Tesla Motors, Inc.'s Demand Is Growing Faster Than Production

Tesla's  (NASDAQ: TSLA  )  Model S has been an enormous success. Not only has the all-electric luxury sedan been outselling all comparably priced cars in North America in 2013, but Tesla is expecting sales to increase by more than 50% this year. Most surprising of all, however, is that Tesla is achieving this without spending any money on advertising.

How long can this trend continue?

Model S. Source: Tesla Motors.

A closer look at Tesla's growing demand
Every earnings report, Tesla reiterates that there is more than enough demand for its vehicles. And Tesla's second quarter was no exception.

In the company's second-quarter letter to shareholders, Tesla told investors that even though it increased both production and deliveries, average global delivery wait times actually increased "because our production growth was unable to keep pace with increased demand."

Even in established markets like North America and Europe, "orders increased sequentially at a much faster rate than for the rest of the automotive industry," according to the letter. Further, Tesla continues to believe that even these markets remain under-penetrated.

Regarding an expansion in Asia in the second half of 2014, "Demand will not be a problem. ... We can drive demand up at will," Elon Musk explained during the call. He then went on to explain that the only customer complaint Tesla gets in China is regarding the wait time.

Even when it comes to Tesla's next big bet, the Model X SUV, Musk emphasized during the call that demand will not be an issue.

Tesla store. Source: Tesla Motors.

How does Tesla drive up demand?
Primarily, Tesla drives up demand by building a store or a service center in an under-penetrated market and delivering vehicles. The result is a word-of-mouth effect that grows orders rapidly. The company commented on this phenomenon in its first-quarter 2013 shareholder letter: "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."

Tesla pinpointed exact sources of its demand in its third-quarter letter to shareholders. "As more people see our car on the road, take a test drive or talk with another Model S owner, more demand is created for our product," the letter reads.

To really put the scale of demand for the Model S in perspective, consider the demand relative to Tesla's retail footprint. Apple is no longer the leader in retail for sales per square foot. In fact, Tesla's sales per square foot are now double that of Apple's, Elon Musk said during the call.

But the word-of-mouth phenomenon that stems from stores doesn't fully explain the demand for Tesla's Model X SUV, which Tesla says will be priced comparably to the Model S. If a member-generated Wiki post in the Tesla Motors Club forums is correct, global orders for The Model X are now approaching 19,000. For perspective, Tesla sold 22,500 Model S in 2013 and predicts that it will sell 35,000 this year. While this perspective alone makes the orders seem significant, what is even more astounding about these orders is the conditions under which they are being accumulated. Musk explained in the company's second-quarter earnings call:

Let's just put the orders in context. There are no cars available for a test drive. There is no information about the cars in our stores because we're only selling the S. In fact, if somebody comes in who wants to buy the X, we try to convince them to buy the S. So we anti-sell it. And we don't really provide all that much information or details about the car or provide a definitive date on when you can get it. Despite all that, there's huge demand from around the world for the X.

Model X (right) next to the Model S (left). Source: Tesla Motors.

And Musk is confident he can deliver on customers' high expectations. "They don't really have enough information to know they're right, but they are."

Finally, Tesla's borderline euphoric expectations for future growth in deliveries also point to the company's confidence in the demand for its vehicles. "Provided that we execute well and there are no serious macroeconomic shocks, Tesla's annualized delivery rate should exceed 100,000 units by the end of next year," Tesla said in the second-quarter letter.

What about longer term?
In just three years, Tesla believes it can deliver an all-electric vehicle with more than 200 miles of range for a starting price of about $35,000. Tesla is calling this vehicle the Model 3. At half of the price of the Model S, you can bet the same word-of-mouth effect will drive meaningful demand. And what is meaningful demand at the $35,000 level? For some perspective, BMW sold 348,540 units of its 3 Series Sedan in 2013.

Further, by the time Tesla launches its lower-cost car, the company will have a robust network of stores, service centers, and Superchargers to help begin the word-of-mouth process. 

In fact, Supercharger stations will be within Tesla driving range of 98% of the U.S. population by 2015, if everything goes as planned. In Europe, Tesla plans to make Supercharger stations accessible to 100% of the Netherlands, Switzerland, Belgium, Austria, Denmark and Luxembourg by the end of 2014, and 90% of the population of England, Wales, and Sweden in the same period. Norway and Germany are already approaching 100% coverage. Further, by 2015, the network in China will likely be gaining significant traction. This sprawling network of Superchargers that enables long-distance travel will serve as a key driver for demand as Tesla rolls out both the Model X and the Model 3.

With ample Model S and Model X demand and a game-changing vehicle that will be priced at half the price of the Model S on the horizon, production is the storyline to watch -- not demand.

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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 August 06, 2014, at 2:58 PM, mehtasaab wrote:

    This is a good news for Tesla. They can increase price (High demand less supply). I think TTM or TM will try to operate as a joint venture or they may take over Tesla. I heard a news from India that TTM (TATA Motors) is seriously thinking about Tesla, TATA is trying to use Tesla technology in all TATA cars. I will hold stocks.

  • Report this Comment On August 07, 2014, at 9:22 AM, spencerdr wrote:

    Your measure of $ spent on "advertising" should include all the times Tesls has cars for show and get drives and people at events. I've seen them 4-5 times already this summer. That's an advertising expense in my book.

  • Report this Comment On August 07, 2014, at 10:14 AM, ffbj wrote:

    Tesla also gets free advertising from all the news stories about the company. If someone tracked it the could probably find that their were hundreds of stories on Tesla last year. Musk alone must have given 50 interviews and made numerous appearances at events, that were then covered by the media. Also you tube is rife with videos of them.

  • Report this Comment On August 07, 2014, at 11:24 AM, BenjaminSamuel wrote:

    I don't understand this notion that they "don't spend money on marketing".

    Why in the world do they have 'showroom' stores in expensive real estate in states that they technically can't sell a car in? I can't imagine how else to classify these expenses.

    It's very confusing. To say they don't spend money on marketing is false.

  • Report this Comment On August 07, 2014, at 1:39 PM, TMFDanielSparks wrote:

    Marketing is a much broader term than advertising, @BenjaminSamuel. The claim is that Tesla spends no money on advertising. And, indeed, they don't.

    @spencerdr and @ffbj

    The terms you are referring to sales expenses, under SG&A. It is fair to say Tesla spends no money on advertising, because they don't.

    Some auto companies spend several billion on advertising every year. Tesla doesn't spend a dime.

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