Tesla Motors: We're On Track

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On Tuesday, Tesla Motors' (Nasdaq: TSLA  ) , management team held a conference call with analysts and media to answer questions about the departure of two engineers, news of which had sent shares tumbling Friday.

As I wrote yesterday, CEO Elon Musk ably deflected investor concerns about the loss of the two engineers, who had worked closely on the automaker's upcoming Model S sedan. But Musk and his team also used the call to give an update on the status of Tesla as it prepares to put the Model S into production, and for Tesla shareholders, the news was pretty good.

"Highly confident"
Musk started off by saying that he is "highly confident" of four things:

  • The first Model S would be delivered to a customer by July.
  • Tesla will deliver 20,000 cars in 2013.
  • Tesla's next vehicle, the Model X SUV set to be unveiled on Feb. 9, "will be very well-received."
  • Tesla will have gross margins of "at least" 25%.

While it's not exactly news, that last point remains somewhat eye-popping in context. Mass-market automakers don't typically have margins anywhere near 25% -- 6% to 8% is more the usual range.

But of course, even at 20,000 vehicles a year, Tesla won't really be a "mass-market automaker." Twenty thousand sounds like a lot, but consider that General Motors (NYSE: GM  ) sold something like 9 million vehicles in 2011, counting its Chinese joint ventures -- and will likely match Tesla's electric-car output within a couple of years. But Tesla's playing in a very different league, at least at the moment. With a product and message carefully calibrated to appeal to well-heeled early adopter types, and a limited supply of cars, Tesla will be able to command premium pricing, at least for a while.

That pricing power is what will allow Tesla to have margins comparable to Porsche and Ferrari, generally regarded as the world's most profitable automakers on a per-vehicle basis. But Porsche and Ferrari are immensely powerful, enduring brands, with decades of racing history and classic models that are traded among wealthy collectors like Picassos and Rembrandts.

Tesla doesn't have that kind of brand heft. But Tesla does have a certain cool factor right now, and that will work for them for a while. But I think those margins will be in danger once significant competitors to Tesla's cars appear, and if Tesla is successful, those competitors will appear. (In fact, with the advent of Ford's (NYSE: F  ) Fusion Energi, the latest in a series of advanced hybrids to appear recently, one could argue that they are already starting to appear.) Investors thinking long term would be wise to ponder that possibility carefully.

But right now, it sounds like Tesla's operations are in quite good shape.

Status report: Almost ready for production
Tesla's managers reported that, as you'd expect, the company is busy making the last refinements to the Model S, working on the Model X, and preparing its factory for mass production. Musk, Chief Technology Officer JB Straubel, and VP of Manufacturing Gilbert Passin talked at length about Tesla's approach to building cars, heavy on automation and -- interestingly -- heavy on redundancy.

While Tesla, like most automakers, will be buying many of its parts and subassemblies from suppliers, the company is determined to have the ability to manufacture most or all of those parts in-house "in a pinch," as Musk put it. That's not something major automakers can (or should) afford to do, but for a manufacturer dealing with smaller volumes that might not command a megasupplier's full attention in that proverbial pinch, it makes sense.

Meanwhile, Passin reported that Tesla's factory, famously acquired from Tesla investor Toyota (NYSE: TM  ) in 2010, is "very close" to being able to produce the Model S. The company has already done some test runs, in fact, and is waiting for delivery of the last stamping dies and other machinery that will bring it up to full speed.

Demand for the Model S remains strong
On the "demand generation" front, to use Musk's term for sales and marketing, things are also looking good. George Blankenship, Tesla's sales VP, noted that the company had more than 8,000 "reservations" (Tesla's term for pre-orders, which are accompanied by $5,000 deposits) for the Model S as of year end, and that the sales pace continues to be strong. In fact, he noted, Tesla's strongest week for reservations was the week that the company announced pricing for the Model S, suggesting that concerns about high prices deterring potential buyers were unfounded.

Musk also pointed out that last Friday's hullabaloo didn't slow the company's sales pace. Reservations stayed on track over the weekend, despite the concerns raised by the Bloomberg article. That's good news for Tesla, which from all appearances is on track for a solid result in 2012 -- notwithstanding the challenges that could lie beyond.

Tesla is an intriguing story, but the Fool's analysts have selected a different company that they believe is poised for tremendous growth in the coming year. You can learn more about this great stock in their new special report: "The Motley Fool's Top Stock for 2012." It's completely free for Fool readers.

Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Tesla Motors, Ford, and General Motors. Motley Fool newsletter services have recommended creating a synthetic long position in Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (9) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 18, 2012, at 3:44 PM, beauars wrote:

    I'd still like to know the real reason why 2 senior level engineers left the company. I don't think we're getting the full answer yet. 1 left for personal reasons and the other was no longer a fit with the company? Come on. Really? I smell a skunk.

  • Report this Comment On January 18, 2012, at 4:02 PM, TMFMarlowe wrote:

    @beauars: Go to Tesla's investor relations site and listen to Tuesday's con call with Musk and management. If you still smell a skunk after that, come back and tell me why. I'm no Tesla fanboy but I thought the explanation was convincing, but I could be talked out of that view if there was some substance to the argument.

    Thanks for reading.

    John Rosevear

  • Report this Comment On January 18, 2012, at 4:45 PM, rosenauj wrote:

    John, you did/are doing a great job covering this situation and company, and I agree with your position.

  • Report this Comment On January 18, 2012, at 11:55 PM, baldheadeddork wrote:

    Something surprising happens, the market reacts badly, and a company CEO responds a few days later with breathtaking claims about the company performance.

