Why does Tesla lose more money as it sells increasing amount of product?

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Even if  Tesla had a different owner and new management team it would still need to solve its greatest problem. Tesla’s greatest problem is its chronic profit losses, that on its current trajectory will force an eventual bankruptcy. Tesla’s predicament is a case of 1 of 3 scenarios up to this point.

 

a. Tesla could sell less product. If Tesla sold less product it follows that revenues and losses would be lower.  Of course, its stock price would collapse, and its major funding source would evaporate.  Tesla would then go bankrupt without its stock price as a funding anchor.

b. Tesla could raise prices on its top revenue sellers, the  Model S and X. But if it did so, it is reasonable to submit based on years of evidence that Tesla would lose unit sales.  Tesla’s  investors also haven’t assigned an astronomical value to its business on the premise that the company is to be a niche electric vehicle maker. This leads us to one last option Tesla has to remain intact as it has been currently fashioned.

c. Tesla can raise the price of the Model 3. This is what Elon Musk effectively has done. The outcome is yet to be determined by most people on the market for its cars or its stock. Raising the Model 3 price significantly is a problematic solution that will not work and here is why.

 

 

Raising the price of the Model 3 was not something the market would have likely anticipated. Afterall, one limit on the Model 3 is that there are used Tesla Model S’s and new ones before discounts that start at $75,000 dollars in the US. Having to manage therefore a product portfolio means that there is a natural limit on how much further the Model 3 price can go. That is the Model 3 will always have to be sold for less than the Model S. More important than this fact is that  Elon Musk had prepared the public to accept a Model 3 that was significantly cheaper than the Model S, a vehicle that was released in 2012.

So what is the Model 3’s expected price exactly? Well at this point it is hard to know. The only way to truly get there is by inference. Most logical inferences will lead to the conclusion that the Model 3 is going to be priced significantly higher than the public was led to believe, though the public in the majority is not likely to be aware of this very fact. This is different than saying that the Model 3 is not a great car potentially or that Tesla doesn’t have the right to price the Model 3 where it sees fit. The public, or Tesla’s consumers, were lead to believe I would submit that a mass market long range EV that would be better than any other car, would be priced at $35,000 dollars.  But since the Model 3’s April 2016 reveal, Elon Musk, and Tesla has thru a sleight of hand guided a “mass” market price that is closer to $50,000 dollars for the Model 3. I submit Musk did this sleight of hand trick to please the stock market, his funding source, while his consumers lay in the dark. This is incredibly important for consumers, who in the internet age all live in their own secluded and imaginary news feed bubble and do not really know how much a Model 3 will cost until configured.  The sharpest observers in the stock market and media will know the game that Musk has played with the public. But the paying public for the new Model 3 I submit do not yet know this game that Musk has played. In fact, it might be the extremes of hubris to assume that the public at large realizes what is happening with the Model 3. Part of this is likely due to the way Tesla gets its message across.  Tesla, unlike established automakers, does not have a real ability to project a marketing signal without PR messaging via the press and tweets from Elon Musk’s social media handle on Twitter. Projecting a signal thru the press is different though than actually getting price discovery by going on Tesla’s website to configure and then, more importantly, ordering a Model 3.

The way that Tesla projects a signal also match no other public company of its size. For instance, if Tesla were to say that the Apple model of selling products is representative of its marketing strategy, this would in fact clearly not be the case. By and large what happens when Apple signals a price, it cannot only back it up with conventional and expensive ad placement, the prices it projects on its hallowed marketing blitzes to consumers on public demo stages are one and the same as what these consumers will see in their stores.

Suffice it to say through some clever logical word games Musk can claim that the price of the Model 3 at any price frankly is what he means by the mass market. Musk most sophisticated investors know what he is about when he makes claims that on the surface might be logically true but empirically untestable. That is there is no such thing as a “mass” market for any car technically or that one can define a mass market subjectively and always be right in some sense. The humbling and therefore reflective thing to respect is that Musk has his version of a mass market and it is airtight. As interesting as a thought experiment as it may be, there is no point really debating it since Musk will always be right. The Model 3, as a car is a realistically priced closer to $50,000 dollars objectively because it has to for Tesla to make it more than a couple of quarters without going under. Such a statement might sound drastic but I believe the coming quarters will prove this out. The hubris, therefore, is not that this will happen, or that others have not predicted that this will happen, but that that the market is ready to accept that this is the case en masse. The Model 3 in production though is a rare opportunity to see how far an unsustainable story can be pushed onto a society at large.

