The Mystery Of Tesla Model 3 Demand
Demand is a mystery that can only be measured once supply is provided, and at that point, it’s not demand anymore. You only know what demand you really had after its gone. Supply is a fact you can easily measure, while demand is never really known or completely understood. Even worse, the supply you measure is usually only a part of the demand you once had, and the closer you get to the moment of supply, the more you know how real the demand is.
A simple definition of demand is: “what people want.”
“If I had asked people what they wanted, they would have asked for faster horses,” Henry Ford is reported to have said (or not).
This polarizing sentence is an expression of consumer imagination limitation with a touch of arrogance. If you ask consumers, they tend to request better existing features instead of a new kind of vehicle or product that did not exist before. The very same that has been true for the transition from horses to cars is today true for the transition from gas combustion engines to electric cars.
You can rightfully state what Henry Ford really said is that consumers are dumb and he as a visionary knows better what they want than they do themselves. Admittedly, he was more polite, and admittedly, his success probably proved he was right. Once people had experienced the superiority of the Model T versus their horse, they suddenly knew that they wanted one, and they knew it with certainty.
Photo by paulbr75 on pixabay
Consumers know what they want once they touch, feel and experience a product and service that is much better, but they usually are not very good at imagining a new form of transportation with a different drivetrain and a new innovative energy concept that did not exist before.
For 10 years, I have followed consumer behavior concerning electric vehicles, and if one part of it is obvious, it is that Henry Ford did dare to express what many visionaries feel, which is that they know something before you do. Early on, in most cases as children, they learn it the hard way — that you better not try to explain or try to convince with words, but rather convince with reality and experience.
During the last 10 years and through today, the vast majority of people claim that electric vehicles are not what consumers want. All incumbent automakers for decades declared that consumers would like a faster, bigger, heavier, and prettier internal combustion engine (ICE) car (a gas or diesel car). That sentence is true for almost all ICE drivers until the very moment they drive a Tesla for the first time.
Henry Ford faced the very same challenge 100 years ago. He believed in an affordable way of transportation that was in every aspect better than a horse and accessible for the normal consumer. In those days, some 100 years ago, cars were only for the rich, and he revolutionized an entire industry by listening stubbornly to his own conviction, avoiding and disregarding all who told him it was impossible.
Elon Musk faces the very same challenge Henry Ford had. Nothing has changed. Most consumers cannot imagine how much better it feels to drive an electric vehicle like a Tesla, and the total cost of ownership* and safety benefits, and the auto industry does not believe (or does not want to admit) that the consumer wants to buy them. (*For example, see: Tesla Model 3 vs. BMW 3 Series in Germany — ~3× Better Model 3 Could Save Owner €10,000 in 5 Years and Tesla Model 3 Costs vs. 10 Best Selling Cars In The USA and Tesla Launches Meteor To Kill The Dinosaurs Of The Auto Industry.)
Here we are now in the year 2019, in which history has been written from a small car company in California that produced and sold 245,000 BEVs in 2018 and is about to sell between 370,000 and 420,000 in 2019. All of those are pure electric vehicles that the auto industry, the majority of the media, business analysts, and executives of the largest automakers have explained to us year over year the consumer doesn’t want. I ask myself who is the one arrogant enough and pretending to know what buyers wanted back in 2018. The best way to determine what a consumer really wants is to look at what a consumer spends his money on.
Numbers are facts and facts have no alternative — they are undeniable truths. If a consumer buys an electric vehicle instead of an ICE car, she or he has created a fact that can be measured. It shows what people really want.
If those purchasing choices cumulate to larger numbers, you have a strongly confirmed fact that has societal implications, and if they repeat over time and grow, you have a positive trend. It is as simple as that. Cars sold or cars delivered cannot be questioned or called “not real” or “vaporware.” They show us simply what a consumer wants and is willing to pay money for. Cars sold are an expression of demand.
