TheStreet: Tesla Has One Big Problem

[FutureBoy]

DEC 28, 2021 8:21 AM EST

Tesla Has One Big Problem
Elon Musk's electric vehicle (EV) company has done a lot right, but it's facing a pretty big hurdle.
DANIEL KLINE

Elon Musk's Tesla (TSLA) - Get Tesla Inc Report had a very successful 2021. The company increased its deliveries, increased its profitability, and generally set the standard for the electric vehicle industry.

CFO Zach Kirkhorn detailed the company's strong year during its first-quarter earnings call.

"We're continuing to make great progress as a company, setting new records on each of the most important financial metrics for Q3. Overall, we delivered just over 240,000 cars, 20% higher than last quarter and 70% higher than the same quarter last year," he said.

Tesla has also improved its ability to produce vehicles and the CFO shared how in his remarks.

We were also able to achieve an annualized production run rate of over 1 million cars toward the end of the quarter. The increase in production rate has primarily been driven by further ramping of the Model Y at our Shanghai factory. Additionally, we have made great progress increasing production volumes of Model S and have recently started the ramp and deliveries of Model X. It will take a bit more time to get this program back to prior volumes, but based on demand, we are targeting to exceed historical production levels.

That's good news for the long-term success of the company, but it's not enough to meet its current demand.

Tesla Can't Keep Up
Tesla has a problem, but in some ways, it's a problem like having no place to store your collection of precious gems or being too good-looking. Kirkhorn explained the problem in his earnings call remarks.

Despite these increases in production and generally higher prices, our backlogs are continuing to grow and average customer wait times are extending. The only practical way to address this in the immediate term is to do everything we can to build more cars on our existing production lines, which is where we are focused. Similar dynamics are also playing out on our storage business as we are working to expand Powerwall and Megapack production as quickly as parts and cells allow us to do so. Additionally, we have made good progress on the in-house battery manufacturing program, and we're excited to have expanded the full self-driving beta program to more customers.

Basically, Tesla has more orders than it can fulfill and that runs the risk of creating unhappy customers. That's a problem created by great success but being back-ordered and unable to deliver does leave the company vulnerable to customers turning to rivals like Lucid Motors (LCID) - Get Lucid Group, Inc. Report, which offers a comparably luxurious vehicle targeted at the same audience.

Don't Expect a $25,000 Tesla
Tesla has long promised to deliver a lower-priced vehicle, specifically one that hits the $25,000 price point. Its current production backlog makes that seem unlikely in the next year.

"We don't want to add any new vehicles to our lineup when we're generally in a cell-constrained world," said Vehicle Engineering Vice President Lars Moravy during the call. "While there is still more runway to grow these existing products, we are focused on Model Y expansion in Austin, Berlin, ramping S and X further in Fremont to restore to past levels while also growing 3 and Y production in Fremont and Shanghai. As we've mentioned before, after Model Y in Austin, our next product launch will be Cybertruck."

Basically, until Tesla can meet the demand for its existing (and future) high-end products, it's not going to put money or production effort into delivering a $25,000 version of the Model 3.

 

[FutureBoy]

Tesla certainly does have a "problem" being able to produce enough vehicles to keep up with orders. It's going to take a few years to catch up fully and to be able to supply enough vehicles for new demand that will be coming. At least this is a good "problem" though.

I think it is far better than the situations that nearly all other manufactures are in where they either don't have enough orders to keep their production lines humming apace, or they've had to shut down production entirely because of serious dangerous defects, or their projected production numbers are so low as to not really be of any meaningful consequence.

Its just insane that anyone would say there are any other manufacturers even close to where Tesla is right now. And the crazy thing is, people keep saying that Tesla isn't so far ahead. But no one else seems to be even attempting to build out the supply and production lines at anywhere near the capacity of where Tesla is. And yet the more Tesla produces, the more they seem to get behind.

The next couple of years are going to completely change the vehicle landscape. In ways that very few traditional auto insiders seem to even recognize.

 

[jerhenderson]

lol such a terrible problem that Tesla can't keep up with demand.... and oh BTW Lucid isn't a competitive option, nor is Rivian, nor is GM or Ford, all for their own reasons such as inferior specs ( GM Ford ), or niche product ( Lucid, Rivian ), or very expensive with low production ( Lucid ). None of them have the charging infrastructure or software tesla has. I'll wait for my Tesla, as there simply isn't any other option on the market.

