Tesla’s New Products and Challenges in 2019

We covered Tesla’s awesome, horrible 2018 earlier this week in our year-end wrap up. Now we look ahead to Tesla’s 2019 plans and challenges.

Included on the list: Tesla just broke ground on its Shanghai factory, the Q4 and year-end earnings report is a few weeks away and rollout of the Model Y electric crossover is imminent. Tesla is starting its Model 3 delivery efforts in Europe and China in a quarter that will need a lot of pieces to fall into place to keep volumes growing profitably.

That’s not to mention the Semi truck, the new Tesla Roadster and the pickup. Also

We covered Tesla’s awesome, horrible 2018 earlier this week in our year-end wrap up. Now we look ahead to Tesla’s 2019 plans and challenges.

Included on the list: Tesla just broke ground on its Shanghai factory, the Q4 and year-end earnings report is a few weeks away and rollout of the Model Y electric crossover is imminent. Tesla is starting its Model 3 delivery efforts in Europe and China in a quarter that will need a lot of pieces to fall into place to keep volumes growing profitably.

That’s not to mention the Semi truck, the new Tesla Roadster and the pickup. Also on the to-do list is a refresh for the Model S and Model X, and perhaps a ramp of the seldom-seen Solar Roof. The charger network will need to be built-out to accommodate the real volumes of EVs rolling off of Tesla’s lines. And service centers and parts inventory will have to scale with the brand’s growth as well.

We’ll try to understand how Tesla is going to pay for all of this new product development and infrastructure. But it's a new year, and at this point there are more questions than answers.

The Shanghai Giga

Earlier this week, Musk attended the groundbreaking of the "Shanghai Giga," the first wholly-foreign-owned car plant in China — destined to build "affordable" versions of Tesla’s Model 3 and Model Y. 

Musk said: "We think with the resources here we can build the Shanghai Gigafactory in record time and we’re looking forward to hopefully having some initial production of the Model 3 towards the end of this year and achieving volume production next year.” Tesla aims to begin production with 3,000 Model 3s per week, according to the firm. 

Figures of $2 billion have been floated as the cost of this effort and financing was to come from “local debt” according to earlier reports. Tesla has also been accepting orders and deposit money for the Model 3 in China, according to the Tesla China website

"We need to sell cars today in order to build the factory tomorrow," said Musk in an interview with Chinese press, cited by Bloomberg, discouraging consumers from holding out for lower-cost versions or price drops.

A demand lull to start 2019?

Tesla’s record quarterly production and delivery volumes were announced last week, but the nitty-gritty details on profit, loss and cash flow will be announced later this month or in early February. 

There was an all-hands effort at Tesla to sell and deliver as many cars as possible in the closing weeks of last quarter. The firm was offering Supercharger incentives as well as discounts, ostensibly to cover the partial loss of the tax credit. 

The Fremont factory even phoned the author of this article in mid-December to offer a test drive, not knowing my job. Or income. 

The first quarter of 2019 is going to potentially feel the hangover of that delivery pull-in. In addition, the roughly $57,000 Model 3 average selling price is liable to fall in Q1 since Tesla shipped higher-ASP orders to maximize revenue and profit last quarter. The reduction of the tax credit in the U.S. is another demand headwind. Bloomberg's Tesla tracker shows Model 3 production levels at a trailing 13-week average of 4,577 cars per week.

Initial deliveries to Europe and China may come too late to compensate for the upcoming “lull in demand” expected by Goldman Sachs analysts in the first quarter. 

EU and China deliveries

Musk said Tesla would begin delivering Model 3s to Europe and China in February/March and March/April, respectively. Tesla has roughly 15,000 orders in Europe, according to a tally kept by Tesla reservation holders.

The starting price of a Model 3 will be approximately $70,000 in China — so a stronger dollar is an obvious headwind for China and overseas sales.   

Model Y and other new products

In October of last year, Musk claimed "significant progress" on the Model Y, Tesla's crossover. The CEO said that he "approved the prototype to go into production" and expects it to be in volume production in 2020. He also cited progress on the Semi truck, the new Tesla Roadster and the pickup truck. 

The Model Y crossover will presumably be built on the Model 3 platform with similar battery ranges and performance. Tesla is expected to unveil the Model Y in the first half, or maybe even the first quarter of the year. Will it be built in Fremont or in another location? And how many billions in deposits could the Model Y garner for Tesla globally?

Musk tweeted:

Shanghai Giga will produce affordable versions of 3/Y for greater China. All Model S/X & higher cost versions of Model 3/Y will still be built in US for WW market, incl China.

— Elon Musk (@elonmusk) January 7, 2019

“Shanghai Giga will produce affordable versions of 3/Y for greater China. All Model S/X & higher cost versions of Model 3/Y will still be built in US for WW market, incl China.”

So, an “affordable” version of the Model Y and Model 3 will be produced at the Shanghai factory, while the U.S. will build the higher-end versions. 

According to Electrek, the Model S and Model X are going to get an interior refresh, at least, with a cabin design in the same austere style as the Model 3. Tesla delivered 27,550 Model S and X vehicles in Q4, just missing its 2018 target, with a sales decline over Q4 2017 and a sequential decline over Q3 2018.

Despite their popularity in Europe and the U.S., these numbers prompt the question: has sales growth ended for these two high-end models?

As for the Semi truck, the new Tesla Roadster and the pickup, one would expect unveilings and prototypes in the near term, while volume production might wait until 2020 or beyond. And the only question about service networks, spare parts, charging stations and faster chargers is...

How will Tesla pay for all this?

There are a few ways in which Tesla will try to pay for all of this. First, there are low-interest loans from China for the factory, potentially billions in deposits for the Model 3 and Model Y in China and Europe, and there's the actual corporate profits that Musk expects on a quarterly basis from here on in.

There are also asset-based securities. Late last year, Tesla issued $837 million in its second issuance of securities backed by Tesla auto leases, according to Auto Finance News. Tesla's first securitization was downgraded because of a "shortfall" in the Model 3 build rate.     

Then, of course, there are the public markets — Morgan Stanley analysts expect a multi-billion dollar capital raise despite Musk's oft-stated determination not to go this route.    

Is Tesla's growth trajectory still alive? 

Tesla had record profits in the third quarter of 2018 with unit vehicle sales more than doubling from the second to the third quarter. Tesla's story and stock price are all about rapid growth. But records are tough to keep beating. And if the company is no longer growing rapidly, the stock price will become difficult to justify. 

Absent new models, Tesla is depending on the Model 3 to carry the company for the next year. European sales might help make up for demand pockets in the U.S., but Tesla seems to be on a relatively flat sales trajectory — at least until the Shanghai factory comes to life later this year.

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