Tesla's U-Turn, Poor Paint, Cancellation Numbers Questioned

UBS says the Model 3 Finish is "Below Average". Lawers say u-turn compounds legal issues. And what about production?

The Tesla saga continues. Securities lawyers say Musk's U-Turn on Tesla Deal Could Intensify his Legal, Regulatory Woes.

> The SEC will continue its investigation until its satisfied that it is on top of the facts, said Stephen Crimmins, an attorney with Murphy & McGonigle who spent 14 years at the SEC, where he prosecuted hundreds of securities cases.

> What happened on Friday will be of interest to the SEC because it will allow them to probe whether Musks pulling back from the go-private somehow indicates that he did not have a reasonable basis for his statement. They will be asking questions of him and others involved in the decision as to why he reversed course.

> Musk said on Friday he believed there was plenty of potential funding to take the company private, but he did not provide any further details to bolster his funding secured assertion.

> Teresa Goody, CEO of law firm Goody Counsel and a former SEC attorney, said Musks statement on Friday appeared to undermine his Aug. 7 tweet that investor support was confirmed.

> She also raised concerns about a second comment Musk made on Friday, where he said it had become apparent that compliance restrictions would prevent many of Teslas institutional shareholders from holding private Tesla equity.

> Both statements are likely to raise further questions among SEC officials as to whether Musk had performed sufficient due diligence to have had a reasonable basis for his Aug. 7 tweets, she said.

Tesla Model 3 Finish is Below Average

Analysts at UBS found more to fault with Tesla Inc.s Model 3, saying the electric sedan they scrutinized had "Finish Below Average", and numerous other quality issues.

> Analysts at UBS found more to fault with Tesla Inc.s Model 3, saying the electric sedan they scrutinized performed poorly in terms of finishing quality, sporting missing bolts and uneven welding.

> The analysts, led by Colin Langan, have performed a complete teardown of a Model 3 alongside engineering partners and last week, in a first note about that process, said Tesla could stand to lose about $6,000 on every cheaper, base-version Model 3 it will sell because the cars powertrain isnt as cheap as expected.

> This weeks note focused on the cars finishing versus other mass-market electric vehicles, and said it stumbles in comparison with General Motors Co. Chevy Bolt and BMWs i3. The analysts said they found significant fit & finish issues with the Model 3 that would be expensive to fix.

> Our teardown experts noted numerous Model 3 quality issues including inconsistent gaps (and) flushness throughout the car, missing bolts, loose tolerances, and uneven (and) misaligned spot welds, the analysts said in the note.

> As of April, the standard deviation of all gaps and offsets across the entire car had already improved by nearly 40% on average, with particular gap improvements visible in the area of the trunk, rear lamps and rear quarter panel, a Tesla spokesperson said in a statement.

40% Improvement?!

Tesla cites a 40% improvement in April. Questions abound:

Is that an admission cars produced before April were junk? And what about cars produced in the one-of-a-kind tent?

Whoa!

> Customer satisfaction scores for the Model 3 have averaged about 90% since January, with steady improvement through the year, even as the number of cars delivered has rapidly multiplied, the spokesperson said. If customers are unhappy with their car, they can either give it back for a full refund, allow us to address any issues, or ask for an entirely new Tesla.

Whoa. I would like stats on that. Is anyone asking for their money back?

Production Numbers

Teslarti reports Tesla Model 3 VIN registrations rocket past 100k mark as production approaches 6k/week.

Bloomberg's Tesla Tracker reports a similar story but future production is in question.

> Our best estimate is that Tesla has manufactured 77,261 Model 3s so far, and is now building approximately 4,588 a week. Those figures, and the charts below, represent Bloombergs latest estimates and will automatically update to reflect changes in the data. (Tesla reported on July 2 it had made 5,031 Model 3s over the previous seven days, the first time it passed the 5,000 milestone.)

> The Bloomberg Model 3 tracker relies on data from official U.S. government resources, social media reports, and direct communication with Tesla owners. We have two methods for gathering and analyzing the VIN data. Tesla declined to comment.

Shutting Down Early

In contrast to Bloomberg, Business Insider reports Tesla employees say the main Model 3 production line has been shutting down early.

>On Wednesday, Tesla factory workers putting together the Model 3 on the GA3 line were allowed to go home early from the Fremont, California plant, leaving at 2:30 p.m. PT, instead of the usual 6 p.m., three Tesla employees told Business Insider. The employees spoke on the condition of anonymity for fear of losing their jobs.

>Typically, a worker told Business Insider, a shift is only sent home early because it met its goals for a period of time or because there is a problem that is making it impossible to assemble more vehicles. For example, one of the two lines on GA3 might be sent home if there is a problem that has prevented the progression of assembling vehicles for hours.

