Tesla’s Obvious Math Problem | Fort Worth Star-Telegram

In the last week of August the Associated Press ran a story on Tesla’s Elon Musk under the headline, “Private Mess: Musk’s Credibility Goes from Bad to Worse.” Of course this was before he claimed to be smoking a joint on the Joe Rogan podcast, so that article stuck to facts — such as Musk’s questionable claim he was taking Tesla private and already had the funding secured.

Two weeks later CNBC’s headline screamed, “The wheels are coming off Tesla and we’re watching it in real time.”

But even before that apocalyptic headline, CNBC carried the story of Greg Furstenwerth, who was forced to fix his out-of-warranty Model S himself; Tesla’s lack of concern for previous owners had resulted in his apparent inability to get replacement parts to fix his car. While Furstenwerth loves his Tesla, he believes the company has grown far too fast to continue providing what was once exceptional customer service. However, everyone loves their car and dealer as long as nothing has ever broken on it. Once things break, emotions can quickly shift from love to hate; the passion is equally strong on both ends of the ownership spectrum.

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Other stories have discussed how Tesla finally built the promised 5,000 Tesla Model 3s in a single week, even going so far as to say there was brilliance in Elon Musk’s building a second Model 3 assembly under a tent in the Fremont, California, factory parking lot. Everyone seems to have missed asking why one needs to build cars out in the parking lot under the Big Top; that factory used to turn out hundreds of thousands of Toyotas and Chevrolets, all on the assembly lines inside the factory. Not since the early days of WWII Jeeps have production numbers demanded the use of extremely large Coleman tents; that’s a sign of desperation, not genius.

However, none of this prevents happy headlines like, “Tesla Model 3 Becomes the #1 Best Selling Car in the U.S.,” posted by CleanTechnia on September 9. Funny, as that article shows no such thing; if one is counting volume sales, the Tesla comes in a distant 5th. But then they claim that if one takes the average selling price of the Model 3, combined with its volume, it becomes “the #1 best selling car in America by revenue.”

There has never been a “best selling vehicle by revenue” category in the history of the auto industry. What does that even mean?

The Static Line

What I find most amazing about all of this is that so far it doesn’t seem that any business journalist has picked up on the most obvious problem of all. Which is strange as it truly is staring everyone in the face: What happened to the 450,000 preorders for the Model 3 that Tesla has been claiming since it opened its website for orders back in March of 2016?

For the record, Tesla claimed that that many individuals put up $1,000 each to ensure that they would receive this inexpensive Tesla for the masses. And Tesla’s SEC filings seem to show the right increase in working capital from those would-be Tesla owners’ putting up their hard-earned cash. However, there is something seriously wrong here.

Bloomberg has been doing the best job at analyzing how many Tesla Model 3s have been built so far, so we’ll use those numbers. Keep in mind that Tesla was over half a year late in hitting its promised build of 5,000 vehicles each week. Now, according to Bloomberg’s most recent tabulation, Tesla has managed to build 86,242 Model 3s, or 3,857 per week.

In spite of all of its production problems and still running behind the promised average weekly build production, 3,857 cars a week is actually exceptional for a neophyte in the auto industry. Still, that doesn’t change the fact that if there were at one time 450,000 preorders and you have built 86,242 of those vehicles, then there’s still a backlog: 363,758 individuals remain who have put up a grand to reserve one of those vehicles.

It gets even stranger when one realizes that back in February, Tesla notified everyone on their Model 3 order list that they could now go into their reservation and spec out the way they wanted their Model 3 built. Apparently that didn’t move much of anything; if you were waiting on the mythic $35,000 version of that Model 3, you had to continue to wait in line. On this point, Elon Musk admitted what I’ve long suggested about that base model, that without loads of expensive options, each one built loses money for the company.

Well, so few individuals added the expensive upgrades it took to actually get their Model 3 into production that just four months later Tesla opened up all orders to anyone wanting to purchase a Model 3. That’s right, if you were among the 363,758 individuals who put up $1,000 well over two years ago, you found out the first of July that anyone willing to buy a top-of-the-line Model 3 was getting to cut in line before you. But even that didn’t work; over the past weekend, Tesla announced the beginning of immediate deliveries of the Model 3 on a first come, first served basis.

Tesla added that those who were “first day reservation holder[s]” were invited to take advantage of these vehicles built for immediate retail delivery. This once again ignored the 363,758 individuals who long ago paid for the right to purchase a plain base-cost Model 3, but keep getting pushed back further and further on their delivery date. Assuming it ever comes — which the way things are going is highly unlikely.

Was It All Just a Joke?

There are a number of scenarios that could explain that issue. First, did Tesla really have 450,000 preorders, or did they inflate that number for the hype? Maybe a great many of those individuals have already demanded their deposits back. The media suggested one sizable number, but Tesla said it wasn’t that many who have canceled.

The far more likely explanation is that the majority of those who put up that $1,000 wanted a Tesla Model 3 for $35,000, with no options on it. Moving forward comes another potential problem. When those orders were placed, potential Tesla owners were eligible for a $7,500 direct federal income tax credit, which meant a base model would have a net cost of $27,500 plus registration. But it’s been so long since then that Tesla is running out of those federal income tax credits, and that could definitely change how many real Model 3 buyers it has going forward.

The fact is that Tesla has gone from having 450,000 pre-orders for its Model 3, to informing those individuals that they could pay another $1,500 and finish the order process for their vehicles, to allowing anyone to go online and order one of those vehicles, to “hey, we’ve already got some built” and you can buy one today. That’s a problem. Then again, basic math is always a problem for those trying to obscure the obvious.

For those who have forgotten, when Tesla announced that the Model S would go into production, Elon Musk claimed it was a $45,000 car. Of course, it never was. Most who have purchased that vehicle have paid over $80-90,000 for theirs. To be fair, all manufacturers put low prices on their base models, then load them up with “options” that you’d think should have been standard equipment — at least, on a luxury vehicle. That’s always been true. The difference here is that Musk overpromised the value in the base $35,000 Model 3, leading many to believe that it was nicely equipped, or equipped well enough for their needs.

However, I’m reminded of the last few times a hot shot entrepreneur has started a car company. One was Malcolm Bricklin in 1975; he built a plastic body “Corvette fighter” with electric gull-wing doors. We carried them at Henry Butts Oldsmobile in North Dallas, receiving a couple of truckloads to start and promised maybe, just maybe another truckload of Bricklins per month. They were certainly eye-catching in a futuristic way, but their quality was horrendous; the batteries went dead if you didn’t drive your Bricklin every day. Meaning your electric gull-wing doors wouldn’t even open. But almost as soon as the first two truckloads arrived, Bricklin reps were begging us to take more cars, lots more.

That immediate reversal on availability scared management at the dealership. These things weren’t hard to get at all, which was part of their original allure. Mr. Butts said that something was seriously wrong and suggested we should now treat the company with real caution. Smart man. Bricklin failed almost immediately.

The auto industry is cash intensive, low margin, high cost large consumer manufacturing. Which is why the majority of car companies worldwide have failed since the beginning. Keep in mind that Saab went out of business selling twice as many vehicles as Tesla, and Saab knew what it was doing.

As for you 363,758 individuals who put up money to reserve a Model 3 and don’t have one and probably never will, Elon Musk should send you a framed certificate that reads, “I was once Tesla’s banker.”