Earnings Call - 2017 Q4 (2/7/2018) Production Issues

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  1. Dan Detweiler

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    Is it just me or will it be a total letdown for Elon to attend the Tesla financial call today after the euphoria of yesterdays SpaceX success? Not that there is any particular bad news or anything. It's just sort of like when you were a kid and had to go back to school the next day after attending your first big rock concert. LOL!

    Dan
     
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  2. Michael Russo

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    Doesn’t that really depends on the news he has to share? ;)
     
  3. Frank99

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    The question is, will he still be riding a high from yesterday? Or will he be dragging his tail because he partied all night?
     
  4. John

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    #4 John, Feb 7, 2018
    Last edited: Feb 8, 2018
    In the earnings call today, Elon and JB talked at length about the Model 3 production bottlenecks. I'll give you the TLDR; version here, read the transcript if you'd like more detail, and others can chime in.

    Battery modules at the Gigafactory aren't being "built by hand," they are being made by machines but shuffled from station to station by people. There are three lines (I think four were planned) and each line has four zones. Zones 1 & 2 that some outside company designed and built failed work "at all," according to Elon. That design was supposed to get people out of the process. The automation to replace that has been redesigned and programmed by Tesla/Grohmann and is currently sitting in Germany and working. It just needs to be disassembled, shipped to Nevada, and installed. The timeline for that is to be running by end of March.

    The impact of that will be that the new zones developed in Germany will take up less space and will be 3 or 4 times faster than the original plan. The confidence level is high, because it's tested and working now in Germany. Elon sort of apologized that they didn't take the module assembly more seriously to start with. "And I think in part we were probably a little over-confident, a little complacent in thinking that this is something we know and understand. And put a lot of attention on other things and just got too comfortable with our ability to do battery modules because we've been doing that since the start of the company." Also that they designed a system that normally would take 18 months in just 6-9 months. One would assume starting in June or July of last year when production hell began.

    The company reiterated that they would get to 2,500 cars / week by end of Q1 (end of March), and 5,000 / week by the end of Q2 (June). My guess is that we're limited to ~1000/wk until then, maybe with some modest ramp. But really, that module line needs to get installed, and Elon confirmed it's still the bottleneck.

    After that, the bottleneck will probably shift to the automated parts conveyance. If you remember, they installed a giant vertical parts storage building in Fremont last year, and automation to bring parts from storage to the line. Evidently that's going to need some tweaking as they go as well. Not much color was provided about that, though.

    They talked about Model Y a bit, and how much simpler even that was going to be to build than Model 3. But they were more vague about that, saying they'd say more about Model Y in 6 months, and that spending for construction wouldn't hit until late this year.

    All cars at Fremont share the North Paint Line currently.
     
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  5. John

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  6. John

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    Here's the key part about the battery module assembly problems (copyright SeekingAlpha):

