When asked about his team's execution in the midst of a run in which his Tampa Bay Buccaneers lost their first 26 games as a franchise, coach John McKay replied, "I'm in favor of it." When I read the constant barrage of newsflow about Tesla's (TSLA) operations, I have the same feeling.
CEO Elon Musk is obviously well known for his tweeting, but his tweet Thursday night was especially disturbing. He wrote, "Due to a large increase in vehicle delivery volume in North America, Tesla customers may experience longer response times. Resolving this is our top priority."
Musk has been a human hype machine for the past three years about the potential for Tesla to begin mass-producing the Model 3, but as that production pace starts to expand (albeit gradually) it would seem as if his company had no idea of the consequences of mass production. Namely, a buyer who orders a mass-market car wants it delivered as soon as possible. The Model 3 ramp is more than two years behind schedule in terms of production cadence, so how did Tesla execs not use that extra time to figure out the logistics involved in delivering cars?
That's the issue facing Tesla and I believe it will have profound impact on the company's share price. TSLA is down almost exactly $100/share since Musk's now-infamous "funding secured" tweet, but that decline, in my opinion, stemmed from the fact that he clearly never secured financing and that Tesla senior executives continue to leave in droves -- more than 50 at the VP level or above in the past 12 months.
I don't think TSLA shares have factored in the risk of higher production. Yes, the risk.
Legacy carmakers have dealership networks to handle the final delivery of cars to the consumer and mid-stage infrastructure of rail, port (for imports, obviously) and trucks that you rarely see. Yet its invisibility is its very strength, because if you wanted to buy a 2019 Chevy Cruze from famed Nascar owner Rick Hendrick's Hendrick Chevrolet in Cary, NC today, the website shows ample inventory, and some good deals on the 2018 leftovers, as well. Also, if you take your car in for service on Tuesday and the dealer promises it will be fixed by Thursday, it better darn well by ready then.
That's what dealers do. They hold the stock and provide after-sales service. It's not pretty but it works. It's an advantage that among mainstream carmakers only Tesla lacks.
When Tesla was delivering only Model S and Model X at a cadence of about 100,000 per year, the company enjoyed the status of what I call a "super-niche" player. It's a sweet spot in terms of customer interface. We'll bring your car to you! Sounds great.
Somehow, though, the company managed to burn through $6.3 billion of cash in the past 18 months while sitting in that sweet spot. How much of that cash burn was due to the incredible foibles and follies of ramping Model 3 production in Fremont, CA? I would say at least half, although the low variable gross margins on the S and X are a constant worry for me. They are luxury vehicles, of course.
The Model 3 in its current buildable configuration still falls into the entry-luxury category, but that is not the bulwark for Tesla's $49.5 billion valuation. No, that is based on a future of "sustainable transport," and an affordable for all (or most, anyway) Model 3 with a starting price of $35,000.
No one knows when that $35,000 Model 3 is going to be produced, but it is extremely unlikely that its first buyers will qualify for a full $7,500 federal tax credit (which declines to $3,750 for Tesla buyers on Jan 1, 2019 and then to $1,875 on July 1, 2019.)
But that's the existential problem facing Tesla. Most consumers only buy one car at a time. For all the hype about OTA updates and such, Tesla has not cracked the code on after-sales revenue generation and recently settled a class action suit over its inability to deliver a promised feature (Autopilot 2.0) on time.
So, if there's only one crack at profitability on a given car, a company better make it as cheaply as possible and deliver it as efficiently (and at as little cost) as possible. I can't think of a car company that is worse at either of those functions than Tesla.
Without a strong manager (instead of a visionary) at the helm I don't think that is ever going to change. Without that execution Tesla will never be self-funding, and experts on that issue tend to quote Charles Ponzi, not John McKay.