Tesla’s End-of-Quarter Rush — Avoidable or Unavoidable?
Credit to Author: Maarten Vinkhuyzen| Date: Sat, 05 Oct 2019 16:14:59 +0000
Published on October 5th, 2019 | by Maarten Vinkhuyzen
October 5th, 2019 by Maarten Vinkhuyzen
Tesla end-of-quarter rush is unavoidable, inevitable, inescapable, necessary, unescapable, needed. But is it?
We all hate Tesla’s end-of-quarter delivery hell. It is the price Tesla pays for its direct sales model. Other companies also try to score some extra sales at the end of a period, but no one gets into a frenzy like Tesla.
It’s all about the balance sheet. The balance sheet is supposed to be stable. But in reality it is a snapshot. And like people at a wedding, companies try to look their best. At the last moment before the picture is taken — quick, some rouge, lipstick, a comb through the hair — or at least the financial equivalent of those actions.
Unlike other carmakers, Tesla is both a producer and retailer. Modern carmakers try “Just In Time” (JIT) processes to minimize the costs of raw materials, parts, sub-assemblies, and finished products inventory. A retailer that needs an attractive offering of models on his lot can’t use JIT. Even the slower selling models have a function in giving the customer choice, enabling the sales person to offer alternatives and steering the customer to the model with the most margin.
During the quarter, Tesla has billions of dollars tied up in its inventory of vehicles — as service loaners, as test drive vehicles, as showroom models, and as stock for walk-in customers who hope to leave with a new car. Before the end of the quarter, this inventory has to be converted into cash on hand. Or even just “in transit” vehicles from the factory to the customer. If a significant portion of these cars couldn’t be turned into cash at the moment of the quarterly snapshot, the bears and shorters would have a heyday!
Wall Street would freak out. They still compare “Tesla the retailer” with the wholesale business of other car companies that sell to dealers “ex works.” Typically, as soon as the car is factory gated, the dealer takes possession of the car, has to pay for it, and organize (and pay) for transport. Other car companies don’t have finished product on their balance sheet when everything is normal. The months of stock reported and used to gauge demand and popularity of the brands and models are owned and financed by the dealers.
By the way, this is the reason dealers are protected from competition from their suppliers. They finance the stock, adding costs to the car. The suppliers could compete with special high-volume products, avoiding the dealer’s costs. It is the old rule that a supplier should never undercut its retailers. It would destroy the market.
This fear of Wall Street, or should I say “encouragement” of Wall Street, necessitates a tidy balance sheet and is what creates the quarterly delivery hell — groups of anxious future Tesla owners trying to get their papers processed, have the keys handed over, and find their car in a parking lot with hundreds of other Tesla cars waiting for their new owners.
For fashionable products like smartphones with fruit logos or a hot new video game, we see long lines like this and chaos in front of a store when a new product arrives. But that is incidental, irregular. Tesla’s delivery hell at the end of the quarter is structural.
To understand this problem, let’s look at the number of cars that would be in inventory on average. When deliveries to Europe take six weeks from factory gated to being handed off to the customer, half of European quarterly sales should be in transit at any point in time. For China, that would be a week less or about 40% of the sales. Local sales in the USA also have a normal time to reach the customer — and average of two weeks — which covers one sixth of local sales in transit.
Using rounded numbers, with 100,000 deliveries in a quarter (easier than 97,000):
That is on average 28,000 cars in inventory, about $1.7 billion extra inventory and $1.7 billion less cash on hand. With a polished and shining balance sheet at the end of the quarter, these numbers in the middle of the quarter are far worse. We know that a week sooner or later does not really make much of a difference. Regretfully, the trust to believe that is lacking on Wall Street.
When Tesla tripled its quarterly sales, it also tripled the amount of cash needed to finance the vehicles on the way to their new owners. Spreading the logistics and deliveries evenly over the quarter would lower the operational cash needed by over a billion dollars.
This situation is untenable and it does not need to be. The deliveries should be evenly distributed over the quarter. That would have a lot of positive consequences:
The first thing Tesla has to do to mitigate this problem is change its communications.
At the end of the quarter, Tesla should publish an operational report on its core business. That is about producing cars, selling them (getting signed sales orders), and transporting them to their new owners. The shareholder letter three weeks later reports on the financial results.
The numbers released the second day after the end of the quarter should be:
A nice extra could be the size of the backlog at the end of the quarter. Those are the important figures (really only the first two) that tell how well the company is functioning. To make us CleanTechnica nerds and the SeekingAlpha shorts happy, differentiate those numbers by model (S, 3, X) and region (USA, Europe, China, RotW).
At the moment the information after the end of the quarter is a mix of operational and vague financial information. Production volume is nice to know, an indicator of how well the factory is working. The delivery number without the ASP (average selling price) is rather meaningless. And what is always the biggest question — demand. More nuanced, we want to know how well Tesla is turning demand into orders, but that is completely missing.
A month later in the financial report the results of those activities are reported. The exciting Profit and Loss about: Revenue (= cars delivered), Cost of Revenue, Gross Margin, and Result (profit or loss). The boring balance sheet. And the even more boring cash flow statement.
Extra information could be the top, bottom, and average figures for inventory and cash on hand. By reporting these numbers, the pressure to create artificially nice end-of-quarter numbers would lessen.
The problem is that this increase in transparency would create a shit-storm of FUD stories. But it would not be the first, nor will it be the last. Tesla and Elon Musk have survived worse before.
Maarten Vinkhuyzen Grumpy old man. The best thing I did with my life was raising two kids. Only finished primary education, but when you don’t go to school, you have lots of time to read. I switched from accounting to software development and ended my career as system integrator and architect. My 2007 boss got two electric Lotus Elise cars to show policymakers the future direction of energy and transportation. And I have been looking to replace my diesel cars with electric vehicles ever since. And putting my money where my mouth is, I have bought Tesla shares. Intend to keep them until I can trade them for a Tesla car.