    Rod Lache - Deutsche Bank Securities, Inc.
    Hi, everybody. Thanks for taking my question, and congratulations on the launch yesterday. Wanted to just ask a couple of questions. One is just to get a little bit more color from you on Model 3, what the production run rate is at the moment. Maybe if you can just provide us a little more color on where the challenges are at this point?
    On the last call you talked about I think two of the four zones at Gigafactory that were still kind of an issue in manual operation. Have those been resolved? And once you get to 2,500, is the ramp to 5,000 – does that just merely involve increasing line speeds?
    Elon Reeve Musk - Tesla, Inc.
    Sure. I'll try to give you as much color as possible. I am reminded of – I think it may have been Churchill's line about sausage. If you like sausage and respect the law, you should watch neither being made, and to some degree that is true of our production ramp.
    So, I wouldn't read too much into the day-to-day battles of this or that. But I'll give you the color, but don't read too much into it. Yes. There are four zones in module production. Module production is fundamentally the limiting factor on Model 3 output, which is ironic since battery modules really should be the thing we're best at.
    And I think in part we were probably a little over-confident, a little complacent in thinking that this is something we know and understand. And put a lot of attention (06:58) on other things and just got too comfortable with our ability to do battery modules because we've been doing that since the start of the company.
    And of the four zones, two of them, of which are subcontracted to – the production systems are subcontracted to other companies, flat out didn't work, it turns (07:20). We promised they would work and it just didn't work. So, we had to do what would normally be maybe an 18-month development cycle for a production system of that scale and complexity, and try to do that in basically six months, maybe (07:45) six to nine months.
    And we've tackled that on multiple levels, so we have a design that is nearing completion for a new automated system for Zone 1 and 2 that is being led by our Tesla Grohmann team. It's an excellent design. All the other work that they've done has performed to spec, and we expect a single Tesla Grohmann line to be equivalent to three, if not four, of the current lines that we have and be smaller, which is kind of amazing.
    And then we have what we call a semi-automatic line, which is a series of small automated stations manned by people and they've actually been remarkably effective. It has to some degree renewed my faith in humanity that the rapid evolution of progress and the ability of people to adapt rapidly is quite remarkable.
    Our semi-automatic – our sort of semi-manual, semi-automatic line is exceeding all three of the automatic lines right now. So – and that is something that we're able to scale quite rapidly.
    I mean, JB, is there additional color you'd like to – on that?
    Jeffrey B. Straubel - Tesla, Inc.
    Sure. That's a great summary of it. I think much has been made about the manual production of modules, but it's really not very accurate. These are – these are, as Elon said, semi-auto lines where we have people that are moving materials, perhaps between the machines, that are actually performing the operations. But there is still a degree of automation doing the operation.
    Elon Reeve Musk - Tesla, Inc.
    It's not artisanal.
    Jeffrey B. Straubel - Tesla, Inc.
    Exactly. This is what has been ramping quite effectively in the last – in the first half – first part of this year.
    Elon Reeve Musk - Tesla, Inc.
    Yeah.
    Jeffrey B. Straubel - Tesla, Inc.
    So, we're continuing to expand that, those semi-auto lines, and that is effectively bridging the gap as we re-design the full automation and bring that online.
    Elon Reeve Musk - Tesla, Inc.
    Yes, actually I think it's probably worth providing some tours for investors that are interested, so you can actually see it first-hand. I think part of it is like, if you see it firsthand you'll understand exactly what's going on.
    And so I think let's arrange for some tours for investors that are interested because I think you can really get a feel for what it is. Otherwise, it's just some words that are kind of hard to put – hard to imagine.
    Jeffrey B. Straubel - Tesla, Inc.
    I also just want to add. I think it's fair to say that this maybe degree of complacency that happened at the end of last year has been thoroughly replaced by an intense focus from a huge portion of the Tesla team and there are a lot of different initiatives and teams, whole teams, targeted at this area. So, as Elon opened with, it's not a question of if we will get to the production rate, it's just a question of the matter of time.
    Elon Reeve Musk - Tesla, Inc.
    Yes. Absolutely.
    Rod Lache - Deutsche Bank Securities, Inc.
    If I could just clarify. What's the run rate now with semi-automation and when are you expecting the fully automated line to come on?
    Jeffrey B. Straubel - Tesla, Inc.
    Well, it's probably a level of granularity that is not productive to dive into in terms of exactly what is coming from which operation. But we do expect the new automated lines to be landing and starting up at the Gigafactory in just the next – landing in sight within this quarter.
    Rod Lache - Deutsche Bank Securities, Inc.
    Okay.
    Elon Reeve Musk - Tesla, Inc.
    Yes. We expect the new automated lines to arrive next month in March, and then it's already – it's been – it's working in Germany. So, that's got to be disassembled, brought over to the Gigafactory, and re-assembled and then brought into operation at the Gigafactory. It's not a question of whether it works or not. It's just a question of disassembly, transport, and reassembly.
    Jeffrey B. Straubel - Tesla, Inc.
    Exactly.
    Elon Reeve Musk - Tesla, Inc.
    So, yes. So, we expect to alleviate that constraint. That – with alleviating that constraint, that's what gets us to roughly 2,000 to 2,500 unit per week production rate. The next constraint would be material conveyance at our Fremont vehicle plant, and there's a very sophisticated automated parts conveyance system. We think it's probably the most sophisticated in the world, or at least we're not aware of one that is more so, and the software for that is quite complex. So that would be the next constraint on production to get to 5,000 is the conveyance system in Fremont. So that also appears to be on track. So, we feel like the air bars (13:14) around the unit volume predictions are getting smaller with each passing week.
     
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  7. John

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  8. MelindaV

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    that is the longest tdlr ever


    ;)
     
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  9. emolas

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    I expect disassembly, transportation and reassembly, and trial operation of the new automated lines going smoothly.
    I'm really seriously serious.
     
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  10. NOGA$4ME

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    As is my nature, I'm drinking the Kool-aid on this and do believe what they're telling us...but man, does this statement from Elon ever sound like like something our fearless leader would say:

     
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  11. Russell

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    I hate to say this, but the real TLDR here is 3 months maybe, 6 months definitely.
     
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  12. mtdoak

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    Like everyone else, my reservation was pushed (from Dec-Feb to March-May).

