Tesla Motors, Inc. Enters Market Number 16

The list of countries where Tesla (NASDAQ: TSLA  ) is selling its Model S continues to grow. Tesla's latest market where the company will begin delivering the Model S -- Hong Kong -- makes 16 total regions where Tesla is now selling the luxury sedan. Importantly, an entrance into Hong Kong suggests Tesla is on track with its international rollout plans.

Model S in Hong Kong. Image source: Tesla Motors.

On schedule
Yesterday morning, Tesla tweeted that the first right-hand-drive Model S vehicles are now coming to Hong Kong, showing pictures of some already there. Tesla was already delivering vehicles in China, but it hadn't started deliveries of the right-hand-drive version of the Model S to Hong Kong yet. Hong Kong is the second right-hand-drive market Tesla is readying to deliver vehicles in. The first was the U.K., followed by Australia.

Model S in Hong Kong. Image source: Tesla Motors.

While the expansion to Hong Kong isn't a surprise, it does suggest Tesla is on schedule. Tesla said in its fourth-quarter letter to shareholders that it would expand "gradually over the year starting this spring" to the United Kingdom, Japan, Hong Kong, and Australia. Then, in Tesla's first-quarter letter to shareholders, Tesla said, specifically, that it would have a presence in the United Kingdom, Japan, and Hong Kong all by "later this summer." With the planned U.K, and the seemingly earlier-than-expected expansion to Australia, and now Hong Kong, all selling Model S with several months of the summer left, Tesla appears to be on track with its international expansion plans.

This leaves Japan as a good candidate for Tesla's next market. Tesla's achievements in the important Japanese market will be closely watched, especially with the country's top auto manufacturers, and its government making big bets on fuel-cell cars.

Execution is paramount
Given Tesla's very forward-looking valuation, rapid execution on the company's plans is going to be crucial for Tesla to be able to live up to the market's expectations. Tesla's continued retail expansion, within the U.S. and abroad, enables the company to avoid spending money on advertising. Geographic penetration drives new orders, and demand is compounded by word-of-mouth marketing.

Tesla explained the effect on demand that occurs from entering new markets in its 2013 first-quarter letter to shareholders: "Importantly, we are seeing orders in a particular region increase proportionate to the number of deliveries, which means that customers are selling other customers on the car."

In Tesla's 2013 third-quarter letter to shareholders, Tesla mentioned this effect again: "Importantly, we are seeing orders in a particular region increase proportionate to the number of deliveries, which means that customers are selling other customers on the car."

Photo: The Motley Fool

Illustrating the power of Tesla's word-of-mouth marketing, Tesla explained in the Q3 2013 earnings call that, despite not even trying to create demand in China, there was what looked to be "pretty good initial demand in China," according to Tesla CFO Deepak Ahuja. And in Tesla's first-quarter 2014 letter to shareholders, Tesla CEO Elon Musk was still impressed with demand in the country.

Well I really don't think we've got any kind of demand challenge in China, in fact I was blown away by my visit to China at the level of interest and enthusiasm for Tesla and the amount of goodwill that I encountered from people at all levels, from the government, from people in industry and sort of consumers in general. And I'm really optimistic for how things will go there.

Expanding rapidly to keep demand well ahead of Tesla's ability to produce is a great strategy. The Model S has proven to elicit sufficient demand in any market the company enters. The biggest risk in expanding Tesla's addressable market of interested customers, therefore, is simply its execution. So it's good to see Tesla executing as planned with its international expansion.

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  • Report this Comment On July 17, 2014, at 6:38 AM, Bert1987 wrote:

    "Expanding rapidly to keep demand well ahead of Tesla's ability to produce is a great strategy."

    I don't understand why this is a great strategy? I would think demand in NA, europe and china is more than enough for the coming year.

  • Report this Comment On July 17, 2014, at 8:20 AM, TMFDanielSparks wrote:

    @Bert1987, good question. There are two reasons this is a good strategy. 1: Tesla is ramping up production rapidly. It expects the total combined market of China and Europe to be equal to or greater than annual delivery rate in North America by the end of the year. So, though it is keeping demand ahead of production, it is probably able to keep the gap between the two fairly close. 2: Tesla is laying the groundwork for its Model 3 car that it plans to launch in 2017. With a global presence in retail, service, and Superchargers when the car is ready to launch, Tesla can effectively compete with the likes of BMW's 3 series. The BMW 3 series is a global car, selling 500k in 2013. If Tesla only had a North America presence when the Model 3 launched, demand could exceed Tesla's production capacity.

  • Report this Comment On July 17, 2014, at 8:49 AM, Bert1987 wrote:

    Thx for the quick answer Daniel.

    I hope it is not true that tesla is able to keep the gap between demand and producten fairly close. That would mean that demand in NA already stopped rising, which I don't think is true.

    But I do think your second point is valid that a global presence is needed for the Model 3 car.

    Btw, I think you typed some mistakes :)

    * 500k in 2020

    * demand could be lower then Tesla's production capacity

  • Report this Comment On July 17, 2014, at 9:04 AM, TMFDanielSparks wrote:

    @Bert1987,

    Haha. Thanks for pointing out my typos. That's what happens when I write a comment before I have breakfast.

    I would say that even though Tesla is likely to be trying to keep the gap between demand and production fairly close, that doesn't imply North America demand has peaked. I don't think it's as simple as that.

    First of all, we know demand hasn't peaked. Tesla said in Q1 that orders were up 10% sequentially in North America. Second, there are still lots of U.S. states where Tesla has no retail presence. And since the company doesn't pay for any advertising, the awareness for Tesla vehicles is still very low in some areas in the U.S. still.

    So, I think Tesla is trying to let demand ramp up gradually in North America still, while already tapping in to overseas markets to let demand ramp up gradually there, too. Meanwhile, Tesla is, overall, trying to slowly ramp up production in all of these markets simultaneously to keep production as close to demand as possible. But obviously since Tesla is constrained by bottlenecks (particularly battery production), there are going to be some markets where Tesla is considerably behind -- and this is bound to happen when Tesla is entering so many markets at once.

    For a typical company, yes -- expanding to new markets might imply that demand has peaked in North America. But, for Tesla, It's trying to balance two important things at once: building out its business to prepare for the Model 3 while ALSO keeping demand fresh enough that it never has to pay for advertising.

    Sure, I think Tesla could have stayed in North American and sold their planned 35,000 Model S in North America alone in 2014 -- if they expanded their retail and service rapidly here. But, as a shareholder, I'm very happy with how the company is simultaneously planting seeds in markets globally so that it will have the distribution and support channels ready to support the Model 3.

    Make sense? What do you think?

    P.S. All the silly Seeking Alpha stories I read about North America demand peaking have no substance, because they are based on deliveries... not orders. But Tesla has said many times that it is filling its overseas logistics pipeline in the last couple quarters, but orders in North America are still steadily increasing.

  • Report this Comment On July 17, 2014, at 10:30 AM, Bert1987 wrote:

    Thx Daniel, you do make sense.

    I also think that demand for model S hasn't peaked anywhere.

  • Report this Comment On July 17, 2014, at 11:03 AM, TMFDanielSparks wrote:

    Awesome! Glad to see someone else understand Tesla's demand in the same light.

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