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Getting psyched about my X.

Getting psyched about my X.

Comments from Morgan Stanley.

2015 is all about the Model X. We cannot sufficiently impress upon
investors the importance of the Model X launch this year. Key execution
variables include: launch timing, speed of ramp, initial quality, media reception,
order backlog and cash flow (working capital). Profit impact may need to wait
until the very end of 2015 or into 2016 given up-front costs and
manufacturing inefficiencies inherent in any product launch. We expect the
Model X to be far better than the Model S in virtually every measurable
category with the exception of exterior design (the Model S being hard to beat
and naturally more athletically gifted as a sports sedan). While the Model S is a
great car, we really believe it will be the worst car Tesla will ever make… not
because it’s bad, but because it’s the first car they ever made from the ground
up. The Model S was made by a cash-strapped, resource-constrained company
where many suppliers refused to do business with Tesla. It’s remarkable that
the car is as good as it is given the bootstrapped nature of the development.
On the other hand, the Model X is the first car made by Tesla as a wealthy,
well-endowed company with an array of suppliers that want to do business
with them – some even opening up dedicated facilities in California only to
supply Tesla. Tesla also has all of the experience of the Model S (what worked,
what didn’t) and the 1 billion miles traveled of its 100% connected fleet.
We don’t pretend to have an edge on visibility of timing or attributes
of the Model X launch. We only know the product is more than 18 months
delayed from its original launch date and that the company has made nearfinal
prototype ‘release candidates’ for testing on public roads for some weeks
now. A successful launch and ramp of the Model X can significantly improve
the tone of investor sentiment on Tesla’s execution abilities, estimate revisions
and financial liquidity… potentially putting the company in a strong position to
tap into further capital resources to develop new models and technologies,
growing its ability to produce at higher volumes and enhancing its ecosystem
of electric, connected mobility.

georgehawley.fl.us | 04/04/2015

What the Morgan Stanley report omitted was the enormous resource of Model S owners contributing the results of driving experience and Model S ownership to product and process improvements. It is clear from following this Forum that there are many intelligent people willing to spend time, energy, and even personal resources to improve Tesla as a company and Tesla products. That's why I am enjoying a trouble free ownership experience with the Model S that I acquired a month or so ago. The car is a brilliant conception within the constraints of state of the art Li-ion battery technology that has evolved into a sensational product.

The author of the article is correct in my opinion that the Model X will be the beneficiary of the Model S evolution with a smoother path to commercial success.

Solid execution will have to continue for some years before Tesla can be considered to be a success as a commercial enterprise but they have made a solid start. They need to be wary of potential distractions that could dilute precious resources. Self-connecting charging cables, battery swapping, and home energy storage systems are examples of possible distractions.

jacksiart | 04/04/2015

@GeorgeHawley,
I have to tell you that I really enjoy your frequent posts, they are intelligent, well thought out and very often humorous. I just don't understand how you can continue to spend the time posting when you have your plan B Model S to drive in Sunny Florida. (The latest MX delay caused me to buy my wife a used mercedes-benz that shouldn't depreciate too much when they get around to building our reservation # 7K).

The question that still nags at me is how quickly the competition will get to market and how it will compare. If the costs for the batteries continue to decline and there is a lot of good competition, the value of my Model x could suffer.

EternalChampion | 04/04/2015

As a selfish consumer, I agree with George about focusing on becoming the best automaker on Earth. As an investor, I want Tesla to become as ubiquitous and valuable as Apple.

I'm not sure that both roles are mutually exclusive.

Red Sage ca us | 05/04/2015

Thanks for the article! It basically states what has been clear to me since about August 2014. The Model X will make a lot of money for Tesla Motors. They will sell a lot of cars. The stock price will rise considerably. Lenders will gladly extend them credit. Bond issues may be a thing of the past. And Jim Cramer's head will explode.

