Tesla last week released its Q1 2019 shareholder letter. You can read it in full here. We also had a special livestream and liveblog of the Tesla conference call published here. Below are some of the top highlights from me that I think have been mostly ignored or skimmed over by the press (including the EV press).
I’m focusing my attention on the issue of consumer demand for the Model 3. I have thought for months (quarters, actually) that demand is indeed the big question for Tesla in the short to mid term. (In the long term, my opinion is that Tesla demand will be insane, as the mass market will eventually discover that you simply can’t beat a Tesla.) It’s clear several Wall Street analysts have the same question top of mind, and they appear to want simple answers that perfectly predict the future. Ah, if life and business were so easy!
Nonetheless, Tesla has provided a number of statements on the topic, a few hints, and broader context that should help to consider the matter. So has the universe.
The first highlight is that Tesla produced 63,000 Model 3s in Q1 2019 — 3% more than previous quarter. The 4th quarter was considered a high-volume blowout quarter in a number of respects, with a bit of hype that Tesla couldn’t continue along those lines. The first quarter of 2019 showed that Tesla could continue at that pace and was actually able to increase output a bit.
The more impressive highlight is that the Model 3 was again the #1 best selling premium-class car in the United States in the first quarter, and that it outsold #2 by a whopping 60%! This is impressive for a few reasons.
- First of all, the first quarter was expected to be a large sales crater for the Model 3 in the United States. The US federal tax credit had just been cut in half from $7500 to $3750 and Tesla was focused on shipping Model 3s overseas. Nonetheless, the Model 3 dominated its segment of the market.
- Aside from the above, Tesla wasn’t yet shipping the base Model 3 or Model 3 Standard Range Plus. These are notably cheaper than previously available trims. Also, I’m not sure this is the case with Tesla because of its unique circumstances, but generally speaking, as you go down the cost curve, auto sales grows exponentially. A $35,000 car isn’t just more popular than a $50,000 car, it’s more popular by significantly more than a $50,000 car is more popular than a $65,000 car.
- Connected to that, but I’ll make it a third point, most people who know about Tesla think that its cars are super expensive. Word of mouth takes some time, but the $35,000 Model 3 is finally available, so word should be spreading now that an “affordable” Tesla is finally on the market.
- A final point is that the Model 3 is not just cost-competitive with its premium-class competitors. It offers both a lower price and much more premium features. In other words, in several ways, it’s a more premium car at a lower price. It still somewhat baffles me that so many people are still buying BMWs, Audis, and Mercedes (Mercedeses? Mercedi?), but people will learn that buying one of those is essentially idiotic — sooner or later. Also, there are many buyers who do already get it.
Perhaps my favorite and the biggest note is Tesla’s simple explanation of why there’s so much potential globally for Model 3 sales. The explanation is here:
Yes, there’s a ton more midsize premium sedan potential elsewhere than in the US, and if the Model 3 was represented abroad as it is at home in the US, it would have enormously more demand. We’re yet to see the Model 3’s true demand globally, but it has been knocking the socks of the market in the Netherlands, Norway, Germany, Switzerland, and other initial foreign markets. Over time, especially as the lower priced versions of the car become available, we’ll see how things settle out.
It’s not all about the Benjamins and BMWs, though. Another highlight hinting at the Model 3’s potential demand in coming months, quarters, and years is that Tesla still isn’t pulling most of its buyers from the premium-class market. “Since introduction of Model 3 Standard Range and Standard Range Plus, 69% of trade-ins were non-premium vehicles, indicating that Model 3 is demonstrating appeal beyond the premium segment,” Tesla notes.
We have been quite happy to show Tesla’s cost-competitiveness with the Honda Accord, Toyota Camry, Nissan Altima, and other top selling cars — because it’s so astounding. But I assume this is something the mass market is yet to learn.
Another hint that Tesla Model 3 demand is looking good: “Although we are driving towards higher internal goals, we reaffirm our prior guidance of 360,000 to 400,000 vehicle deliveries in 2019, representing an increase of approximately 45% to 65% compared to 2018.”
Actually, going on, Tesla highlighted that it may produce significantly more cars in 2019 than previously forecasted. “If our Gigafactory Shanghai is able to reach volume production early in Q4 this year, we may be able to produce as many as 500,000 vehicles globally in 2019. This is an aggressive schedule, but it is what we are targeting. However, based on what we know today, being able to produce over 500,000 vehicles globally in the 12-month period ending June 30, 2020 does appear very likely.” Why would Tesla target that much production if it didn’t feel comfortable about the demand for so many vehicles?
Just following that quote was this one: “We continue to target a 25% non-GAAP gross margin on Model S, Model X and Model 3, depending on variant mix and option take rates as our product offerings change.” It’s very hard to have 25% gross margin on a product if demand isn’t matching supply. Most of the auto market has much lower gross margins. (Granted, they don’t sell cars to customers themselves, as they have to go through dealers, but the point is still the same.)
Some other tidbits: On the conference call, Elon Musk noted that they had less of a US demand drop-off in Q1 than expected, that there was enormous demand for the Model 3 Standard Range Plus, and that they really aren’t concerned about demand.
Okay, it’s Elon, he’s optimistic. But if we are going to say he’s optimistic and he says they were positively surprised by the Q1 demand in the US, that’s a good sign that demand has been holding up and word of mouth is already getting around well enough to bring in many more of former BMW 3 Series, Honda Accord, Toyota Prius, Nissan Altima, and Toyota Tacoma buyers.
There are other big matters that could drive a great deal more demand for the vehicle in coming months, like leasing, which just became available on the Model 3, and Tesla’s activation of “Full Self Driving” features. Additionally, on the financials front, the Full Self Driving option may be something most Model 3 owners didn’t initially buy but will buy once they see some exciting features activated. (That’s an easy revenue boost that costs Tesla nearly nothing.)
I mentioned “the universe” at the top of the page. As I reported last night, search traffic for “tesla” and Tesla.com’s traffic ranking have both spiked in 2019. That’s a sign of stronger demand, not weaker demand.
I’m going to close on a topic that isn’t about near-term or mid-term consumer demand, but it’s something I find astounding, hugely relevant to Tesla’s future, and potentially a powerful factor influencing demand in the long term. Again, a Tesla chart from is shareholder letter captures the point best:
To try to summarize what the chart summarizes best, capex costs for Model 3 production in China are going to be dramatically lower than capex costs for Model 3 production in California (per unit of production capacity). Not only that, capex costs for Model Y production in the US will also be significantly lower than capex costs for Model 3 production in California.
That means one of three things: 1) Tesla could sell these vehicles for less and make the same money on each of them (selling them for less would, of course, mean more demand/sales, which would mean more revenue and profits), 2) Tesla could sell for the same price and just make more money on each of them, 3) some combination of those two options.
The future looks bright.
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