Tesla Is In Worse Shape Than I Would Have Predicted
I’m glad that I published my book regarding the problems with Tesla back in 2017. Because thus far, everything that I’ve predicted about Tesla is coming true and I can't be accused of changing my story. I predicted the manufacturing and quality problems that would arise from skipping the Model 3 line qualification. Later, I predicted that Tesla was running a 2nd line separate and apart from their main line to goose production numbers. And I also predicted that Musk’s bragging about his production spike was due to the usual 4th of July swing and his numbers would immediately drop.
Do I have spys at Tesla? No, but unlike most analysts who cover Tesla, I actually work in manufacturing accounting. It helps me to read between the lines.
Tesla Margins
The tech press is going crazy trying to portray Tesla’s Q3 as some kind of unexpected turning point in the companies troubled existence. This is a straw man meant to discredit the critics. But all of the serious Tesla bears that I know predicted that Q3 was going to be profitable. That little tidbit gets swept under the rug by the all the propaganda. It wasn’t too hard of a prediction to make.
All companies have a product portfolio that resembles a pyramid. The top of the pyramid are the expensive high margin products and as you go down the products are cheaper and less profitable. Even the Tesla shorts could see that Tesla was running through two years of orders that were at the top of the pyramid.
This is like a new airline company taking 2 years of reservations for transatlantic flights. But then in their first year of existence they only fly the 1stclass customers. But guess what happens in the 2ndyear? Their mix is then necessarily skewed towards the lower margin customers.
Tesla’s problems are turning out to be even worse then I predicted. Even I would never guess that they would be in such dire trouble that they couldn’t afford to produce their entire product portfolio. Musk himself said that producing the low cost Model 3 would kill the company. Only now, he’s set up his company to start producing predominantly the lower margin cars in the future.
I had written an article a few weeks ago speculating on how Tesla could artificially increase their Q4 automotive margins via taking margin hits in Q2 or Q3 and reaping the benefit in Q4. It never occurred to me that perhaps Tesla could pull this favorability forward into Q3 by going nuclear and revaluing their inventory in Q3. If this is what they did, the impact would be huge due to the amount of inventory they have stashed in lots all over California. However, this is a one time only event that will boomerang on them in Q4 in the form of reduced margins on all Model 3 sales.
Tesla Isn’t Outselling Anyone
The smart money knows that all the other automakers have their production matched to demand. Thus, they produce and deliver cars each month on a fairly steady basis. Tesla on the other hand, took reservations for two years and is now working through their backlog. They do not have production capacity matched to their demand. They aren’t outselling anyone. They are simply out delivering. And these spikes are a high cost and inefficient way of doing business. But that is the Tesla way. Replicate what everyone else is doing in a way that costs 2 or 3 times more.
Tesla apologists got into trouble for saying that the Model S was the best selling vehicle in its class. When in reality, it should have been compared to the 5 Series and not the 7 Series. In terms of size and cost it was much closer to the 5. However, the 5 cleaned the Model S's clock in units sold. These Tesla apologists are up to their same old tricks.
Tesla Cash Flow
Tesla improved their cash flow but the problem is that if you look real close. You can see that Tesla hasn’t been paying their bills. There’s been a lot of press about suppliers not getting paid by Tesla and worried about Tesla’s future. It’s gotten so bad that even the government has come after Tesla for unpaid taxes. Yes, Tesla increased their cash flow but they used the old accounting trick of holding off on their payments.
Tesla’s Doom
I’ve predicted that Tesla’s doom would come 3-5 years after production for the Model 3 is matched to the demand. Why this point? Because this is how long it’ll take for everyone else to finally come to the realization that Tesla will always be a money losing operation. Thus far they are right on schedule.
This Q3 profit was another one-time event engineered to allow for a future capital raise. But Tesla’ stock is so over-valued that even if I play devil’s advocate, the stock is still going down. Meaning that even if Tesla is mildly profitable, the stock will crash. Because the stock is priced at Tesla revolutionizing transportation and urban development at wildly profitable margins.
Shorts Turning Long
As I mentioned earlier, the shorts predicted that Tesla would turn a profit in Q3. As such, a skeptic could say that it would be to their advantage and predict the behavior of the retail investor. Which is to buy the stock when they heard news of a “surprise” profit. These shorts would want to drive the stock up as high as it can go so that they can short it again in the future. These guys plan to make money on both sides. It is always the small retail investors who are left holding the bag when things implode. But that is how the shorts make their money. By predicting how the unsophisticated investors will react to expected news.
Tesla’s Future
If Tesla didn’t pay their bills in Q3. If Tesla’s mix starts to shift towards the lower priced cars. And if Tesla revalued their standard costs upwards. All of these factors will push Tesla’s Q4 results into the negative. But anyone who’s read my book knows that I assumed none of these things would be a problem for Tesla. My problem with Tesla as a company stemmed from their making the same mistakes as GM, Ford, and Chrysler in the 1970’s.
American auto manufacturers tried to stem their market share losses to the Japanese by discounting the impact of quality. They didn’t believe that that they were losing customers to Honda and Toyota due to fit & finish and long-term reliability. They believed that they needed to offer more flashy features, and faster more powerful cars. They thought their bleeds blue oval and Chevy bow tie hat wearing customers were so loyal that the market share losses were temporary. They were wrong.