 

[Klaxon]

How many automakers are dreaming about such problems?

 

[SpaceDoc]

Tesla certainly does have a "problem" being able to produce enough vehicles to keep up with orders. It's going to take a few years to catch up fully and to be able to supply enough vehicles for new demand that will be coming. At least this is a good "problem" though.

I think it is far better than the situations that nearly all other manufactures are in where they either don't have enough orders to keep their production lines humming apace, or they've had to shut down production entirely because of serious dangerous defects, or their projected production numbers are so low as to not really be of any meaningful consequence.

Its just insane that anyone would say there are any other manufacturers even close to where Tesla is right now. And the crazy thing is, people keep saying that Tesla isn't so far ahead. But no one else seems to be even attempting to build out the supply and production lines at anywhere near the capacity of where Tesla is. And yet the more Tesla produces, the more they seem to get behind.

The next couple of years are going to completely change the vehicle landscape. In ways that very few traditional auto insiders seem to even recognize.

There are few EV manufacturers where Tesla is right now... but there will be soon.
As I have said before, Tesla will likely remain king of the high-end EV market, while others swoop in and capture the mid to low-end range, and may even chip away at the high-end. It will most likely be Chinese and Korean manufacturers first, followed by the big US automakers. Asian manufactures are already making plenty of EVs. Ford will probably be first US company after Tesla to mass produce EVs, because they already have an extensive line of hybrid and EV vehicles, and only have to ramp up their production, which as we see is the main challenge.

The big holdups are computer chips and batteries. Chip backlog is temporary, but batteries are the big problem, not just for Tesla, but for all EV makers. The market will solve that problem soon, then we will begin to see production scale worldwide.

And there is no way traditional automakers are not aware of the situation given the increasing legislation worldwide stating that x% of new cars must be EV. It may be that some automakers will be unable figure out how to change in time to prevent them from becoming irrelevant.

The gist is that Tesla is by far, NOT the only game in town.

Just some obvious points from someone who follows these sorts of things.



https://emag.directindustry.com/who-are-the-three-main-chinese-electric-car-companies/

https://www.greencarreports.com/new...lectric-car-companies-headed-for-boom-or-bust

https://electrek.co/2021/05/25/egeb...nearly-40-billion-to-build-ev-tech-in-the-us/

https://www.greencarreports.com/new...or-europe-will-it-ease-availability-in-the-us

 

[HaulingAss]

There are few EV manufacturers where Tesla is right now... but there will be soon.
As I have said before, Tesla will likely remain king of the high-end EV market, while others swoop in and capture the mid to low-end range, and may even chip away at the high-end. It will most likely be Chinese and Korean manufacturers first, followed by the big US automakers. Asian manufactures are already making plenty of EVs. Ford will probably be first US company after Tesla to mass produce EVs, because they already have an extensive line of hybrid and EV vehicles, and only have to ramp up their production, which as we see is the main challenge.

The big holdups are computer chips and batteries. Chip backlog is temporary, but batteries are the big problem, not just for Tesla, but for all EV makers. The market will solve that problem soon, then we will begin to see production scale worldwide.

And there is no way traditional automakers are not aware of the situation given the increasing legislation worldwide stating that x% of new cars must be EV. It may be that some automakers will be unable figure out how to change in time to prevent them from becoming irrelevant.

The gist is that Tesla is by far, NOT the only game in town.

Just some obvious points from someone who follows these sorts of things.



https://emag.directindustry.com/who-are-the-three-main-chinese-electric-car-companies/

https://www.greencarreports.com/new...lectric-car-companies-headed-for-boom-or-bust

https://electrek.co/2021/05/25/egeb...nearly-40-billion-to-build-ev-tech-in-the-us/

https://www.greencarreports.com/new...or-europe-will-it-ease-availability-in-the-us

We can count on SpaceDoc to swoop in with the gloomy Tesla prognosis. Every take is negative, as sure as the sun rises every morning.