>In this case, both lines were sent home, with the entire GA3 line leaving early. According to a factory worker, the reason was not because the company had hit its production goals for the day.

>In fact, the worker said the company missed internal targets. The employee said the target is to produce 300 cars per shift (there are two 12-hour shifts per day), but on Wednesday the line produced 211 vehicles during the day shift.

Cancellations

In July, CNN reported 24% of Tesla Model 3 orders have been canceled, analyst says

Musk disputes the number but he does not provide his own number.

Questions I'd be Asking If I Owned Tesla Stock

Vitaliy Katsenelson blogs Questions I'd be Asking If I Owned Tesla Stock

Heres a big question Id be asking if I owned Tesla stock: What happened to 345,000 reservations?

When Teslas Model 3 was released, it was supposed to be a $35,000 car. Four hundred thousand people, including yours truly, put down a $1,000 deposit to reserve their spots in line so they could get their hands on that marvel as soon as it became available. It was a brilliant move by Tesla, as it provided the company $400 million of interest-free financing the biggest crowdfunding project ever.

But something interesting happened recently. I received an email from Tesla that said: Model 3 is available to order, and no reservation is required in the U.S. Were now offering all our best options including our Long Range and Performance configurations with dual motor all-wheel drive. You can design and order yours today for delivery in approximately 24 months.

On the surface this sounds like great news, except that it begs a question: What happened to 345,000 orders?

According to Bloomberg, which has been tracking Teslas production, to date (as of July 28, 2018) Tesla has produced 55,000 Model 3 cars. Since a $1,000 deposit was supposed to secure buyers a place in line, any car ordered today will only be delivered after orders that were placed years ago are fulfilled after all, 400,000 people paid Tesla $1,000 to hold their places.

Thus there are only three possible explanations for the email I received. One is that Model 3 production is expected to accelerate at an exponential rate to 40,000 cars a week, starting now.

Or two, maybe Tesla has been extremely liberal with its statement of a two-to-four month delivery schedule because it still has 345,000 cars to produce before it can start fulfilling new orders, and the company is using that email to raise additional funds from new customers making deposits. (The required deposit is now $2,500.)

There is a third explanation: The bulk of the original 400,000 orders were for a $35,000 car. When it came time to actually buy the car, consumers may have realized that the out-of-pocket expense was much more than expected and simply canceled their orders, draining Teslas balance sheet of $345 million.

If you believe in magic stop reading right now. Okay, youve been warned.

There is no magic. Magic is just the art of misdirection. The magician gets you to focus on the shiny object he holds in his left hand and you dont see what he is doing with his right hand.

Musk has been showing us a lot of shiny objects. Some are real, like the success of SpaceX; some are superfluous, like sending a Tesla Roadster into space, and some are future promises on which Musk may or may not be able to deliver, like his futuristic underground railroad for cars (the hyperloop) and the Tesla truck, which is unlikely to be produced on time and at the promised price. The list is long in this category and never-ending; Musks futuristic thinking knows no bounds.

Tesla investors are still fascinated by the shiny objects, but I note that CDS insurance on Teslas bonds prices in a 24% risk of default by 2025. I am not long or short the stock. But if I were long Teslas shares Id be asking myself these questions. After all, youre paying $50 billion for a company that trades completely on the spoils of future dreams.

Short Tesla

Unlike Katsenelson, I am short Tesla, via PUTs staggered out September through December.

I may be very wrong. My biggest problem is that not only do I need to be correct, I need to be correct by a certain magnitude, within a fixed timeframe.

That aside, I have heard nothing from Musk on Tesla that does not smack of a Hail Mary, blame the shorts approach coupled with seemingly-obvious lies the SEC is investigating.

Time will tell.

Mike "Mish" Shedlock

Comments (8)
No. 1-5
Bam_Man
Bam_Man

I will say again - TSLA equity is an eventual zero. The bonds may be worth a look once they crash.

Brian1
Brian1

VIN registration is meaningless. They can register as many VIN's as they want without actually producing the cars to assign them to.

purelogic
purelogic

Whatever the outcome, Mish is my hero for shorting Tesla.

marulo
marulo

I supposed they could continue to raise capital and even work through massive cancellations, but the whole production process as I've heard it reported is bizarro. Toyota they obviously ain't and since they are competing with Toyota whether they care to admit it or not, that's a problem...

AlexSpencer
AlexSpencer

I am surprised that the car build wasn't contracted out with only the electric drive and control handled by Tesla. Mass production of cars is well developed with plenty of excess capacity available. Seems like a good opportunity for GM or Ford to restart a factory and put otherwise under used capacity to use. Would customers really care that GM door hinges or seat belts were being used. Tesla could then concentrate on areas that they have experience, such as batteries, and controllers.