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.
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