China is causing problems for Tesla (NASDAQ:TSLA). By problems I mean the good kind of problems that just about any business would love to have. Virtually every car that Tesla produces is sold before it's even off the production line, and the upsurge in orders from China is doing nothing to alleviate this most welcomed shortfall. Tesla needs to jump-start its production -- and that's what it plans to do next month.
Going into Tesla's last earnings report and conference call, investors were looking for updates on production and demand. Some were concerned that the waiting list in the United States was merely a function of deliveries being siphoned off to China, and that the reality was that demand was already starting to cool off. Along that same theme, fans and critics wanted to hear if there was any update regarding advertising and its implications.
The earnings report and conference call reiterated Tesla's prior target of producing 1,000 vehicles per week on average by the end of the year. During the February call, CEO Elon Musk said that a "new final assembly line" would be completed by the end of the third quarter and that would push production over the top. I wondered, going into the most recent call, if that target time frame was still on schedule.
Musk stated, "We have a much more efficient production line that's going to come online in July, which has more automation and it's just set up in a better way and that's making the car with greater labor efficiency is the biggest single improvement." July is certainly better than the end of the third quarter. Perhaps the 1,000 cars per week mark will be coming early and Tesla will raise its full-year 2014 production guidance?
But what about demand?
Jeffrey B. Straubel, Chief Technology Officer of Tesla, said in the May conference call, "The orders in North America were up 10%, not deliveries." This is an important distinction because there are many variables involved as to why deliveries may be up or down in North America in any particular period, but there is only one reason why orders would be up 10%, and that's increased demand.
During that call, Musk said:
In our case sales means deliveries. It's our measure of demand, it's a measure of how many cars we're actually able to get to customers. ... Deliveries and demand are not the same thing for Tesla. They are for other car companies but not Tesla.
For China, after much speculation and uncertainty, it's the same thing. Musk stated that the biggest issue the customers in China are having is that they are unhappy that they aren't getting their cars soon enough. The wait time, in some cases, is four to five months. In some cities Tesla is purposely delaying the deliveries as it builds out the Supercharger network.
If there is any doubt about how robust the demand is in China, Musk summed it up nicely: "I think we'll actually have to limit the amount of cars we send to China; otherwise it would starve the rest of the world production." In other words, the single country of China alone has enough eager customers that could likely buy up all of Tesla's production.
That's a lot of lithium needed for Tesla's lithium-ion batteries, no? Well not really. At least not as much as you may think. According to Brian Jaskula, a lithium specialist with the United States Geological Survey, lithium is only between 2%-3% of the content of a battery. Don't let the name of the battery fool you.
While I'm still not crazy about the valuation of the stock behind the fantastic company that is Tesla, the company itself continually surprises and impresses in so many ways. I would not bet against Musk and his team, especially not now. When production gets a new boost next month, it's sure to stir up some excitement. It should be clear by now that all of Tesla's vehicles born this year will quickly find loving homes. It will be interesting to hear what new targets and plans Tesla has in store.