The best part though, is that Tesla Motors is still growing, and learning. The lessons learned from both Model S and Model X will be very beneficial to the launch of Model ≡. Anyone who has naysayed themselves into a $#0r+ position and remains there will be sorely butthurt come this time next year. And then it will only get worse for them, as the various automotive awards come in for Model X across multiple publications.

georgehawley.fl.us | 06/04/2015

@jackstart: I have noticed that I am driving twice as much as before I obtained the MS which by the way has been a terrific acquisition. This has cramped my posting time so I now use two fingers.

I am very old. From this perspective competition for the Model X and and possible accelerated depreciation are not an issue for me. That is a problem for my heirs to deal with and they have unanimously endorsed Plan B.

I would love to see effective competition for Tesla. It would keep a cattle prod to their butts in the future while Elon is wandering around on Mars wondering how he is going to get back. It won't be Toyota. They are heading down a siding. Competition could come from one of the German big three. They have the engineering know how but they don't seem to be very agile. Hyundai? Maybe. Detroit? One could wish.

Don't look at the MX as a monetary investment. Maybe, if you were thinking about a 1956 Silver Wraith, you could do that. It will be a sunk cost, however one chooses to rationalize it. But you are going to have a boatload of fun with it. Every time you open a Falcon Wing door and laugh at someone's reaction, try to put a value on that. Life throws a lot of punches at us. If we can manage to find a lot of fun in the meantime, that's what living is about. Duck the punches and have some fun. Doing it withou tailpipes is even better.

georgehawley.fl.us | 06/04/2015

Oh, the battery bit. Well, look at it this way. I believe from what skimpy information is around that Tesla is absolutely on top of the battery game. If they decide to go flying off into the home energy storage business, they will be even more heavily into batteries. Assuming they complete the big GF in Nevada, they will be invested to the eyeballs in battery technology. I have a bit of inside scoop that they have already been sneaking higher voltage 18650 cells from Panasonic into their battery packs. Remember the old Italian adage: what you hear, you forget; what you see, you remember; what you do, you understand

Who do you think will have the best, lowest cost batteries in the future? Then, when your MX is 10 years old and you have lost 10-15% of the battery capacity in your pack, you will be able to buy a new pack from Tesla with significantly more capacity. Put that in your depreciation and smite it.

vandacca | 06/04/2015

Tesla's biggest competition may be Apple.

With regards to Tesla getting into the Battery storage industry, this is a natural progression for them because its a simple extension of their battery pack and they have a lot of experience in this area due to their links to Solar City and building out their super-charger network.

I suspect that their use-case will be for homes with solar panels and if they don't have solar panels, then they can sell them those too.

Its a very good idea for Tesla to diversify so that if there is a drop in any one of their businesses, the remaining product lines can keep them a healthy company. A good example would be Apple with the iPod. They had a hit product with the iPod, but they needed to move beyond the iPod to stay in business.

georgehawley.fl.us | 06/04/2015

OK, Dan. No argument with your logic but Apple was able to build on the iPod base to create the iPhone, a significant addition of complexity in several ways. They had the resources to do it.

Tesla is bleeding money, building Superchargers, opening new showrooms, new service centers, new countries, new factory, adding production capacity, etc. Home storage system development is nowhere near as complex as developing an EV but it isn't nothing. Here are some possible requirements:
1. Battery pack configuration options x by y cells
2. Packaging and management system for ease of installation, management, and safety.
3. Multiple configurations based on estimated energy storage demand and physical space constraints
4. Environmental protection, including lightning direct hits.
5. Operational interface for both consumer and solar supplier
6. Manufacturing space, production lines, technicians, testing equipment

Then a house burns down. Did the battery pack cause the fire or was it a victim of the fire, batteries exploding and sending off shrapnel in all direction for television viewers to see? Elon Musk now distracted by having to answer for the safety of home energy storage solutions. JB Straubel dispatched with a team to do a post mortem. I'm just sayin.......

vandacca | 06/04/2015

@georgehawley, you have made some excellent points and I agree with all of them. However, I personally think (and Elon too?) that all these risks (and the bleeding money) is necessary.