The price of the Model 3 is still incredibly important to consider the real price will I believe the decisive for the Tesla story. The Model 3  was sold as a $35,000 dollar car originally because Musk deemed it necessary to convince the public at large that was the right price for the vehicle to be accepted by the largest number of people. It was also the price level he had appeared to be promising to the public to be achievable for years. To be more precise, the $35,000 dollar price is what Musk thought or felt the need to communicate at that point in time to achieve pre-market acceptance for the Model 3.  Tesla’s brand bubble at that time, and the need to collect large numbers of pre-orders, which Tesla would then use not only for operating cash but as a proof consumer market acceptance was necessary especially given the fact that the company needed more cash to fund the production of the vehicle. Musk believed at that time, that he, and therefore Tesla, could deal with any blowback later if the market price was significantly different than the $35,000 dollars projection. Secondly, Tesla and Musk have been doing this sort of false promise to keep the business going for years and it has worked. A sophisticated form of bait and switch, if it works, is what Musk it seems has attempted to do on price with the model 3 though in reality.

What should be concerning, and what is different this time, is that Musk is duping the broadest number of people he ever has up to the point of the Model 3 launch. Tesla’s stock price, for instance, is actually whole orders of magnitude easier for Musk to control than what he has on his hands with the Model 3.

Frankly, Tesla’s stock is controlled by a handful of funds in a form of market dictatorship. As long as these players played a wink-wink with Muskian truth, the faithful would profit at the expense of the skeptics, and drag along anyone in the public that could see through the scheme.  Playing this same game with the mass market Model 3 is, I submit, a whole new ball game. Put another way, the paradigm shift here is to assume that everyone that Musk and Tesla interact with economical is a trader.  In this new market, Musk has never traded against so many hands.   Just by considering the law of large numbers, Musk was sure to piss off more people than he ever has even if everything had gone in his favor with the Model 3. This is backed up by the promised volumes the Model 3 was expected to ship. In other words, up to the Model 3 launch, cumulatively Tesla had sold just over 200,000 ish cars roughly in a span of 5 years. Furthermore, despite the earlier Muskian forecast demand of up to 200,000 S and X’s a year, there had never been demand for more than 50,000 units of the S or X on an annual level. The Model 3 would double Tesla’s installed base in 1  full production year, while at the same time Tesla would still produce another 100,000 S’s and X’s. But by misleading on the Model 3  price to a larger audience, Musk is sure to put a lot more customers off on the product since a price closer to $50,000 dollars is far different than the $35,000 dollar one that he had to lead prospective customers to believe. In other words, Musk this time, and with the Model 3, might create a lot more enemies.

Musk PR tricks have yet to come full circle since the noise around Tesla has killed the signal. Musk potential “mass” market adversaries, however, will not perhaps just be less forgiving, but be a more dangerous group of antagonist than he has ever faced since not only will they be more representative of broader public will, but they can inflict greater collateral damage, through increased lawsuits of  greater value than any single group of archetypal adversaries Musk had faced before. In other words, the mass market customer can extract totals in billions from Apple over lithium-ion battery degradation on cell phones, it could do the same to Tesla on its batteries. More relevantly,  large major auto companies are periodically on the hook for billions in damages when they sell to the greater public.  In 2014 Toyota, spent  $1.4 billion dollars for deliberately hiding “sticky” gas pedals. In that same year, GM took a total of a hit of $4.1 billion dollars for ignition key issues and recalls. Toyota’s and GM’s recalls obviously pale compared to Volkswagen’s 2016 14 billion dollar settlement for its recall for diesel emissions violations, and that was just for its US penalties. Frankly, endangering a broader section of the public is an existential risk to Tesla from the Model 3 on out, whether it ends up being intentional or not, since the company or its investors will not have the quantity of money needed to fund Tesla’s operating losses and settle billion dollar lawsuits against the company if it came to that.

