (18,015), and the Nissan Leaf (11,128). Ford Motor Company alone has plans to launch 13 EVs over the next five years. In both October and November, the Tesla Model S the fourth best-selling EV, outsold by the Chevrolet Bolt EV, the Toyota Prius Prime, and Chevrolet Volt. Over the past two months the Chevrolet Bolt in particular has killed Tesla’s Model S: 5,768 Bolts were sold in October and November combined compared with 2,455 Model Ss.
And there is still no mass-produced Model 3: the vehicles are essentially being built by hand in Tesla’s Gigafactory and shipped to dealers missing components like seats and digital displays. The prolonged “production hell” Elon Musk tweeted about in October means that customers who want to buy a Model 3 will likely have to wait until 2019 for their car. Yesterday Cascend Securities said it thinks those customers will look elsewhere for their vehicles and slashed their TSLA rating from ‘hold’ to ‘sell’.
“The company is burning through cash and will likely need to raise capital in the first half of 2018 (and perhaps even the first quarter of 2018),” wrote Cascend’s Chief Investment Strategist Eric Ross. “And there won’t be enough Model 3 production to suggest break-even is around the corner,” Ross continued. Cascend’s new $250 stock price target (TSLA opened at 300.10 this morning) “is back to where the stock was when the Model 3 was announced, but not yet meaningfully on the horizon.” In other words, Cascend has seen nothing about the Model 3 that adds value to Tesla as a company—investors should price TSLA as if the Model 3 does not exist. Cascend joins ten other analysts, including Jefferies and Vetr, who have rated TSLA as a ‘sell’ in the past month. Tesla insiders Director Kimbal Musk and VP Eric Branderiz sold some of their stock; Tesla insiders sold off $4.1M of their holdings in the last quarter.
And Tesla’s junk bonds aren’t just trading underwater—they’re still sinking. Within a week of Tesla’s high-yield debt offering in August ($1.8B yielding 5.3% maturing in 2025), the paper was already priced at 97.5 cents on the dollar. Today, it’s trading at 94.5 cents on the dollar. This indicates that investors are starting to lose faith in Tesla’s growth story and want better returns for such risky, unsecured debt. “Maybe the dam is starting to break for Tesla,” said Trip Miller, managing partner at hedge fund Gullane Capital. Miller said Gullane does not have a position in Tesla because “their balance sheet is very, very troublesome for us.” Meanwhile, Tesla stock is down 20% from its high at $385 on September 18.
If the company fails to raise proper capital, they might be forced to put the rollout of the Semi on hold, or might delay it until they can restore investor confidence. Additionally, investing in a whole new sector and market will likely prove to be difficult. After all, the Big 3 do not participate in the class-8 market and for good reason.
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