I met a Tesla bull (hedge fund) to debate the short case. I was on the short side (i'm short) and he was
a long (owns the stock in size). This person was intellectually honest, importantly didn't like Musk's
antics or believe in his BS, and owned the stock for substantive reasons so I take his views more
seriously than the typical long. Here were his pushbacks to the short thesis. I'd be curious in people's
1. On underlying demand + profitability: He believes that at the current price level
there is demand for 300k - 350k cars in the US + select geographies in 2019. But he thinks that the price
of the battery pack, which makes up the majority of the cost of this car, is coming down ~10-20% per year
based on economies of scale related to production, productivity improvements (similar to semiconductors)
and declining lithium pricing. He bases this on conversations with Panasonic and others in the EV battery
pack value chain. His research also suggests that Tesla's initial batch of cars was horrifyingly over
budget (due to inexperience in manufacturing) and that the cost of making the rest of the car will come
down ~5% this year and probably another 5% next year at the least. He wouldn't be surprised if it comes
down closer to 10% this year. That means the total cost of the car will probably come down ~low double
digits this year and continue to fall as the cost of the battery falls over the next 5 years. A lower
cost car will, in turn, be reinvested in further price cuts. As the price of the car comes down to the
low 30k range, the addressable market will expand by many multiples since most Americans (and people in
Europe) buy cars at an average price in the low 30k range, not in the high 30k range where it is now.
Model 3 pricing will probably be in the low 30k range in 2021 if battery and manufacturing costs come
down in line with his projections but 2020 growth should be driven by lower pricing to the mid 30k range
as costs fall this year as well. His overarching point is "of course they are losing $$$ now. They are
just trying to buy time to get to a point where they can offer a car in the low 30k range which is the
price range that most people buy cars in. That comes when a) battery prices fall sufficiently, which they
are rapidly and b) as Tesla get better at manufacturing, which they are already".
2. On recent
cap-ex cut: He sees people making the argument that cutting cap-ex is a sign that demand is drying up. He
thinks this is mistaken. His research on Tesla and their EV manufacturing process suggests its much less
capital intensive than a ICE manufacturer. That's because the # of moving parts in the car is 7-10 vs.
over 300 for an ICE guy. This means that adding incremental lines and variants is much simpler and less
cap-ex heavy than it is for an ICE manufacturer. He believes Tesla can add lines in California and
Fremont for roughly 20% of what an ICE manufacturer can add a line for and that currently lines are at
~65% of max utilization so there is room to grow production without that much incremental cap-ex. He says
that most people are so stuck looking at ICE manufacturers and comping Tesla's cap-ex needs and margins
to those players, that they forget that they are 100% EV player and that the EV cost structure is
completely different to the cost structure of an ICE manufacturer. This all implies that the cut in
cap-ex does not signify a decline in demand.
3. Competition: He points to the fact that every
competitor to Tesla in the EV market has significantly worse range and that range is the biggest issue
customers have when buying an EV. He sees the arguments that bears make that Tesla's battery is a
commodity because they buy it from Panasonic and anyone can do that. But he points out that if the
battery was a commodity, everyone would have the same range. His research suggests that Tesla buys
commodity battery packs and then rengineers them physically (by adding hardware) and software that makes
them much more efficient. This has taken time and effort and range continues to improve with new
variants. He says that other EVs are years behind and Tesla is extending their lead. This will always
make Tesla's car more attractive to buyers as long as the price is in line with competitors.
4. Margins: Believes that auto gross margins will hit 30% by 2021. In Q2, auto gross margins ex. reg
credits went up by 200bps from 15.2% to 17.2%. This was with the impact of price cuts - this happened
because a) more cars were sold, b) the price of the battery is falling and c) they are improving their
production process. As the price of the battery falls further and Tesla improves their manufacturing
process, margins should go up to the low 20s assuming volume stays where it is (95k cars per quarter). If
volume grows, margins should improve given the scale benefits of amortizing the fixed cost. Margins
should continue to ramp higher as the Company recognizes FSD revenue which he believes they will start
recognizing in Q4 '19. As prices fall, he believes margins should ramp even faster as volumes should
>I met a Tesla bull (hedge fund) to debate the short case. I >was on the short side (i'm
short) and he was a long (owns the >stock in size). This person was intellectually honest, >importantly didn't like Musk's antics or believe in his BS, >and owned the stock for
substantive reasons so I take his >views more seriously than the typical long. Here were his >pushbacks to the short thesis. I'd be curious in people's >views:
Underlying demand and profitability: First, underlying demand. Once the overall performance of a
BEV (battery-electric vehicle) is close enough to a gasoline/diesel engine car, it all comes down to
price and lifecycle total cost. The key thing to understand here is that while performance is not yet
there for most people, it’s there for some people, and that the degree of this demand is almost entirely
dependent on government mandates, subsidies and other incentives. If those are low or zero, the BEV
market would be 0.1% of the total auto market. But if the government takes those to the extreme, the
share could be 50% (Norway) or 100% (with a strict mandate). So, once you tell me what your assumptions
are for the government to dictate the competitive environment, I can tell you how large the market will
As for profitability and the cost of batteries, this argument is insane. The
correct analogy is this: 5G will increase data speeds etc by, say, 10 times. Does that mean that
Verizon’s profitability will now increase by 10x? The next chip from Intel will be 2x faster. Does that
mean that Intel’s profits will increase by 2x?
