In this Supply Chain Matters industry specific commentary, we revisit EV automaker Tesla’s prior report of Q3-2022 operational performance with this week’s formal report of financial performance. The themes are somewhat similar.

 

In a prior published Supply Chain Matters commentary, we highlighted EV automaker Tesla’s Q3-2022 Vehicle Delivery Performance Exposing Business Model Challenges.

Noted in our commentary was that industry disruptors such as Tesla and others developed business models that challenged existing business practices in either how products were developed, produced and distributed.

In the case of Tesla, it is a business model that shuns a directly owned nationwide or global dealer and post-sales maintenance services facilities. Instead, vehicles are sold online and then shipped directly to consumers globally relying on domestic and global logistics service providers leveraging available transportation and logistics services networks. Post delivery vehicle services are delivered either directly via the Cloud for all software related maintenance needs, or the dispatching of company technicians directly to driveways and available vehicle locations for hardware repair or replacement needs.

Once more, the EV automaker has manifested track record of skewing finished vehicle shipments toward the very last weeks of the company’s financial quarter because of frequently occurring parts or other delays. That often resulted in vehicles not reaching their owners by the close of quarter, hence revenue recognition would spillover to the subsequent quarter.

For the quarter that ended in September, the EV automaker reported that 343,830 vehicles were delivered in the quarter, short of the upwards of 358,000 that were anticipated by equity analysts. The company actually produced a reported 365,923 vehicles in the most recent quarter.

Since the news of delivery performance, the company’s shares have reportedly declined more than 17 percent. Founder and CEO Elon Musk’s parallel efforts to acquire Twitter were likely a further aspect of the stock’s decline.

 

Highlights of Q3 Quarterly Financial Performance

This week, the automaker formally reported quarterly financial performance for the September ending quarter.

Total quarterly revenues, while establishing a new record, came up short of equity analyst expectations. Profitability also did not meet expectations. The narrative was that raw material cost inflation indeed impacted the bottom line, along with some delays in the ramping up of the two newer factories, one being Austin, Texas and the other Berlin Germany.

Reportedly, the Wall Street and investor community was keen to perceive whether market demand for the company’s vehicle’s showed any signs of a decline. For the supply side, there was a keen sense as to whether ongoing semiconductor or battery production component shortfalls hampered the ability to deliver finished vehicles along with what impacts came from supply chain driven cost inflation.

Regarding market demand, Founder and CEO Elon Musk added his usual bravado-based optimism, specifically indicating: “I can’t emphasize enough we have excellent demand for Q4, and we expect to sell every car that we make for as far into the future as we can see.Indicated in the company’s forward-looking guidance is the stated expectation to achieve 50 percent average annual growth in vehicle deliveries over a multi-year horizon.

For the cost inflation and supply side, third quarter automotive gross margin was reported as 27.9 percent, also short of analyst expectations and below the 30.5 percent margin reported in the year-earlier quarter. Musk acknowledged that there are supply and other challenges still ahead and not yet surpassed.

In reporting of Tesla’s latest quarterly financial performance, business broadcasting network CNBC opined that; “While vehicle production and deliveries have grown, service has not kept pace and has been a sore spot for many Tesla owners.” That has been especially the case in China, where consumer complaints focused on vehicle design and quality have attracted the attention of China’s consumer products regulators and of domestic competitors.New reports indicate that the EV automaker is now contemplating a change to its China sales and vehicle services delivery capabilities by providing more of a presence outside major mega city centers and more toward more suburban population areas.

In the services and other revenue category, which includes repairs of vehicles not under warranty, sales rose to $1.65 billion.

The company also acknowledged that an ongoing bottleneck in available transportation capacity at quarter end hampered the ability to record added revenues and that the automaker would be “transitioning to a smoother delivery pace.”

 

Additional Reader Takeaway

When our research arm published its this year’s annual predictions at the start of this year, given the sheer magnitude of disruptions that occurred in the prior two years, our stated theme for industry supply chains was that a reexamination of business and supply chain strategies would dominate as the various implications were assessed.

Tesla’s acknowledgements are a testament that even those that attest to being the coolest and most innovative have to face up to the realities of what has occurred these past two plus years, as well as what is to come.  There is some substance for a global-wide auto manufacturer efforts in retaining direct control, supply network resiliency and influence on critical direct supply, finished goods delivery and vehicle servicing needs.

That is not to imply reverting back to former industry methods, but rather acknowledging where points of control, supply risk and direct influence need to be continuously aligned and nurtured. A company can no longer assume that their unique ways of doing business will disrupt competitors when global and domestic based supply, logistics and transportation services disrupt many industries at the same time.

There is an argument for continuous planning and balancing of resources, fulfillment execution and customer service requirements.  Tesla has in it latest statement to the company’s investors that it now understands where the intersection of market innovation and supply chain volatility requires some reexamination.

 

Bob Ferrari

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