    Tesla's going to make "at least" 25% gross margins in a business where 8% is good? And companies that have hit 10% crumble because you have to butcher your quality to get costs that low? (see Nasser, J.)

    The last time I heard something like this was from an energy trading company in Houston, explaining how their bigger brains made it possible to make triple and quadruple the profits of old-think utilities.

    What's next, a Tesla ad with three blind mice?

  • Report this Comment On January 19, 2012, at 8:53 AM, TMFMarlowe wrote:

    @rosenauj: Thank you.

    @baldheadeddork: I do believe that it's possible they can get 25% for the first year, maybe two, maybe even a little longer. I don't believe they'll get anything like it for much longer than that, for reasons that are probably considerably more obvious to you than they are to me.

    It boggles me that so many of Tesla's investors (including pros) seem to just completely dismiss both the crossing-the-chasm problem and the inevitable challenge of brutal competition from established players with much greater economies of scale. Sometimes I wonder if any of them have ever bought a car before, or thought at all about how this business works. But for all that, Tesla really is executing well so far. It's an interesting story, that's for sure.

    John Rosevear

  • Report this Comment On January 20, 2012, at 1:36 AM, spectechinvest wrote:

    I listened to the earnings call tuesday morning and it was pretty convincing that the two men two left Tesla were originally from Lotus and now that Tesla is scaling up they would be likely be replaced with people more familiar with larger scale production.

    I have collected info about the impending release of the Model X from various sources. Including photos of previous cars Tesla's chief designer has produced for Mazda and GM:

  • Report this Comment On January 20, 2012, at 8:31 AM, baldheadeddork wrote:

    @spectechinvest - Funny, Tesla didn't harp on Rawlinson working for Lotus when they hired him. Didn't mention it at all, actually.

    "Peter Rawlinson, Vice President and Chief Vehicle Engineer, is responsible for the technical execution and delivery of the Model S, and for leading a world-class vehicle engineering team. He led vehicle engineering at Corus Automotive, an advanced engineering consulting firm. Rawlinson guided projects, including for the Jaguar X and F types; Land Rover Freelander and Discovery; Ford Fiesta; Honda Accord; BMW 5-Series; and Bentley Continental.

    Rawlinson’s work on the Think electric vehicle set a new world record for best crash safety performance in the subcompact vehicle class. In his spare time, he designed and constructed his own sports car, with an innovative and efficient structure that influenced a generation of production cars.

    Rawlinson also spent nearly a decade at Jaguar, ascending to the position of principal engineer, working on advanced body structure design, layout and packaging, including crashworthiness. He was one of the first to apply computer-aided design to automotive engineering and was an integral part of the small team that advanced the integration of computer-aided-design with computer-aided analytical tools within a simultaneous engineering environment, a methodology he will apply and refine at Tesla. He has a mechanical engineering degree from Imperial College."

    Those are the first three paragraphs from the press release Tesla made when they hired Rawlinson. Jaguar's production volume is right on target with what Tesla is aspiring to achieve.

  • Report this Comment On January 20, 2012, at 9:21 AM, baldheadeddork wrote:

    @John - I think the 25% number is a fairy tale, even for the first year when they only sell Signature Series models at the maximum price - and even if they don't count any of the development or infrastructure costs.

    They will blow through their manufacturing man-hour budget for the first few hundred cars (at least) because the line employees will be scaling the learning curve and the managers/production engineers will be sorting out their processes and fixing design problems with the production machines. For the first few weeks of production on a high volume line you are going to have days where the line won't move at all, and a lot more days where a car might move one station. Unless you know there is zero chance of running that day, you have to keep the assembly workers around because when the problem is fixed you need to verify that immediately so your maintenance and engineering people can move on to the next problem.

    When they clear that hurdle, they still have the volume dilemma I've beat like a drum for so long. At 20,000 cars a year they have to invest in a full assembly line. That requires a massive capital investment and it's labor intensive. The only advantage of an assembly line is that you can achieve very high production numbers and if you do they can be cost efficient. But 20,000 units a year is off by a zero. To make a production line profitable at that volume you have to be selling at a Ferrari price point.

    But the problem with Tesla's price goes beyond that. The materials cost in their car is stratospheric. The battery pack alone is estimated to make up half the retail price of the car. The chassis is made of aluminum, which is much more expensive in material and manufacturing costs than steel. And they are targeting the luxury mid-size class which means they can't skimp on interior amenities and materials.

    Yet despite all that, Tesla's pricing on the Model S isn't that far out of line with the A6/E-Class/5-series - all of which are made of steel and have much less expensive powertrains.

    All together, Tesla's 25% margin claim is like a brand-new restaurant saying they're going to sell wagyu steaks for the same price as Sizzler - and they're going to be twice as profitable doing it.

    But - and this is the part that really p*sses me off - there is no accountability on this because it's a made-up metric. Tesla can shuffle the internal cost numbers any way they want. They can back out all of the development and manufacturing investment costs from the cost of the car, they can exclude the actual labor costs during startup and only count what they project the labor costs will be when the line is running at full efficiency, and the ocean of red ink can get shuffled off to someplace else.

  • Report this Comment On January 20, 2012, at 11:30 AM, TMFMarlowe wrote:

    @baldheadeddork: If you're right, they can't hide it indefinitely. (And do keep in mind that we haven't seen their production interiors yet. I will be surprised if they're really Mercedes-good, or even Buick-good.)

    Believe me, I will be all over their numbers in the next few quarters. We shall see.


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