1.) Who would even buy a Tesla car if there weren't any superchargers for long-distance travel?
2.) Who would even know about the benefits of a Tesla if there weren't any showrooms?
3.) Who would trust Tesla if there weren't service centres close by?

And what if Tesla could say, if you buy our car and our solar/battery pack, then all your travel will be free for life, whether its charging at home or charging at our stations? Plus, if there is a power outage, we've got your covered too?

I think Elon is trying to lower the barrier to owning a Tesla and all these individual programs are necessary for the whole to succeed.

Thoughts?

R.EV.olution.Qc | 06/04/2015

@vandacca

Right on!
Those are three requirements for Tesla to succeed at selling its super cars.

georgehawley.fl.us | 06/04/2015

@dan: all valid points, so with limited resources and the need to keep growing at 50%+ per year, they need to minimize distractions.

vandacca | 06/04/2015

@georgehawley, well, lets see how Tesla spins this new announcement later this month. If they can manage to make it an integral part of the driving experience and solves some sales issues, then I'd say that its money well spent. Otherwise, it may be a bigger risk that maybe they can do without.

There may be ulterior motives for the home battery packs. For example, since the GigaFactory is ahead of schedule, they may be forecasting a short-term excess in batteries that can be used for this side business. It will help drive the price of batteries down and potentially bring in more sales.

Lets just wait a few more weeks rather than speculate. :)

Brian H | 06/04/2015

george;
JB says that compared to car batteries, static storage is a slam dunk. It's almost like he regrets it's so easy!

georgehawley.fl.us | 07/04/2015

@Brian: This sounds so familiar. I have lived through so many " slam dunks" gone wrong. I hope he is right. It seems like a minor distraction in the grand scheme of things but it isn't a CAR. It isn't even a fender.

georgehawley.fl.us | 07/04/2015

@Dan: not speculate? Not speculate? What fun is that in the absence of facts?

vandacca | 07/04/2015

@georgehawley sorry, feel free to speculate. I am just out of ideas on the limited information we have so far. :)

ernie | 07/04/2015

Ever seen NBA Blooper Highlights? There is no such thing as a slam dunk slam dunk. Just saying. Now, I do hope that there is high probability albeit the present paucity of facts that the end product will be to the bright side of speculation. I am going to the gym now three times a week to extend the probability statistically that I will be around to enjoy the ride.

There are three types of liars in the world:
Liars
Damned liars
Statisticians

Brian H | 08/04/2015

78.6% of statistics are made up on the spot.

ernie | 09/04/2015

Don't you love it when sports figures state that they gave it "110%" or even "1000%"?!

Gotta love it when they give more than possible.

Red Sage ca us | 11/04/2015

Well... Think of it as a gratuity. You can leave a 15% tip... Or you can leave a 115% tip.

;-)

grant10k | 11/04/2015

So what you're saying is that sports figures are not giving 115% of their total possible effort, but rather 15% on top of the effort they expected to give. Like a tip to the coach.

"Well, I was going to completely phone it in this game, but my coach has served me well and I decided give it an additional 15% and at least half ass it this game. I owe my team that much."

Red Sage ca us | 12/04/2015

Yes. Hence, the current state of the entire National Free-Throw League (NBA).

jai.prsd | 12/04/2015

I think home energy storage will become the bigger business. Bigger than the cars, though a lot less sexy.

georgehawley.fl.us | 12/04/2015

OK @jai but don't call me when Tesla says they can't get around to working on cars because the battery business is so good. :-)).

As a car customer: I want a Model X. I want it ASAP. I don't give a flying falcon wing about the home energy. storage business.

As a stockholder, I want to see the business case for home energy storage. Tesla is not profitable at this time. If they divert financial resources from the car business to the energy storage business, the car business is weakened before the home energy business starts making money.