And now, in 2018, Tesla thinks it’s going to take market share by selling faster more powerful cars with flashy features? And discounting the impact of fit & finish and long-term reliability? Good luck with that. Building a backlog by taking orders for two years from your core fans is one thing, but going against the best of the business in terms of quality is another.
Tesla Margins
The tech press is going crazy trying to portray Tesla’s Q3 as some kind of unexpected turning point in the companies troubled existence. This is a straw man meant to discredit the critics. But all of the serious Tesla bears that I know predicted that Q3 was going to be profitable. That little tidbit gets swept under the rug by the all the propaganda. It wasn’t too hard of a prediction to make.
All companies have a product portfolio that resembles a pyramid. The top of the pyramid are the expensive high margin products and as you go down the products are cheaper and less profitable. Even the Tesla shorts could see that Tesla was running through two years of orders that were at the top of the pyramid.
This is like a new airline company taking 2 years of reservations for transatlantic flights. But then in their first year of existence they only fly the 1stclass customers. But guess what happens in the 2ndyear? Their mix is then necessarily skewed towards the lower margin customers.
Tesla’s problems are turning out to be even worse then I predicted. Even I would never guess that they would be in such dire trouble that they couldn’t afford to produce their entire product portfolio. Musk himself said that producing the low cost Model 3 would kill the company. Only now, he’s set up his company to start producing predominantly the lower margin cars in the future.
I had written an article a few weeks ago speculating on how Tesla could artificially increase their Q4 automotive margins via taking margin hits in Q2 or Q3 and reaping the benefit in Q4. It never occurred to me that perhaps Tesla could pull this favorability forward into Q3 by going nuclear and revaluing their inventory in Q3. If this is what they did, the impact would be huge due to the amount of inventory they have stashed in lots all over California. However, this is a one time only event that will boomerang on them in Q4 in the form of reduced margins on all Model 3 sales.
Tesla Isn’t Outselling Anyone
The smart money knows that all the other automakers have their production matched to demand. Thus, they produce and deliver cars each month on a fairly steady basis. Tesla on the other hand, took reservations for two years and is now working through their backlog. They do not have production capacity matched to their demand. They aren’t outselling anyone. They are simply out delivering. And these spikes are a high cost and inefficient way of doing business. But that is the Tesla way. Replicate what everyone else is doing in a way that costs 2 or 3 times more.
Tesla apologists got into trouble for saying that the Model S was the best selling vehicle in its class. When in reality, it should have been compared to the 5 Series and not the 7 Series. In terms of size and cost it was much closer to the 5. However, the 5 cleaned the Model S's clock in units sold. These Tesla apologists are up to their same old tricks.
Tesla Cash Flow
Tesla improved their cash flow but the problem is that if you look real close. You can see that Tesla hasn’t been paying their bills. There’s been a lot of press about suppliers not getting paid by Tesla and worried about Tesla’s future. It’s gotten so bad that even the government has come after Tesla for unpaid taxes. Yes, Tesla increased their cash flow but they used the old accounting trick of holding off on their payments.
Tesla’s Doom
I’ve predicted that Tesla’s doom would come 3-5 years after production for the Model 3 is matched to the demand. Why this point? Because this is how long it’ll take for everyone else to finally come to the realization that Tesla will always be a money losing operation. Thus far they are right on schedule.
This Q3 profit was another one-time event engineered to allow for a future capital raise. But Tesla’ stock is so over-valued that even if I play devil’s advocate, the stock is still going down. Meaning that even if Tesla is mildly profitable, the stock will crash. Because the stock is priced at Tesla revolutionizing transportation and urban development at wildly profitable margins.
Shorts Turning Long
As I mentioned earlier, the shorts predicted that Tesla would turn a profit in Q3. As such, a skeptic could say that it would be to their advantage and predict the behavior of the retail investor. Which is to buy the stock when they heard news of a “surprise” profit. These shorts would want to drive the stock up as high as it can go so that they can short it again in the future. These guys plan to make money on both sides. It is always the small retail investors who are left holding the bag when things implode. But that is how the shorts make their money. By predicting how the unsophisticated investors will react to expected news.
Tesla’s Future
If Tesla didn’t pay their bills in Q3. If Tesla’s mix starts to shift towards the lower priced cars. And if Tesla revalued their standard costs upwards. All of these factors will push Tesla’s Q4 results into the negative. But anyone who’s read my book knows that I assumed none of these things would be a problem for Tesla. My problem with Tesla as a company stemmed from their making the same mistakes as GM, Ford, and Chrysler in the 1970’s.
American auto manufacturers tried to stem their market share losses to the Japanese by discounting the impact of quality. They didn’t believe that that they were losing customers to Honda and Toyota due to fit & finish and long-term reliability. They believed that they needed to offer more flashy features, and faster more powerful cars. They thought their bleeds blue oval and Chevy bow tie hat wearing customers were so loyal that the market share losses were temporary. They were wrong.
And now, in 2018, Tesla thinks it’s going to take market share by selling faster more powerful cars with flashy features? And discounting the impact of fit & finish and long-term reliability? Good luck with that. Building a backlog by taking orders for two years from your core fans is one thing, but going against the best of the business in terms of quality is another.
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