Friday, April 29, 2016

Early Indications April 2016: Tesla Thoughts

In the absence of tech IPOs, must-have new apps, or killer demos, we are in a period of waiting:

  • will Uber continue to scale, win its legal battles, and develop a self-driving ride-share car?
  • will the rapid decline of so many “unicorn” company valuations chill the funding side of the cycle as Theranos et al become cautionary tales?
  • will Apple rebound from the quarter where it failed to set a revenue record, whether on iPad adoption, the watch, or growth in emerging economies?
  • will Facebook ever hit a wall past which privacy concerns, a saturated user base, and generationality slow its growth of ad revenue?

Amid all of this wait-and-see, one big shock has hit the tech world, and it’s more in the realm of bits (and electrons) than atoms: Tesla took $1,000 deposits for roughly 400,000 Model 3 sedans — in under a month. For scale, BMW sold 100,000 3-series cars in the U.S. in 2015, a 6% drop from 2014. Tesla’s name of its car is no accident: BMW is the standard for the mid-size sport sedan, and Tesla likely wants to do to that benchmark what the Model S did to Mercedes S-class, BMW 7-series, and Audi A8 sales: torpedo them. All of a sudden, Tesla is shaking up the automotive world, and every time I investigate, another interesting tidbit comes up.

First, the model 3 sales might not be the biggest news. Solar power is about to get cost-competitive in some climates (without subsidies), given new advances in sun-tracking technology for the arrays. One big drawback is the night-time, obviously, so battery power is one key way for solar to make sense. Tesla’s energy business unit is on track to sell 168.5 megawatt-hours of energy storage applications to SolarCity (another Tesla unit), according to GTM Research. That number is six times what Tesla sold SolarCity just last year, and a 60% increase on the entire industry output for 2015.  In addition, the 85kw battery in the model S is massive — just how big, I didn’t realize until I read that it can power the average household for 3 1/2 days. What does that do to electric company projections, to household disaster recovery, to our thinking about what charges what in the family garage? Tesla is remaking the auto industry, but power generation could be affected pretty radically as well.

Second, Tesla is learning the realities of manufacturing quality control, vendor management, and other “boring” supply-chain tasks that are tripping up the company. Some examples: Reuters reports that Tesla spent more than $1,000 per car on repairs, and set aside about $2,000 more per car for future repairs, on cars sold in 2015. Daimler (a more apt comparison than GM or Ford, given the average selling pice) spent $970 per vehicle but set aside only $1294. This approach appears to be well justified: Tesla has missed ship dates, suffered from repeated quality issues, and is trying to rewrite the industry rule book with over-the-air software updates.

The Model X SUV (the one with the funky gull-wing doors) is getting blasted by online forum reviewers, at the Wall Street Journal, and from Consumer Reports (which loved the Model S). Even CEO Elon Musk said earlier this year, "I'm not sure anyone should have built or designed this car, because it's so difficult to make." Doors won't open (or open correctly), the heater is chilly, and the touch-screen freezes, among other issues. Some of this is a reflection of making something as complex as an automobile, now with more software than ever before. Musk tried to point out a bright side in one presentation, noting that only 6 out of 8,000 parts for one car were in short supply — but most of the time, a single part shortage can stop production entirely.

Third, Tesla is taking a bold tack on self-driving. Their cars on the road are minimally instrumented (in that they lack Lidar), but are recording driving data at a prodigious clip: one estimate claims that Tesla “learns” (in AI terms) as much in one or two days as Google has from all of its cumulative driving experience. Thus if Google sees one deer strike per hundred thousand miles, let’s guesstimate, then Google has a base of 12 or 15 deer strikes whereas Tesla has hundreds or even thousands. Every Tesla has a cellular data connection for the software updates, but that link also harvests driving data from owners who do not opt out of being guinea pigs. Thus the Model 3 could offer stronger autopilot capability than anyone else in the market when it appears. (See this for more)

Fourth, the Model 3 buyers could face a nasty surprise if they are late in the queue. Specifically, U.S. government subsidies of $7500 for electric cars expire after 200,000 units have been sold. If U.S. sales of the Model 3 are 50% of the total, using round numbers, the subsidy (which can be augmented with state incentives in a given locality) will run out early in that 400,000 run: sometime in 2018. Thus buyers who came late to the party might pay the sticker $35,000 base price rather than $27,500 (or less in some states). In reality, Musk reported, the typical option package for the first weekend brought the total average selling price up to $42,000 or so.

Fifth, the big question is of course, can Tesla meet demand? The Model S began as a 15-20 units/week exercise in 2012 before hitting 1,000/week in 2015. Assuming early growing pains, but a faster ramp, 400,000 is a big leap, from 50,000 a year to something close to 3 or 4 times that, in less time than the Model S took to get to scale volumes. The good news is that the Model X complexity costs were lessons well learned, and the Model 3 has the potential to be the “best of all worlds” assuming a) battery production at the Tesla/Panasonic factory in Nevada comes on line as predicted, b) the same engineering that delivers “stunningly graceful” ride quality in the Models X and S can be scaled down to meet the price point (in part from a steel rather than aluminum body, most likely), and c) the factory processes, vendor management, and warranty issues can be contained.

For those who ask, no I did not reserve a Model 3: range anxiety in the middle of nowhere is real (the nearest Supercharger is more than an hour away, and there are none in the places I tend to drive for vacation).

Finally, the wonders of Quora continue to amaze me. There, I learned about the Model S as a “green” car: most electricity is not carbon-free, obviously, but how much does power source matter? If we use a Toyota Prius as a benchmark (19 metric tons of CO2 per year), the Model S wins only if it’s on a clean-running grid, such as the California mix of fuels/methods (11 metric tons) or if one can connect to wind (at which point emissions fall below 1 metric ton). A coal-fired diet for the Tesla’s electricity results in a 34-metric-ton CO2 toll, nearly twice that of the Prius.

Given Apple’s share price slide and the apparent saturation of its main markets, along with the heavy cross-pollination of engineers who have worked at both companies, should Apple buy Tesla? Apple’s supply-chain and marketing expertise and its capacity for major capital expenditures make it a seemingly attractive suitor. In addition, Tesla CEO Elon Musk may be too busy with Mars mission plans in his SpaceX capacity to get deeply engaged in the much less interesting earth-bound business issues such as those at Tesla: quality control, procurement analysis, lobbying for company-owned dealerships, etc.

I’m partial to another scenario, however: Apple could team up (somehow) with BMW, a company with a viable electric compact already in the market in the i3 at $44,000 MSRP. The two brands share customer bases, design aesthetics, and profit margins. Apple CEO Tim Cook is reported to have visited the i3 assembly line, which in itself is pretty amazing (see here), as is Tesla’s, to be sure. Tesla has a nice injection of working capital from those deposits, but also a tall order in the need to execute a step-function increase in production, engineering, and after-sales service on an entirely new scale. Cook’s expertise is in supply chains, and he likely understands better than most the risks facing Tesla at this juncture.

However it plays out, cars are suddenly “cool” again, for entirely new reasons, in part because the global smartphone market appears to be saturating. Wherever one sits in the tech industry (except at Amazon Web Services, apparently), there seems to be concern and caution rather than the unbounded-horizon talk to which we’ve grown accustomed (Intel just laid off more than 10,000 employees, to take only one example). Seeing who emerges from the recalibration will be fascinating indeed.