Tesla Motors reported quarter-ending and full year 2018 operating performance numbers and the company’s investors did not seem pleased by the results.
Production
Total production in the final quarter amounted to a total of 86,555 vehicles, a reported 8 percent increase. The number included 61.394 Model 3 and 25,161 Model S and X vehicles produced during the quarter. As we pen this blog, the news of operational performance has caused Tesla stock to plunge upwards of 10 percent.
It is important to note that the very closely watched Model 3 output performance. The long-stated goal for Tesla was the ability to produce Model 3 sedans at the consistent rate of 5000 vehicles per week. Again, in Q4, that milestone was not accomplished. Instead, the Tesla statement refers to guidance for exceeding a 15 percent increase in Model 3 production in Q4. Milestones cannot be at the convenience of those reporting performance to such milestones.
According to Tesla’s own report, more than three quarters of Model 3 orders fulfilled in Q4 came from new customers, rather than reservation holders. The company has yet to deliver on the original milestone of a base $35,000 Model 3 because of ongoing cost burdens, including supplemental assembly lines. The original target for base Model 3 production performance was originally scheduled to occur more than two years ago. The Model 3 production performance further reflects continued cherry-picking of backlog orders, no doubt to both add new customers or appease some customers who have waited quite a long time for Model 3 delivery.
These are areas requiring more emphasis and remedial actions in 2019, while at the same time, delivering on product margin and overall profitability goals. Such goals are not easily achieved since that would have by now been resolved. This a yet more evidence for providing more transparency and less sugar coating.
For all of 2018, Tesla reported the delivery of 245,240 vehicles, of which 145,846 were Model 3’s. The release notes: “We started the year with a delivery rate of about 120,000 vehicles per year and ended it at more than 350,000 vehicles per year- an increase of almost 3X.” How this auto manufacturer came to declare such an existing run rate defies some realities on the ground. More on that later.
Customer Deliveries
Total customer deliveries in Q4 amounted to 90,700 vehicles that included 63,150 Model 3’s. Keep in-mind that Tesla’s delivery processes call for recognizing revenue when a vehicle has been delivered to the end-customer. Thus, in any given quarter, there is float of in-transit vehicles where revenue is recognized in the subsequent quarter. At the end of Q4, 1010 Model 3’s and 1897 Model S and X vehicles were noted as in-transit. At the end of Q3, in excess of 8000 Model 3 vehicles were noted as in-transit, and thus are now accounted for in Q4 customer deliveries.
The above numbers seem to reflect that some progress had been made to the logistics of the customer delivery process which was sorely overdue.
Stockholder Response
Today’s report of Tesla operational performance included an announcement of a price reduction on all of its models by $2000 to help offset the reduction in the federal tax credit for buyers of electric vehicles in the U.S..
The immediate negative response by stockholders is being attributed to either delivering below consensus forecasts by as much as 2000 vehicles, or the unexpected announcement of a price reduction in the midst of a lot of attention being paid to assuring sustaining profitability. In either case, investors seem to be once again caught off-guard to pricing or supply chain management related news.
Equity analysts seem to now be positioning clients to take a longer-term view of the company’s stock. Rightfully so, since 2018 has featured the reported departure of in excess of 40 executives from the electric auto maker as a result of a corporate restructuring and /or headcount reductions. Some executive resignations were voluntary, the most recent being the executive leader of the Tesla gigafactory that is responsible for battery manufacturing. Jens Peter Clausen resigned in December to pursue a management role at a synthetic biology company funded by Japan based Softbank. Another high-profile departure was that of engineering head Doug Field, who is now at Apple as part of that company’s self-driving car project.
We found it somewhat amusing that the report by business network CNBC reflecting on Tesla’s selloff today includes the image of the temporary tent that was setup in Q3 to house a second temporary assembly line for Model 3 production. As long as that tent remains, the more evidence there is for added work needed in consistent and replicable production and delivery processes to expected quality standards.
Widely followed Consumer Reports magazine has yet to recommend a Model 3 purchase, despite a rave review on the vehicle’s handling and performance features, because of a stiff ride, distracting controls, and long charging times. The magazine has similarly nixed the Model X because of vehicle reliability reports from existing owners.
Moving Forward
As a result of a recent SEC action directed at CEO Elon Musk’s actions on social-media, Tesla now has a separate Board chairperson and two new independent directors, one being Oracle Founder and current CTO Larry Ellison. These moves should help in providing more management balance for Tesla.
At the end of the Tesla announcement of Q4 vehicle production, there is a statement that acknowledges and thanks the efforts of customers, suppliers, investors and especially employees, who worked so hard to accomplish a very challenging 2018. That statement was appropriate and overdue.
Moving forward, a lot of leadership work remains in assuring that growth and consistency of production and customer delivery logistics will continue to improve.
The next milestone of judgement comes in just a few weeks when the electric auto maker reports both Q4 and full-year financial performance. We trust that a lot of thought and analysis of the past year will be a part of that report, along with a concerted plan to get even better.
Bob Ferrari
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