He seems unaware that industry analysts have been predicting for many years that competing EV's would wipe Tesla out by 2019. Now they don't even bother to say they will "kill Tesla" just that competion will mean Tesla is "not the only game in town", LOL!

 

[charliemagpie]

Waiting for the 100,000 other phone manufacturers with GUI, fast processors and with all the bells and whistles to usurp Apple's profit dominance.

 

[Sirfun]

How many automakers are dreaming about such problems?

For GM & Ford it already is their problem. They have way more demand than they are going to produce for years. BUT, for them it's not a dream. It's a nightmare.
They have a VERY limited production planned. Hoping that with the huge demand and limited supply, they can get much higher prices for their EVs. To cover their much higher costs of producing them. And they hope people will buy ICE because of the lower price.
It's called marketing. BTW, I can't stand marketing.

 

[jerhenderson]

We can count on SpaceDoc to swoop in with the gloomy Tesla prognosis. Every take is negative, as sure as the sun rises every morning.

He seems unaware that industry analysts have been predicting for many years that competing EV's would wipe Tesla out by 2019. Now they don't even bother to say they will "kill Tesla" just that competion will mean Tesla is "not the only game in town", LOL!

he's delusional to say that Tesla isn't the only player in town. it is. bar none. And no matter what Mary says, GM has nothing in the pipe.

 

[HaulingAss]

he's delusional to say that Tesla isn't the only player in town. it is. bar none. And no matter what Mary says, GM has nothing in the pipe.

I hear you but, depending upon your perspective, it's fair to say there are other players in the EV game. But they don't really compete directly with Tesla. They are the "alternative" for someone looking for an EV that is not a Tesla. They will sacrifice some range or value or reliability or software that works more seamlessly or Tesla's superior Autopilot but, in return, they won't be driving a Tesla. Why someone would want that, I'm not sure, but who am I to judge? Everyone is different.

Tesla will still sell as many as they can make for years to come. Here's the real important part to understand about all this:

Tesla has had multiple price raises recently. They didn't have to do this due to the rising material costs (they could have absorbed the higher costs), they did it to bring supply and demand more into balance after seeing that their previous price cuts went too far. They want a surplus of demand but not so much that it takes years for your turn to come up. They would rather have a higher price, more profit and better customer experience than waiting lists that extend years into the future.

Unlike all other EV makers, only Tesla has the ability to make HUGE price cuts and remain profitable, should that ever become necessary in the future. That's why the competition is running scared, they know they are second fiddle and can only sell their EV's AFTER all the Teslas have been spoken for. Because Tesla can drop the prices whenever necessary to ensure sales of their continually growing production volume. Tesla's cost to produce is the lowest in the industry due to manufacturing innovations and corporate efficiency and it continues to improve with growing volumes and the bringing on-line of newer factories and production processes with more recent designs optimized for production efficiency. It keeps getting better.

And that, boys and girls, is the difference between Tesla and all other EV makers, an important difference, one that most people have no clue about.

 

[charliemagpie]

It's not a matter of legacy Automakers not being able to meet demand, IMO

If there's no acceptable return, there's no business.

They need to maintain relevance, and by producing say 50,000 EV's they can be a player…for now.

I don't envy them, all their systems and processes and tooling are geared for ICE, they can't switch on the fly. It's impossible. Expenses don't wait.

I predict they will slowly build a parallel EV business, hoping to make it profitable and use their dwindling customer loyalty and FUD to extend and soften the landing. Their ICE production will crash.

They will still have a parts business, but that will wither away.

They know they will end up a fraction of their normal selves. Their real plan is to rebuild from a lower base.

Didn't work for Nokia, Kodak et al.

 

[Sirfun]

I hear you but, depending upon your perspective, it's fair to say there are other players in the EV game. But they don't really compete directly with Tesla. They are the "alternative" for someone looking for an EV that is not a Tesla. They will sacrifice some range or value or reliability or software that works more seamlessly or Tesla's superior Autopilot but, in return, they won't be driving a Tesla. Why someone would want that, I'm not sure, but who am I to judge? Everyone is different.

