Tesla Will Have To Fulfill Backlog Of Orders From U.K. And China To Meet Q2 Deliveries Target

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In a previous article, we wrote about how the interpretation of falling deliveries of Tesla Motors‘(NYSE:TSLA) Model S as a fall in demand was incorrect. The impression that demand for Model S had peaked has been created by supply constraints on batteries faced by Tesla. The actual backlog of orders for Tesla far exceeds the company’s production capacity. Only when the production at Tesla’s assembly plant improves, which was 500 per week at the beginning of the year before the company set a target of 1,000 per week, the company will be able to bring down the lag time between orders and deliveries. In addition, a significant percentage of the orders for Model S are from outside the U.S., where the supporting supercharging network for Tesla’s vehicles is in short supply. As a result, the company is holding back on orders until they can develop the infrastructure required to support the vehicles. Tesla has been in talks with Chinese State Sponsored Enterprise Sinopec to develop charging networks in China. [1]

We have a price estimate of ~$150 for Tesla, which is about 25% below the current market price.

Sales In U.S. And Norway Stalling

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Meanwhile, the trend of stagnating deliveries in the U.S. continues. According to estimates by InsideEVs, deliveries for Q2 are on pace to decline by 10% compared to the first quarter. Deliveries in the first two months of the second quarter fell to 2,100 compared to 2,200 deliveries in the first quarter. This decline is not seasonal as deliveries for competing alternative vehicles such as Chevrolet Volt, Nissan Leaf and Toyota Prius have all risen in the second quarter. At the current pace, the company will only be able to deliver 3,150 vehicles in this quarter in the U.S.. This means that in order to achieve the guided figure of 7,500 deliveries in the quarter, the company will have to deliver 4,350 vehicles in Europe and China. The implied deliveries to China and Europe would represent a near 50% increase from the 2,957 cars delivered in the first quarter. [2]

In the first quarter, sales in Norway helped Tesla beat its stated delivery target. Norway offers many tax-incentives to electric vehicle owners and has many charging stations where drivers of electric vehicles can charge for free. Additionally, many municipalities offer high-speed driving lanes and free parking-lots to the owners of electric vehicles. With help from these incentives, Tesla sold nearly 1,500 cars in the Nordic country in March, according to registration figures reported by Norwegian transportation officials. This meant that in March Tesla delivered nearly 3 times as many cars as in January and February. [3] The significant jump in March was the sole reason why the company was able to meet its stated deliveries target in the first quarter. In the second quarter, however, deliveries are back to the levels of January and February. The company is on pace to record ~820 deliveries in Norway in Q2, compared to 2,056 in the first quarter. [4]

Backlog From U.K. And China Will Have To Fill Delivery Gap

In the Q&A following the earnings announcement in Q1, management said that in addition to selling 6,457 cars in the first quarter, the company spent time “filling the pipeline of deliveries into Europe and Asia.” Cars that are delivered to foreign markets take time to reach their destination, still it is surprising that numbers early in the second quarter are so low, especially when the company spent time in the previous quarter to fill up the pipeline. The only way Tesla can meet its delivery target is by meeting the backlog of orders from the U.K. and China. [5]

Tesla differs from other car companies because it sells its cars directly to consumers rather than through dealerships. This might prove to be beneficial for the company in the long run, but is currently posing problems as the limited retail footprint means that most of its orders come via the company’s website. The absence of inventory stocked with dealerships means that it takes a long time to fulfill the order backlog. Tesla opened its first retail store in the U.K. late last year. [6]. Similarly, the company only started selling its cars in China in late April.

Despite the initial hiccups, Tesla seems set to benefit from many incentives offered to electric vehicle owners by the local Chinese government. These incentives include not having to participate in an auction for number plates(which usually cost around $10,000). Additionally, the State Grid Corp. of China is bringing on board private capital to build charging facilities for EV/HEVs. [7] The plan is to make charging affordable for the consumer with costs going as low as $0.08 (0.5 yuan) a kilowatt-hour. China is targeting around 400,000 charging stations by next year. As the country builds the infrastructure required to support electric vehicles, sales for EV/HEVs could be strong moving ahead.

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Notes:
  1. Tesla, Sinopec to Hold Talks on Building Charging Facilities in China — Report,Wall Street Journal, April 2014 []
  2. Monthly Plug-In Sales Scorecard, InsideEvs, June 2014 []
  3. Tesla Breaks Norway’s All Time Sales Record, Wall Street Journal, April 2014 []
  4. Norway All Electric Vehicles Sales Report May 2014, InsideEVs, June 2014 []
  5. Tesla Motors’ Elon Musk on Q1 2014 Results, Seeking Alpha, May 2014 []
  6. Tesla Opens London Showroom, AutoBlog, December 2013 []
  7. State grid corp. of China to invite private capital for ev charging, May 2014, wsj.com []