There is a principle in commerce: open a store and get it to the point of making money. Open a second store but don't subsidize it with profits from the first store or it will drag the business down. I have witnessed this first hand. If they go to the money markets to raise additional investment to add energy storage as a line of business, that's OK. What is not OK is to suck money out of the car business. That would be dangerous before the car business is profitable.

JeffreyR | 26/04/2015

@georgehawley, Mr. President

I understand your concerns about distractions, but I think you picked the wrong examples. (1) Self-connecting charge cables + self-driving cars means nobody gets stuck behind a forgetful Tesla driver once they are fully charged. (2) Tesla makes industrial storage units for their factories and SuperCharger sites; they should leverage this IP to make solar more cost-effective which helps electrify transportation. (3) Battery Swapping Robots will enable worry- and wait-free road trips; it allows Tesla to sell more cars bc. people will be able to get a smaller BP option since they know they can temporarily upgrade on the way out if town; I bet the battery-swap robots are used in production and at Service Centers already.

So other than the self-connecting cables Tesla is merely leveraging their existing technology to enhance, extend, and improve the driving experience. The good news on the snake cables is that it is something they can use for other purposes, and build it w/ a small team.

georgehawley.fl.us | 26/04/2015

Once upon a time I witnessed the development of an automated "mole" that was to be used to pull telephone cables under streets without disrupting traffic. It was a development that pushed the limits of mechanics, hydraulics, and electronics at the time. After much work, the prototype was finished and was to be used for a demonstration for top management. The mole was inserted into its starter hole and dutifully began banging its way underground. It kept banging and going deeper and deeper. It never leveled off. The collected VPs wandered away to get on with their staff meeting while the mole kept going deeper and deeper. It was never recovered.

I have visions of the automated charging "snake" shocking some VP in the butt...

By the way the total home energy storage business is estimated to grow to $1.5B in 2019. Tesla's revenues in 2019 from the car business should be over $20B. Not much of a diversification. Just a distraction.

vandacca | 27/04/2015

@georgehawley, you mention that the home battery pack is a distraction. Similar arguments could have been made for the super-charger stations or their service stations or their retail outlets. By now, I think everyone would consider them essential to Tesla's success, even those retail places.

Much like Apple, Tesla likely wants to provide a completely finished product, end-to-end. They are not just selling cars, they are selling an automotive experience. You could also argue that selling Tesla branded hats and T-shirts are a distraction, but I think they too have a purpose. Maybe not a purpose that you can easily attribute a dollar value to.

raffael s. | 27/04/2015

A home battery is just a logical consequence to Tesla's business model. They sell environmentally cars, those cars are bought by people with access to a certain amount of money and, most of the times, a own house. Own house can be fitted with solar city PV, which can be made more useful with a home storage unit. If it collects 10kwh at the daytime, it can charge the Tesla at night. Also people like having everything from the same premium brand( e.g. iPhone, iPad Mac). Thats why the battery is a Tesla, not a solar city battery.

Automated charging, on the other hand, is something needed for future fast charging systems. You can't charge 70kwh in 10 minutes without at least 420kw charging power. If you don't want to have extremely high voltage inside your cells, you need a big cable to lower the resistance. But even todays supercharger cables are very heavy, if you want thicker cables, you need a kind of automated plug in system. If you are already designing such a thing, why not sell a smaller home charging version to your customers? (Why 70kwh and 10 minutes? I think a Model 3 with 70 kWh and 10 minutes charging time would be the tipping point for EVs)

georgehawley.fl.us | 27/04/2015

@raffael: at up to 300 amps today's Superchargers are pump up to 4 amps through each little Panasonic 18650 cell in an 85 kWh pack. That's double the Panasonic recommendation. Don't think they can do much more than that.

Brian H | 28/04/2015

10 kWh is a trivial contribution to an MS' charging needs. Not worth the hassle.

Brian H | 30/04/2015

The longer you wait the better the X will be, and the happier you'll be to get it. So hope for maximum delays!