When I was working for Herman Miller I was the lead financial analyst supporting their Miller SQA division. We had just launched the new Q System office line to combat Haworth’s encroachment into our territory. We priced our furniture with lofty volume expectations but a funny thing happened on the way to the forum. It took a lot longer to meet our volume targets than we expected and in the meantime we were losing a lot of money. Until Herman Miller finally achieved their volume goals the internal critics were calling for the Q line to be killed.
What was the problem? Depreciation. We had invested millions of dollars into manufacturing hardware and the monthly depreciation charges were killing us. Fixed overhead costs don’t care about volume. The less units you produce, the more fixed overhead gets spread over each single unit.
This aspect of Tesla’s margin analysis was not addressed by Munro and associates. They and the German team simply took Tesla’s future projections at face value. This means they assumed 10,000 cars per week would be manufactured and sold. Anything less and their margin model falls to pieces. The “studies” conducted by Munro and the German outfit recently were focused on material costs because that is more easily quantifiable. That is also where engineering types feel more comfortable, with real physical part lists. I have no problems with either study from a bill of material standpoint. If they had read my book, they'd know that’s not where the problem is. The problem is in both fixed overhead and selling costs. To tackle those issues you need a real operations financial analyst, not an engineer.
The fact that Munro declared that the Model 3 could potentially achieve its gross margin targets by dissecting its bill of materials is meaningless. It’s like a man lying on the operating table with a burst appendix and the doctor takes a look at his heart and declares that there are no signs of coronary disease.
But anyone who read my book The Tesla Bubble knows that Tesla’s long-term problems are much deeper than even gross margins. Based upon what I’ve seen in manufacturing, I predicted that it was service and support costs that would doom Tesla. Service and support costs fall below gross margin on the income statement in selling costs.
A lot of my thesis was formed from my experience in working at Gateway Computers. We had a profitable financial model on paper to manufacture and sell 42” Plasma TVs back in 2002. We couldn’t understand why Panasonic or Sony couldn’t figure out how to profitably manufacture plasma TVs for under $3,000. It should have been easy. Or so we thought.
But Gateway got clobbered by all the costs below Gross Margin. We quickly found out what Panasonic and Sony knew all along. It is extremely costly to repair and replace TVs out in the field, and you need a big headcount to deal with all the returned stock. These unexpected costs ate through our cash cushion quickly. Gateway’s inexperience cost them the company, and this is one of the biggest reasons that they don’t exist any more.
Tesla is on the same path. For starters, their gross margins are actually not as high as they seem. Since they own their dealership, network you can’t compare their retail prices to the wholesale prices all other automakers get. Second, Tesla’s volume assumptions take the position that the Model 3 will have unit sales on par with the Ford F-150 for many years to come. I’m not buying it. And third, like all inexperienced companies trying to “disrupt” an industry, they have no clue how oppressive a financial burden servicing their glitchy cars will be.
There’s also another problem that I didn’t cover in my book. You should invest in a management team, not just a product. A good management team will expand into new markets and knows how to improvise in order to deal with bad products. A desirable product in the hands of a bad management team is a recipe for disaster. Thus far, the management team at Tesla has shown nothing but incompetence and ineptitude at every turn. Even if their cars weren’t quality nightmares, they’d find a way to lose money via stupid design decisions, inefficient logistics, etc. This group of clowns will never give investors the return that they seek.
Tesla stock priced at over $200 per share assumes profitability on an Apple-like basis. I haven’t seen any evidence that is ever going to happen. Right now major investors will sit tight until Tesla’s production catches up to demand. At that point, if Tesla fails to turn a healthy profit, the end will begin. And it can’t be a small profit, it needs to be enough to justify the humongous investment by the stock holders.
To whom much is given, much is expected.
This aspect of Tesla’s margin analysis was not addressed by Munro and associates. They and the German team simply took Tesla’s future projections at face value. This means they assumed 10,000 cars per week would be manufactured and sold. Anything less and their margin model falls to pieces. The “studies” conducted by Munro and the German outfit recently were focused on material costs because that is more easily quantifiable. That is also where engineering types feel more comfortable, with real physical part lists. I have no problems with either study from a bill of material standpoint. If they had read my book, they'd know that’s not where the problem is. The problem is in both fixed overhead and selling costs. To tackle those issues you need a real operations financial analyst, not an engineer.
The fact that Munro declared that the Model 3 could potentially achieve its gross margin targets by dissecting its bill of materials is meaningless. It’s like a man lying on the operating table with a burst appendix and the doctor takes a look at his heart and declares that there are no signs of coronary disease.
But anyone who read my book The Tesla Bubble knows that Tesla’s long-term problems are much deeper than even gross margins. Based upon what I’ve seen in manufacturing, I predicted that it was service and support costs that would doom Tesla. Service and support costs fall below gross margin on the income statement in selling costs.
A lot of my thesis was formed from my experience in working at Gateway Computers. We had a profitable financial model on paper to manufacture and sell 42” Plasma TVs back in 2002. We couldn’t understand why Panasonic or Sony couldn’t figure out how to profitably manufacture plasma TVs for under $3,000. It should have been easy. Or so we thought.
But Gateway got clobbered by all the costs below Gross Margin. We quickly found out what Panasonic and Sony knew all along. It is extremely costly to repair and replace TVs out in the field, and you need a big headcount to deal with all the returned stock. These unexpected costs ate through our cash cushion quickly. Gateway’s inexperience cost them the company, and this is one of the biggest reasons that they don’t exist any more.
Tesla is on the same path. For starters, their gross margins are actually not as high as they seem. Since they own their dealership, network you can’t compare their retail prices to the wholesale prices all other automakers get. Second, Tesla’s volume assumptions take the position that the Model 3 will have unit sales on par with the Ford F-150 for many years to come. I’m not buying it. And third, like all inexperienced companies trying to “disrupt” an industry, they have no clue how oppressive a financial burden servicing their glitchy cars will be.
There’s also another problem that I didn’t cover in my book. You should invest in a management team, not just a product. A good management team will expand into new markets and knows how to improvise in order to deal with bad products. A desirable product in the hands of a bad management team is a recipe for disaster. Thus far, the management team at Tesla has shown nothing but incompetence and ineptitude at every turn. Even if their cars weren’t quality nightmares, they’d find a way to lose money via stupid design decisions, inefficient logistics, etc. This group of clowns will never give investors the return that they seek.
Tesla stock priced at over $200 per share assumes profitability on an Apple-like basis. I haven’t seen any evidence that is ever going to happen. Right now major investors will sit tight until Tesla’s production catches up to demand. At that point, if Tesla fails to turn a healthy profit, the end will begin. And it can’t be a small profit, it needs to be enough to justify the humongous investment by the stock holders.
To whom much is given, much is expected.
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