    In listening to the Q4 Call, there are a few things of note:

    1) Basically, the battery packs are the bottle neck at this point. They hired a 3rd party to automate the builds, they dropped the ball, and Tesla had to go and basically create an automated line themselves. The automated line is "ready" but has to be shipped from Germany (the Automation company they bought a few years ago).
    2) The company has said they expect to be "consistently profitable" in a a standard GAAP way later this year.
    3) They also straight out refused to say what their production rate is currently. Only that they would be at 2500/wk at the end of Q1.
    4) Elon sounded very proud of the progress made at the fremont factory itself, going as far to say that the automation advances there, not the cars themselves, would be the differentiator between them and the other car companies. That is a bold bold claim.

    So, I think there are a few things we can infer. I'd be willing to bet that the battery pack assembly line coming over for the long range battery packs was originally intended for the standard range pack. The 3rd party dropping the ball forced them to take the resources designing the standard battery pack line and use it for the long range. Also, I'm assuming this involves them installing 2 assembling lines (both long range and standard) rather than just one at the gigafactory.

    My "best guess" is the pause on invites right now is them simply struggling to fill to the currently configured model 3's. The battery pack production is likely as fast as it can get until the automation is in place.

    Timeline wise? Probably impossible to say. I'd assume at least a month to get the new battery line in place and probably some time to get it "up to speed". Not sure if that means non owners won't see tesla's until April or later, but I do think we'll see a a "trickle" of Model 3 invites followed by a more steady stream

    The other interesting thing is the change of putting AWD ahead of standard battery (at least, based on VINs we are seeing). This is obviously related to the battery issue. Though, I am curious if pushing back the standard battery was at least somewhat related to the report that the company will be profitable this year. The margin on a car that costs 44k vs 35k due to higher battery density is obviously going to be more profitable than a base 35k car. Tesla is keenly aware of the status of rebates in both the USA and Canada.

    Many people who think 9k for a bigger battery likely will do some re-calculation when its the difference between getting a 7500 rebate and 3750. 5250 more for 100 miles extra range and a faster car suddenly isn't so bad.

    Finally, Elon's talk of the freemont factory makes me think that....once this battery issue is resolved, we'll really start to see model 3's start to churn out. They have had time to work and improve the assembly lines as they've waited for batteries to come into the door. I'm cautiously optimistic that we're near the end of the "growing pains" of Model 3 assembly and will soon see less people waiting and more people driving.
     
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  13. Mike

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    If they are ready for show and tell, that tells me the worst is behind them.
     
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  14. John

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    Maybe so many employees and other reservationists are waiting on the small battery $35K version that it will be faster to get a dual motor version, even if the small battery comes out first. Dates from a line-standing, prior-owner, non-second-Model-3 would be telling.
     
  15. Michael Russo

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    A bit of a fallout driven by all ‘ye of little faith’...
    Anybody has some money to spare (I don’t) before it rebounds again... ?? ;)

    Note from the editor: this is for information purposes only... your investment decisions will at all times be at your own discretion... :D

    E2A7C66E-222E-4A18-B3F7-DF76DF6B6F04.png
     
  16. John

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    When the whole market goes down like it has lately, there's a flight to quality and other assets (like bonds).
    Tesla's not considered quality yet, so it will be volatile. Also, be careful of the this quarter's results, because it may be ugly. Lotta stuff pulled forward for year end (like inventory and ZEV credits) that aren't available for Q1.

    The language used on the call suggested that Model 3 won't pull out of its production slump until Q2. When Elon says "2000-2500 urn rate by end of March," even modest downside to that range may spell disappointment on what people are expecting. Even though 14,000 Model 3 = ~$750M (which is a 27% quarter-to-quarter revenue growth), much of the value of TSLA is based on Model 3 production, and converting reservations as fast as possible.
     
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  17. NOGA$4ME

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    Good post. I would disagree slightly that the new equipment was intended for the SR module though. My guess would be it was probably intended for the ramp from 5K->10K, which if true, eliminates one possible bottleneck when they do that ramp.

    and faster Supercharging...and better battery longevity...
     
  18. Brokedoc

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    After the close yesterday, Tesla filed an addendum to clarify Elon’s statements during the conference call. The addendum specifically states that the current GF1 equipment and the “semi autonomous” battery lines currently in place are capable of ramping to 2500/wk without the new production line from Germany. The 8k filing clarifies that the additional line from Germany by itself is capable of 2500/wk thereby doubling battery pack production capacity to the 5k/wk production target for the end of 2Q2018.

    https://www.sec.gov/Archives/edgar/data/1318605/000156459018001786/tsla-8k_20180209.htm
    https://electrek.co/2018/02/09/tesla-clarifies-model-3-production/
     
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