Analysts have questioned the demand for Tesla cars since the company was founded. If analysts could analyze, they would not be analysts. A good example of that fundamental truth is billionaire Ron Baron, who was an analyst once and realized he was a good one, making his clients rich. Consequently, he quit his job and is now filthy rich. He is one of the largest shareholders of Tesla today. Would you trust an analyst that is rich following his own recommendations or one that does not trust his own recommendations and is still employed?
Almost all professional analysts you read or listen to in the media have been wrong about what are now the largest, most valuable, and fastest growing stocks ever seen — like Apple, Amazon, and Microsoft. People who did the opposite from what those analysts said are wealthy now. Still, they did not learn from the past and today use the wrong metrics to assess companies like Tesla, and seem not to see the forest because of all the trees. They actually show you a single tree while disregarding the large forest in front of them.
When the media writes about low Tesla deliveries in Q1 2019 compared to last quarter — negative 31% quarter over quarter while the company actually grew 110% compared to the same quarter a year ago — they actually point to a smaller tree not growing that fast in 3 months and do not look right and left and recognize that the forest has actually more than doubled its size. For clarity, to point to one month or quarter and call it an issue is like looking at one tree in a large forest and calling it small.
When the media talks about Model S and Model X deliveries, which were smaller in Q1 versus Q4, it is again looking at a tree while overlooking that Tesla had its third best quarter in history for all models combined and all of these three best quarters happened to be in the last 9 months (the last three quarters). The forest has grown significantly in that short period. To look at just a month or even a quarter is too short a time to evaluate the company, but if you want to pick that period, you have to at least take that month a year ago or that quarter a year ago to compare and assess — as the auto industry is a seasonal business that goes up and down like the weather does through the four seasons. What these analysts are doing is akin to comparing the average temperature in summer with the one in winter and calling the winter a big miss.
Growth matters if the cost per vehicle produced is significantly reduced while growing faster. That is the case with Tesla. It’s growing at an unprecedented rate for the auto industry and reducing costs at a similar rate. All one-time costs for robots and factories are paid off from more cars sold and delivered, something happening every day.
This growth is happening because a Tesla vehicle is actually a shell that is filled over time and improves with software updates. It surprises you with what it learned lately, like your kid that surprises you by walking and speaking all of a sudden, somehow magically out of nowhere. In that sense, there is simply not one other single car, be it electric or not, that is available today and has this impressive promise to improve over time (and perhaps even appreciate in value).
It also can metamorphose into a different car — like, for instance, the Model 3 Standard Range that after an update suddenly becomes a Model 3 Standard Range Plus. This ability is an underestimated factor in flexibility, the flexibility to turn demand into supply at no additional cost. Tesla has a 100% margin on it and makes consumers very loyal to the shell they bought. The consumer is aware that it can be something else over time if they decide to spend money on it.
Anybody who has worked in sales knows that demand is volatile, comes and goes, but if you make the right offer at the right time, you get the deal. The hurdle to overcome for all other automakers trying to convince consumers to sell their old cars and buy new one in order to get more range is massive versus a quick software update for a relatively small amount of money from Tesla, and you keep what you had but it’s now just better. Battery capacity is one thing consumers can upgrade, while autonomous driving features is another. And even without upgrades, all Tesla cars sold today are finished in terms of hardware but never really finished, since the software just gets better and better.
If I told you that one of my best and easiest decisions in life was selling my Porsche and buying a Performance Model 3, the best car I have ever driven, that may not make you change your mind about Tesla. You may call me a fanboy living in a bubble, in an echo chamber listening to people like myself. Maybe that’s true, but it does not matter because I did spend €75,000 for the car and that’s a fact. My euros I worked for are now Tesla’s euros, and the number of consumers buying Tesla’s cars is growing every day — that’s a fact. The forest is growing every day.
All of what I have written in this article so far can be debated, called right or wrong, and won’t necessarily help you to get a clearer picture of whether Tesla will succeed or not. Success means for everyone something different, and Wall Street tends to express its definition of the car industry on production count and deliveries. From my point of view, Tesla is not a car company, but an energy transformation enterprise that happens also to produce cars.