The Production Rate Is Now Irrelevant
This has been an absolutely amazing week for Tesla watchers. For months now, everyone has been saying that pretty soon either the bulls or the bears would start to be proven right. Well, all the news has been going the bears’ way lately.
First, Elon Musk makes the startling admission that the production line was all wrong. It was over-automated. Coming from the man who said the following:
In one fell swoop, Musk disavowed everything he previously promised. Instead of showing everyone else how it’s done, Musk admitted he was wrong about “productizing” his plant and is going to do it Toyota’s way instead. Also, instead of reducing his head count, he’s going to greatly increase it.
This is devastating news for his financial forecast. When I was working at both Gateway Computers and Batesville Casket Company, we did a great deal of analysis on how much money we could save if we could increase productivity in order to get rid of a shift. Why? The cost of benefits is huge. Health care, workers comp, and unemployment insurance all add up to a 40% premium per person. Whenever you go up or down in the number of shifts, you greatly expand or reduce your overhead.
At this point, the Model 3 production rate is irrelevant. Musk just admitted that their plan to achieve profitability has been thrown out the window. The Model 3 is a failed project. Tesla will eventually iron out the wrinkles with production, but it’ll always be a money-losing drag. Which is also a big problem for investors.
So why is Tesla willing to add a shift, giving up on their profitability plan? The current consensus is that they are hemorrhaging deposit holders.
Technology Equity Strategies has the following take:
Let’s be clear. Tesla is pulling out all the stops, costs be damned, to ramp production.
Why?
Because customers are canceling. Reservations declined in the first quarter, a fact that is concealed by Tesla having kept reservations on the books despite customers asking for refunds. Moreover, reservations are being further pressured by all the crappy quality, delays, poor product reviews in the press and in Tesla sites, competitive introductions and the looming shadow of FIT subsidies being exhausted are causing further reservations to be cancelled this quarter.
If Tesla doesn't come up with production quickly, cancellations will accelerate and will likely hit a negative inflection point. And let’s face it, when that happens, we will all hear the giant sucking sound that has always been inevitable.
I said in my book, The Tesla Bubble, that the Model 3 was going to kill Tesla because it would be a low-margin drag on the company. I also stated that skipping their production line verification would result in costly delays and major quality problems. Everything is following the script. If you chart Tesla’s stock price and compare it to the path that Enron took, they are very close. I think I’ll take my bow right about now.
- They didn’t need to do practice runs on their proposed production line because they learned so much when they did their Model X line. They were going to dive head first into production.
- Tesla was going to show those stodgy automakers how manufacturing would be done in the future. They were going to “productize” the factory, as Musk called it.
- The automated manufacturing line with its non-existent headcount was going to allow Tesla to achieve profitable gross margins on the cheaper Model 3.
In one fell swoop, Musk disavowed everything he previously promised. Instead of showing everyone else how it’s done, Musk admitted he was wrong about “productizing” his plant and is going to do it Toyota’s way instead. Also, instead of reducing his head count, he’s going to greatly increase it.
This is devastating news for his financial forecast. When I was working at both Gateway Computers and Batesville Casket Company, we did a great deal of analysis on how much money we could save if we could increase productivity in order to get rid of a shift. Why? The cost of benefits is huge. Health care, workers comp, and unemployment insurance all add up to a 40% premium per person. Whenever you go up or down in the number of shifts, you greatly expand or reduce your overhead.
At this point, the Model 3 production rate is irrelevant. Musk just admitted that their plan to achieve profitability has been thrown out the window. The Model 3 is a failed project. Tesla will eventually iron out the wrinkles with production, but it’ll always be a money-losing drag. Which is also a big problem for investors.
So why is Tesla willing to add a shift, giving up on their profitability plan? The current consensus is that they are hemorrhaging deposit holders.
Technology Equity Strategies has the following take:
Let’s be clear. Tesla is pulling out all the stops, costs be damned, to ramp production.
Why?
Because customers are canceling. Reservations declined in the first quarter, a fact that is concealed by Tesla having kept reservations on the books despite customers asking for refunds. Moreover, reservations are being further pressured by all the crappy quality, delays, poor product reviews in the press and in Tesla sites, competitive introductions and the looming shadow of FIT subsidies being exhausted are causing further reservations to be cancelled this quarter.
If Tesla doesn't come up with production quickly, cancellations will accelerate and will likely hit a negative inflection point. And let’s face it, when that happens, we will all hear the giant sucking sound that has always been inevitable.
I said in my book, The Tesla Bubble, that the Model 3 was going to kill Tesla because it would be a low-margin drag on the company. I also stated that skipping their production line verification would result in costly delays and major quality problems. Everything is following the script. If you chart Tesla’s stock price and compare it to the path that Enron took, they are very close. I think I’ll take my bow right about now.
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