Fremont Factory Delays Shouldn’t Affect Tesla’s Sales This Quarter

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Reports of falling deliveries of Tesla Motors’ (NYSE:TSLA) Model S are once again being interpreted as a fall in demand for the luxury automaker’s vehicles. However, as in previous quarters, this has been caused partly because of supply constraints related to batteries, and partly because of a planned shutdown of the Fremont factory to launch production of the Model X and to boost Model S production capacity.

The backlog of orders for Tesla far exceeds the company’s production capacity. When 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

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

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China, Europe Sales Rose While U.S., Norway Sales Stalled In The Second Quarter

Meanwhile, the trend of stagnating deliveries in the U.S. continues. According to estimates by InsideEVs, deliveries for Q3 are on pace to decline by more than 50% compared to the second quarter. Deliveries in the first two months of the third quarter fell to 1,100 compared to 2,100 and 2,200 deliveries in the second and first quarter, respectively. This decline is not seasonal, as deliveries for competing alternative vehicles such as the Chevrolet Volt and Nissan Leaf have risen in the third quarter. At the current pace, the company will only be able to deliver 1,650 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 5,650 vehicles in Europe and China. The implied deliveries to China and Europe would represent a near 50% increase from the 3,600 cars delivered in the second quarter. [1]

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  country in March, according to registration figures reported by Norwegian transportation officials. This meant that in March, Tesla delivered nearly three times as many cars as in January and February. [2] 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, the company made an estimated 1,545 deliveries in China and 2,245 deliveries in Europe, with Norway contributing 1,080 units. Tesla also started selling its cars in the United Kingdom in June, which also contributed to the final sales numbers . [3]

Backlog From U.K. And China Will Help Fill Delivery Gap

On its Q2 earnings call, management said that in addition to selling 7,500 cars in the second quarter, the company spent time “filling the pipeline of deliveries into Europe and Asia.” Although cars that are delivered to foreign markets take time to reach their destination, it is still surprising that numbers 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. [4]

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. [5]. Similarly, the company only started selling its cars in China in late April.

Upgraded Fremont Factory Set For Strong September

In the third quarter, Tesla planned to shut down its Fremont factory for two weeks in late July/early August to start the production of the Model X, which will be launched next year, and to expand Model S production by 25%. However, things have not gone as smoothly as expected, and there have been reports of 1-3 week delays in deliveries in this quarter. Still, the Fremont factory should now be set to roll out a much larger number of cars than it could previously, and could deliver a much larger number of cars in September than in the previous two months. [1]

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Notes:
  1. Monthly Plug-In Sales Scorecard, InsideEvs, September 2014 [] []
  2. Tesla Breaks Norway’s All Time Sales Record, Wall Street Journal, April 2014 []
  3. Analysis Of Tesla Sales By Geography, Forbes, July 2014 []
  4. Tesla Motors’ Elon Musk on Q2 2014 Results, Seeking Alpha, August 2014 []
  5. Tesla Opens London Showroom, AutoBlog, December 2013 []