While this run of logic is consistent enough to make it plausible that disliking Tesla is irrational until the Model 3 is produced and new adversaries turn up in mass and the truth of the matter gets out, there is still a  problem around pricing that is likely underappreciated. Tesla has competition at its owned self-defined mass market category of a $35,000 dollar EV even before a Model 3 has been delivered. GM’s Bolt, a novelty for its buyers and some of Tesla’s, already outsells Tesla vehicles and it is priced at $35,000 dollars. But that is not really the issue either, though it is worth noting, the Bolt hasn’t changed the estimation of the market of Tesla’s value proposition in mass. Largely this goes back to Tesla’s unique pre-order bookbuild for its product which means that investors conclude that Tesla has not lost any material market share to the Bolt. It is a fair and probable conclusion but skirts the core issue that Tesla is about to face.

The real issue then is that Tesla, so far, has had to cut prices to sell cars to meet investor growth expectations that it has set. They’ve had to do that before the Bolt was released, and even after the Model X was added to the product portfolio. This means Tesla’s pricing power and brand were already suspiciously much weaker than widely understood. In other words, what is commonly accepted by both bulls, bears, skeptics, and admirers alike implicitly mostly is this I believe.  Tesla designs attractive and therefore desirable cars. The seemingly convincing argument that follows is that the Model 3 will be a great success and the stock deserve a sort of a brand premium for the glory’s  in the future to come. As crass and as simple as some of this sort of dialogue might sound, this is the way of affairs in social markets. Rumours, innuendo, simple speak, doublespeak, and deception are not the exception, but the rule of the day. The markets are not so much unpredictable but has an ability to be so creative and in a sense recursive to a point of no end without significant enough break in the collective psychology of everyone for such sorts of games to end. For it to be so, much of the premise for self-talk has to be deceptively simple. Too simple it might seem to sustain whole values of Tesla’s GM  sized valuation.

 

The question then that might be asked, and the one that can break the recursive happy bubble is there any real evidence to suggest Tesla’s really are not as well-loved as is commonly perceived. Could there be support for a factor at work that has yet to wear off that could explain Tesla’s success?  This is another way of saying that even if Tesla’s Model 3 was actually priced where Musk had told the public it would be priced, $35,000 dollars, Tesla might have still had a problem for the number of cars it is able to produce. To get a better idea of what I mean we should go back in time a little. But before doing so lets just get the premise fully out of the way.  Tesla’s Model S sold well early simply because of something we should just call the novelty factor.

 

When the Tesla Model S was revealed, the vehicle was an immediate hit. Yet Tesla had a real problem, the company was broke and didn’t have the funds to invest to expand capacity or operate the business at the losses management would have been sure to expect. The reason it is important to understand this is that the seminal moment that created Tesla the line auto company also created Tesla the liquidity incinerator that needed the stock market to expand and even worse, to sustain its yearly operations. It was all too convenient that shares of the stock skyrocketed on heavy volume just a few short months after the Model S went into production,  as longs, supporters of Tesla’s cause and mission, pounded shorts (disbelievers) with heavy call and stock buying on the companies limited share float. This is not to mention that the longs had superior balance sheet buying power, likely insider information from management on sales progress, and perhaps other intelligence gathering information that was superior to the skeptics. ie it likely longs new that the Model S was selling well enough to support the Tesla story. The long-term memory effect of the stock market reaction to the early Model S success story which could perhaps only be called financial violence is that Tesla’s stock had enabled longs to play on the same narrative of hope, and shorts seemingly oblivious to the script and evidently too skeptical, to repeatedly get run over by the longs in synchronous buying moments just whenever it seemed that Tesla might be running into trouble. This liquidity extraction feedback loop of the longs gorging on disbelievers, and Musk delicately selling the minimum of shares to the market to help the longs control the supply of stock with their larger money stock, has helped to give Tesla a long funding rope in the cash market. This market liquidity extraction loop, more than buyers of the Model S, has given Musk the funds to keep the parlor game running. Musk and his longs are therefore engaged in a liquidity extraction scheme from the stock market despite what the fundamentals of the Tesla’s balance sheet or demand for its vehicles suggest.