Tesla will still sell as many as they can make for years to come. Here's the real important part to understand about all this:

Tesla has had multiple price raises recently. They didn't have to do this due to the rising material costs (they could have absorbed the higher costs), they did it to bring supply and demand more into balance after seeing that their previous price cuts went too far. They want a surplus of demand but not so much that it takes years for your turn to come up. They would rather have a higher price, more profit and better customer experience than waiting lists that extend years into the future.

Unlike all other EV makers, only Tesla has the ability to make HUGE price cuts and remain profitable, should that ever become necessary in the future. That's why the competition is running scared, they know they are second fiddle and can only sell their EV's AFTER all the Teslas have been spoken for. Because Tesla can drop the prices whenever necessary to ensure sales of their continually growing production volume. Tesla's cost to produce is the lowest in the industry due to manufacturing innovations and corporate efficiency and it continues to improve with growing volumes and the bringing on-line of newer factories and production processes with more recent designs optimized for production efficiency. It keeps getting better.

And that, boys and girls, is the difference between Tesla and all other EV makers, an important difference, one that most people have no clue about.

Of the other manufacturers, I'm very interested in Hyundai. As customers, we really want there to be other players. It seems like Hyundai is making a lot of the right moves and they are serious about transitioning to EVs. Don't forget Hyundai is Kia, and Genesis also. Maybe being in California, we see more of these cars than other states. But, if you just look at vehicle vs. vehicle, they are building some good vehicles.

 

[Huntsman]

Of the other manufacturers, I'm very interested in Hyundai. As customers, we really want there to be other players. It seems like Hyundai is making a lot of the right moves and they are serious about transitioning to EVs. Don't forget Hyundai is Kia, and Genesis also. Maybe being in California, we see more of these cars than other states. But, if you just look at vehicle vs. vehicle, they are building some good vehicles.

You bring up a good company to watch. They have mastered the low cost budget vehicle and managed to achieve great reviews and customer satisfaction. I find their vehicles to be a little too plastic, albeit fancy plastic. With the goal of achieving a high end market through Genesis (I don’t think this is ever going to mature) they have both a budget and premium market to work within. I don’t think they are a threat to Tesla, but they may satisfy the budget EV market so that Tesla never has to cut quality; face it, the model 3 is not an S. About $40,000 dollars is missing in 2 feet of car. What got cut? I’d prefer TSLA not strive to create a $25,000 Tesla. If that market is that important, create another company - MuskAuto - and make it a budget car offering range for a price.

 

[HaulingAss]

Of the other manufacturers, I'm very interested in Hyundai. As customers, we really want there to be other players. It seems like Hyundai is making a lot of the right moves and they are serious about transitioning to EVs. Don't forget Hyundai is Kia, and Genesis also. Maybe being in California, we see more of these cars than other states. But, if you just look at vehicle vs. vehicle, they are building some good vehicles.

Anyone can build a reasonably good EV, it's just a matter of exactly how good it is and how much it costs them to build it. Because there is no point in building it if they can't make a reasonable profit on it eventually. And for the profit to be significant, they have to build them in volume.

You cannot determine how much a car costs to build from it's MSRP. Many of the EV's available in small volume cost more to build than what the dealership pays for them. Let that sink in. It's not sustainable. They only have a low price because there is a limit to how much any car can sell for and still sell in volumes that allow it to be produced in efficient volumes.

While it's always nice to have more choice when I need to buy a car, I really don't care about how many cars are available that I don't want. And there are currently a lot of those. I only care about cars that I want. Wishing that someone other than Tesla would make and sell a car that I want doesn't make it more likely to happen. Those other manufacturers want to do exactly that. But it's hard and wanting to do it doesn't mean they can make it happen.

 

[xodarap1]

lol such a terrible problem that Tesla can't keep up with demand.... and oh BTW Lucid isn't a competitive option, nor is Rivian, nor is GM or Ford, all for their own reasons such as inferior specs ( GM Ford ), or niche product ( Lucid, Rivian ), or very expensive with low production ( Lucid ). None of them have the charging infrastructure or software tesla has. I'll wait for my Tesla, as there simply isn't any other option on the market.

Well said. Same. There are other options, but dollar for dollar, pound for pound, feature for feature, nothing else even comes close. And the odds of these other companies being around in 10 years is getting more and more slim each day. That means that vehicles purchased from them could suffer a huge decrease in value down the road.