In the final week of Q3 2021, Tesla (TSLA 11.00%) CEO Elon Musk claimed it would be the "most intense delivery week ever" for the company. In a Motley Fool Live segment recorded on Sept. 28, Motley Fool contributor John Bromels explains to Motley Fool contributor Toby Bordelon why Tesla is always rushing to fulfill its end-of-quarter deliveries.
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John Bromels: So Tesla isn't like a traditional automaker which sells cars to its dealerships, and then the dealerships sell them to customers. Tesla, the manufacturer, sells directly to the consumer, which means that the company technically owns that vehicle until it's actually delivered to the buyer and paid for. It doesn't matter if they build it, it doesn't matter if someone has signed up to buy it, it doesn't matter if that person has put their down payment down. Until the keys -- I don't know if they even have keys anymore -- until that vehicle in the hands of that consumer and they have taken possession of it, Tesla doesn't get to book that as a delivered car and they don't get to book that revenue for selling the car. Regardless of whether Tesla has built a lot of vehicles during the quarter, if they haven't been delivered, that quarter's going to look worse for them financially because they can't book that revenue and it won't show up on their quarterly results.
This is why Tesla tries to build vehicles that it's going to export early in the quarter and then it saves up its vehicles that it's delivering locally later in the quarter to allow for transit because if they build early in the quarter and it takes time to ship it overseas, probably going to get to the consumer. But all those local late deliveries -- and of course, California near the Fremont plant, this is a huge market for Tesla -- they are trying to pump these out, get them out the door, get them delivered. But what that means is there are these massive efforts to deliver the vehicles and get them in the hands of customers before the end of each quarter, and these are called "delivery waves" or "delivery pushes." That's why Elon Musk is saying, "We've got to do this, we've got to get this done. This is going to be our biggest delivery push ever."
The reason it's so big this quarter as opposed to in past quarters is because there have been all these supply chain issues with car components, things like semiconductors especially, that have slowed down the manufacturing process. Of course, if the car doesn't get manufactured on time, then they can't get it out the door, get it in transit on time. Elon Musk has said he hopes or he thinks that a lot of these supply chain issues are going to resolve themselves before the end of the year. But, for now, the supply chain issues mean that Tesla still has this mad push to get these vehicles into the hands of consumers so they can book the revenue before the end of the quarter and it will show up on their quarterly statement, which of course is what a lot of analysts are going to look at when they decide how to react to Tesla's quarterly results at the end of Q3.
That is why, perhaps, Elon Musk is going to get A's like Barry Goodrich and not like me. By the way, Barry Goodrich, you know who you are. If you're watching, great to see you, Buddy: hope I'll see you at the next class reunion.
Toby Bordelon: Nice. Thank you, John. That's great to understand. I like that. I want to say this right here, lest our viewers think that the Tesla way of selling direct to the customers is problematic and they should adopt a more traditional automaker model. I'll throw this out there: Ford has recently gone in the Tesla direction a little bit, in that they have announced they are doing a lot of made-to-order vehicles and that the customer order is exactly what you want. Now, it's still delivered and sold through a dealer, but it's not a situation where the dealer is just taking a whole bunch of inventory. When they get this car on their lot, they know who's buying it because you ordered through the dealer and you're probably going to drive off with it the next day. Very similar. The amount of time that it's actually on that dealer's inventory is going to be minimized because it's essentially going from Ford Corporate's inventory to the customer with only maybe a couple of days' lag time in there when the dealer is making arrangements for you to show up and take it.
John Bromels: Other automakers are starting to adopt this online sales model. I know Chrysler is doing that where you can go onto its website. You can build your car from start to finish and pick exactly the features you want. You can pick the color. You're not limited to what's on the dealer's lot. Then, all you need to do is you pick what dealership you want to actually take delivery of the car in. However, for Chrysler, this is still essentially the same model, they're building the car, they're selling into the dealership and you're getting it from the dealership. Still, there's a production-delivery paradigm there, but it's not as important for them to get that car into your hands and off their books, because if you don't show up at the dealer to pick your car up for a day, or a week, or a month, it's not going to matter to Corporate and to their bottom line.
Toby Bordelon: That's right. Again, most of these auto dealers, the dealers aren't actually public companies, so they didn't report quarterly. They care a lot less in terms of what the public thinks about what their revenue looks like on any given quarter. Now, the salesmen care obviously, the people who are getting quarterly bonuses care, but the public at large just doesn't even know or have anything to do with that. There's less pressure there on the dealer side.
John Bromels: Also, they are not Tesla. The public doesn't know or care [laughs] about them either.
Toby Bordelon: Exactly.
John Bromels: That's not true. You should care about other car companies besides just the one.
Toby Bordelon: The other thing, too, that strikes me: we heard last quarter when Elon Musk said that the supply chain shortage, the shift toward it wasn't affecting Tesla as much because they were able to mitigate it to some extent. I wonder if other automakers, when they're looking at, "Hey, let's go to this direct online purchase model," are sitting there thinking there may be some benefit to what Tesla is doing in terms of mitigating the supply chain issues and that being, I'm not just making a random car and sending it to a dealer. What Tesla is doing is saying, "Hey, what do you want to buy?" You order it. They have a higher degree of confidence that the car they're able to produce -- and there may be limitations on when they can produce given the supply chain shortages -- but what they are able to produce is more likely to be bought because someone has said, "This is the exact thing I want." Ford, Chrysler, GM might be looking at that and saying, there's a benefit to that because if we're constrained in what we can produce -- and they are, we've all seen pictures of I think Ford F-150s sitting in empty airport parking lots because they don't have that last chip in there they need for production to be finished. If you can maximize the vehicles that you are producing and say, "I've matched these with the buyer already," you're going to maximize your ability to generate revenue and sell cars in a constrained environment. I think we may be seeing some of that, some of the automotive space like, "hey, that's not a bad idea when I have limits on what I can actually produce," right?
John Bromels: Exactly. Let's face it: having a bunch of cars on the dealership lot is not necessarily great for the dealer itself. I mean, kind of in that someone who is shopping for a car can see multiple models if they want to have a look or sit in them themselves, but far easier though for a dealer to have the vehicles that people are interested in, and the vehicles that people want, and the vehicles that are in demand. Because what you're going to find, of course -- and I found this out when shopping for a new minivan over the summer, which are in, by the way, short supply, especially if you're trying to buy a new one -- what you find is that the popular models, the popular colors, and things get sold out quickly. Even if you're a dealer who is hoping to have a lot of variety on your lot, if something's popular, it's going to sell fast and then people who show up can't see it or buy it anyway. It's a very interesting paradigm. Of course, it's very disruptive, but it's interesting that so many other auto manufacturers are -- I'm not going to say they're embracing this whole hog -- but they are taking steps in that direction to have people actually order these vehicles and make them to order, or at least some of them.
Toby Bordelon: Yeah. Thanks, this is so fascinating.