The fact that the stock market can be so easily manipulated should not be a surprise judging by recent and historical events. This sort of behavior has come more to light for example with bitcoin, but it has been the same for markets at all times. Whenever one group can identify an adversary and outflank them, the same outcomes are almost certain to re-occur over and over again. The Hunt brothers cornered the silver market to their ruin, just as Amaranth’s Brian Hunter did to the natural gas market in methods that are surely related to bitcoin and Tesla trading.  The precedents have not affected Tesla’s longs since they have needed relatively little capital to do a rinse and repeat of the same fundamental game.

Getting back to Tesla as a consumer entity, evidence that the novelty has worn off faster for its cars in the auto market than its stock though can be seen in the professional review media for its cars. Two examples for Tesla’ number one market, North America, stand out. Consumer Reports and Car and Driver Magazine both had positive recommendations for the Tesla’s Model S shortly after it was unveiled.

Consumer Reports,  twice since the launch of the Model S, 2014 and 2015, held the Model S as one of its top 10 recommended cars.  Car and Driver Magazine similarly had the Tesla Model S  on its top ten list in 2016 and 2015. Car and Driver it should be noted runs its Model Year with the car industry, meaning that 2016 and 2015 were effectively recommendations for the 2015 and 2014 calendar year. In a strange then bit of chance, these two notable publications had the Tesla Model S  as a top 10 recommended car for the same exact years. For the record, it is possible for a car company to have a model stay on the Car and Drivers 10 best list for instance for periods up to a decade.  In other words, there was nothing inherent stopping the editors of these magazines recommending the Tesla Model S from being a perennial favorite every year after its launch. But stop recommending it they did. In consumer reports case, not only did it no longer make the most recommended list, after years of experience with Tesla’s electric chariot, the vehicle got dinged for reliability in 2015. The two organizations since then have had verbal reposts across the internet.

So where does this sample of two magazines really leave us when it comes to the public and Tesla’s brand and the concept of novelty? Nowhere and somewhere new at the same time.  But a fragmented picture emerges from these two reputable media sources. Undoubtedly Tesla made a splash with the Model S with the automotive press. The Model X, the follow up to the Model S, despite a lot of hype from Tesla and a radical X wing door, might as well be invisible. The Model 3 is not on the market despite what the company and its CEO has said. Investors though have much more than the sample of two magazines. Investors have every quarterly report Tesla has had since the Model S release date. That more frequent picture supports rather than disproves the fading interest in the company’s product, its novelty, despite the increased unit sales since they had to eat profit margin to get those increased sales. In other words, Tesla’s lack of profits, more so than its decision to be let’s say deliberately unprofitable, what Amazon did with its EC2 and S3 cloud offerings for instance,  placed a limit on how much Tesla could have reinvested in growth opportunities. This by definition should mean that they are underinvesting for future automobile markets and will be uncompetitive. Tesla’s brand equity by definition is also over-estimated. The liquidity loop has created a gross market distortion.

 

So on what basis can anyone begin to say that the Model 3 or Tesla’s brand is all that powerful taking this history, albeit anecdotal, into account? Perhaps the quantity theory of money is one basis, but it is one that only makes sense to those wizened in the more subtle dark arts of financial and economic wizadry. These are the same arts used to jack up Tesla’s stock price in 2013 and is an easy enough concept to understand. The longs, or the true believers in Tesla, were simply right at the time because they commanded more quantity of money than the skeptics. Yet having a large quantity of money or faith in the belief in the quantity of money didn’t stop any crises in the past from occurring. If anything, they exacerbate them since they do not allow agents(traders) in a free market, both buyers and sellers, to recalibrate their decisions for the correct solution in the face of real scarcity. This plays out in the raw material markets where scarcity is being ignored.   It is becoming more apparent to larger audiences than even if Tesla weren’t going fade away due to the end of its novelty factor, it would have even much bigger problems to solve. Instead of financial alchemy, Tesla needs material science alchemy while operating on a budget and intellectual capacity deficit to its peers alleviated only be the helpings of governments who are either making a social statement, in defiance of markets, or have national strategic interests as their first and foremost consideration for their support of the unprofitable enterprise.