So what if battery prices will be
going down by 10% or 20% or whatever? If battery prices are going down by 20% for Tesla, chances are
they are going down for all other automakers as well. Nobody in the industry is seriously arguing that
Panasonic has some special cost curve here, that doesn’t apply equally to Samsung, LG, SKI, CATL or BYD.
On recent capex cut: The argument that Tesla has some sort of special advantage
in manufacturing cars is equally insane. The comparison is not between a BEV and an ICE car. It’s
between Tesla making a BEV and another automaker making a BEV.
Add together the Model X and S, and Tesla might be around 16% of the worldwide plugin car
It does not matter whether it’s cheaper to put together a BEV vs putting
together an ICE car. Because if it’s cheaper to put together a BEV for Tesla, it’s also cheaper for all
other automakers to do so. See the analogy with 4G vs 5G and the next-gen Intel chip.
For example, VW will soon have its first BEV-only factory in Germany. China already has them,
with so many more being finished in only months from now, that I can’t keep count anymore. Why would
Tesla have some sort of capex advantage against any of those dozens -- soon to be hundreds -- of BEV-only
factories, even if as a general statement it’s cheaper to build a BEV-only factory?
Competition: The author does not seem aware that when comparing range, he is not comparing apples to
apples. Tesla has optimized its cars for range. The competition has optimized for other things, all of
which eat away at range:
· Serviceability of the battery pack.
Making the battery pack survive a crash.
· Reducing the probability of a battery
· Longevity of the battery pack.
· The car itself has less
aerodynamic efficiency because it’s more practical that way.
· That goes for door
handles and roof racks, for example.
· The car itself weighs more (Audi eTron 5,600 lbs
for example) because it’s a sturdier build.
· The car can go off-road (Audi and
Obviously if you optimize a flimsily built lightweight car for
long-range highway driving, you are going to get better range than if you build a heavier and more square
car that will last longer and go off-road.
Still, even after adjusting for all of
those factors, Tesla may still have an advantage against most or all competitors in terms of
miles-per-kWh. But, it’s not nearly as big as the raw number suggests. You have to adjust for all of the
factors outlined above. Tesla’s real advantage here is somewhere between zero and very small -- not
Margins: That depends on pricing, which in turn is going to be heavily
dependent on what competitors do with their prices. Of course, if you assume that competition isn’t
going to increase, and/or that those competitors will not cut prices in order to meet their quotas,
indeed Tesla’s margins could go up. Considering that there are over 200 competitive models in the
pipeline between now and the end of 2022, that proposition may work in the short term -- perhaps for the
next quarter or two -- but probably not for much longer.
That actually goes to
basic economics 101: In a highly competitive market -- let alone one with notorious oversupply,
home-champion over-investment, and government-mandated price pressure thanks to minimum sales quotas,
margins are doomed to be small, negative and shrinking. This goes for Tesla as well as all other
A friend’s take on battery pricing and quality testing:
Battery prices may or may not be falling from this point. Considering that all battery manufacturing
has been fully automated already, the scale efficiencies beyond a certain limited point are very modest.
There is not a lot of labor involved. You capture almost all automation/scale benefits already at a
fairly small scale.
Three has been a lot of advancements in terms of battery PACK
design. That includes thermal management (heating, cooling) and the way that the pack is integrated into
the body of the car, how it handles a crash, and so forth. That’s where most of the cost reductions have
originated in the last 5-10 years.
Most people I know in the auto industry say that
the battery prices are not falling much from here, if at all. Any movement from here will be mostly
dependent on raw material prices, such as cobalt and all the other ingredients that go into a battery.
If those costs go down, battery prices go down. But not very much otherwise.
overall cost of the vehicle will decline somewhat from here because of dedicated BEV production lines
with slightly simplified assembly processes. See both Tesla and Volkswagen’s MEB-based factory in
Zwickau, for example, as they are 100% BEV. Or see Audi’s factory in Brussels, which is also 100% BEV.
In China, already dozens of examples, rapidly approaching hundreds.
indeed pioneered some battery pack and software techniques. They have two good motors, with
industry-leading efficiency. So let’s say that buys them 2% or even 3% on those parts. Who is a more
efficient manufacturer overall? Who buys steel and aluminum at lower prices? Who buys tires and all other
components at lower prices?
The other automakers can also afford to outright
subsidize their BEVs, because they actually have profitable product lines (gasoline, diesel) from where
they can subsidize.
This is Audi’s 100% electric car factory in Brussels,
You may ask
yourself why Audi’s former production boss -- Peter Hochholdinger -- who left Audi 3 years ago to join
Tesla -- left Tesla as soon as his 3 year contract was over. That was just over a month ago.
There is a world of difference between the way in which an Audi eTron is assembled, and
the way in which a Tesla is assembled, from a quality and professionalism perspective. In addition,
guess to what standards the Audi eTron was tested before being released for production, compared to the
way a Tesla is tested (barely) before it goes into production. The level of quality control is in a
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