While the idea that Tesla survives on money quantity theory in liquidity markets, which cannot go on forever due to its weak pricing power, or that scarcity of raw material will eventually stop in its tracks, the novelty factor wearing off is Tesla’s most immediate threat. Telsa’s novelty in the market wearing off is a clear and present danger from my perspective to its existence. It is one I believe that the market has discounted. My belief is that once  Musk’s duplicity in pricing gets it into the consumer community, order cancellations, and pricing power deterioration away from his targeted  $50,000 dollar aspiration price for the Model 3 will mean that the Tesla story ends in the latter half of 2018 or the first half of 2019. While that might seem like a long time, in the grand scheme of the narrative, it is not very much time at all. More importantly, smart money investors will likely bail before it becomes obvious if they haven’t already. This is another way of saying that the story of Tesla’s end could be in the first half of 2018 or the second half of 2019.

The prognosis is likely therefore this. Tesla will sell its early reservation list of Model 3’s at a raised price. In all likelihood, these early buyers won’t care that Musk was deceiving them at all. But the rest of the market, the ones after the initial 2-year production run will, and they won’t have the global government incentive pool to help make their pricing shock anymore acceptable. These buyers as of yet do not know the real price of the Tesla Model 3. Undoubtedly there are some investors who either will or have already gauged what the reaction of consumer interest will be to the real price of the Model 3. The rest of us can go on history and infer that at much lower prices, ones that are tremendously unprofitable to Tesla, disillusioned consumers will not buy and may, in fact, become adversaries to the Tesla cause. This history, therefore, suggests that the raised price of the Model 3 will prove to be unsustainable, just as much as is Tesla. Moreover, besides just having Tesla’s history, investors have Elon Musk’s history. While Musk promises a lot, he rarely delivers. This is much different than saying that he never delivers. Tracking Musk fequency of lies is a popular topic among his detractors but that hasn’t stopped Tesla to this point. What will be consumers turning off from the Model 3. What will happen to all the true believers who have never questioned Tesla’s assumptions after that point will be an interesting one as it certainly seems cognitive dissonance is at play since the facts have been subdued for so long.

My advice for 2018 to anyone that is still an “investor” in Tesla is this. Get out while you still can, the novelty has worn off some time ago, which is one reason Musk closed the year with selling semi-trucks instead of mass market cars. Semis are just his latest trick for re-invention. How much time he has put into that and figuring out when he needed another story to sell to believers on the Tesla cause is an interesting one that none ask, but he would have had to have precalculated the need for this event a significant time before the unveiling of that latest shift.  What Musk will next sell is a lot more shares, and that is far more predictable. Certainly, the more people Musk has to sell to increases the chance that more disbelievers enter into the fold and start asking more questions of the enterprise. He will not want to lose control of his company, but already he has little choice.  The smart money will not wait for the window to close having fooled and beaten the market on one of the greatest financial schemes since Enron.

 

 

***

Spot the distortion… ( volatility on the left, 3month avg volume on the right )

 

 

***“All warfare is based on deception. Hence, when we are able to attack, we must seem unable; when using our forces, we must appear inactive; when we are near, we must make the enemy believe we are far away; when far away, we must make him believe we are near.” — translated to Musk and the Model 3, he deceived the public on the mass market price of the Model 3 or that Tesla is a mass-market enterprise at all.

Whenever Musk and Tesla project strength, they do so to disguise the companies structural failings. Tesla was always structurally bankrupt and was never forced to restructure, which might have given it a long-term fighting chance.

 

“Put simply, Napoleon’s strategies consisted of excellent manoeuvring, flanking and isolating the enemy”

For a man who was going bust in 2008, Musk has amazingly outflanked the skeptics. It is likely not a situation, going bust as he had in 08,   he should have been in, but having escaped the trap, it surely must be one of his driving motivations to keeping the narrative of Tesla as a giant on the automotive stage when it is in fact just the opposite in real terms. Musk has outflanked the stock market, all evidence suggest anecdotally that even outside of all the risks Tesla faces, the auto industry has now outflanked him. If not a big bang, it, Tesla, will die a death by a thousand cuts.

 

 

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