Problem 1: The Gigafactory Was Always an Absurd Business Model
Some months back, I detailed why (in Tesla's Alien Deadbeat Factory) Tesla’s plan for a fully integrated Gigafactory at which all the “partners” in the manufacturing process – from suppliers of precursor materials to participants in cell production and battery assembly – never made any sense as a rational way to organize a business enterprise.
The plan imagined a dozen or so “partners” signing up and committing capital to the venture, only to then be exposed to the risk that any one of the following would not happen:
Every partner would remain solvent throughout a multi-year ramp-up process.
Every partner would perfectly perform its part in the manufacturing process. A flaw in a single part dooms the whole.
Every partner would achieve its targeted production rate on time.
Every partner would achieve its result on budget.
Tesla would manufacture the Model 3 in the timeframe and at the volume promised.
And then, assuming all else went perfectly, Tesla would generate sufficient profits to share with all its partners. Just imagine if Tesla had succeeded in attracting partners to the Nevada Gigafactory.
(if it didn't happen how is this a problem)?
The financial stress caused by the Model 3 delays would be crippling a dozen firms far smaller than Tesla and far less able to absorb the shock.
There is an excellent reason why supply relationships in the auto manufacturing business are structured just as we see them structured outside Tesla. It’s not because other manufacturers lack creativity. It’s because they have chosen the time-tested manufacturer-supplier arrangement that works best.
(then isn't that the arrangement that Tesla and Panasonic have now because they didn't attract partners)?
Problem 2: The Gigafactory Will Be Buried by Changing Technology
Because its plan for having multiple partners came to naught,
(How will the Gigafactory not having multiple partners bury it due to changing technology? That doesn't even make sense, besides I thought problem #1. was avoided by not having multiple partners.)
Tesla has been forced to shoulder a greater portion of the Gigafactory capital spending than it intended to.
But the inherently unrealistic business model is not the Gigafactory's most flawed feature.
(Again its not a feature if it didn't happen as pointed out earlier).
Its most flawed feature is that it represents a huge and expensive bet on battery technology.
(A bet that includes post lithium-ion research including solid state technology. The kind of bet that enables Tesla and Panasonic to dominate
and lead in the future).
The most recent installment of Autoline This Week, hosted by one of the auto industry’s most likable and knowledgeable journalists, John McElroy, brings this risk into sharp focus.
The guest this time was Hau Thai-Tang, Ford’s (NYSE:F) Executive Vice President of Product Development and Purchasing. A good portion of the show was devoted to Ford’s efforts in EVs and hybrids.
(Ford's redoubtable Hau Thai-Tang, courtesy of Autoline.TV)
At the outset, Thai-Tang acknowledged that electric motor propulsion has some clear advantages relative to internal combustion engines (ICEs), including the electric motor’s simplicity and quiet operation.
Mike Martinez of Auto News went to the heart of the battery issue with his questions, starting at 4:45. Martinez noted that, aside from Tesla, OEMs were relying on their suppliers for batteries. Martinez wondered whether there isn’t a lot more demand than capacity for EV batteries, and asked whether Ford is concerned.
Ford decided to let others invest in cell manufacture
No, said Thai-Tang, Ford is not concerned, for two reasons.
First, cell manufacture is hugely capital intensive, with an enormous volume of production required before good factory utilization is achieved.
(This is where Tesla and Panasonic are already developing and pioneering the methods to mass produce electric vehicle batteries, methods that will no doubt be copied).
Ford lacks the battery demand to soak up that amount of cell demand, and finds it advantageous to rely on outside suppliers who bear the capital investment load and can achieve the required capacity utilization be serving the needs of several OEMs. (Panasonic is already the largest battery cell outside supplier, the Gigafactory is the first of its kind and will be followed by many more Gigafactories around the world).
‘We know the technology landscape is going to change…’
The second reason cited by Thai-Tang seems to me of much greater importance:
The other thing we’re seeing is, we know the technology landscape is going to change.
You’ve seen predictions around cost per kilowatt-hour. Everyone believes that for us to really have a crossover between cost versus an ICE, you have to go post-lithium-ion.
So, we don’t want to get into a situation where we invest billions of dollars of capital, have inefficient scale, be over-capacitized, and then have the technology landscape change on us. And then you’re stuck with that asset.
Thai-Tang said Ford had seen precisely such a scenario play out in the context of hybrids with nickel-metal hydride chemistry. Although he did not mention it by name, my surmise is that he was referring to Toyota (TM).
John McElroy picked up on the "post lithium-ion" comment. Can you see, McElroy asked, what the next generation battery will be?
Thai-Tang said there will be a lot of options, and mentioned the nascent solid state battery architecture as having a lot of potential.
And that, I submit, is the essential flaw of the Gigafactory. Panasonic is stuffing it with hundreds of millions of dollars of equipment suitable only for lithium-ion cell production. Under Panasonic's business arrangement with Tesla, Tesla must repay Panasonic for all that equipment, plus a return on investment.
And those lithium-ion cells are, alas, simply too expensive - by a wide margin - to make (unsubsidized) EVs cost competitive with ICE vehicles. Further battery cell breakthroughs will be required.
(Cost of the vehicle will not matter when governments around the world ban ICE powered vehicles, you pay for the added pollution control devices installed on every ICE vehicle and mandated by the government since the 1970s).
(Tesla certainly understands this, which is why it campaigns so fiercely for continuing taxpayer subsidies and government mandates.)
There is good reason to hope for such breakthroughs, as a prodigious amount of research is being carried forward.
(Tesla and Panasonic is at the fore front of this research).
When they arrive, alas, the Gigafactory will become a cavernous empty building in the Nevada desert.
(Really)?
Why EVs and AVs Are Not Synonymous
In a change of topic, Keith Naughton of Bloomberg noted that, unlike some automakers, Ford envisions the autonomous vehicle future as more about hybrids than EVs.
Thai-Tang offered a thoughtful explanation of how Ford has reached that conclusion. In a nutshell, the early autonomous cars will be expensive (incorporating, as they do, equipment such as Lidar that Tesla has eschewed), and will need to operate around-the-clock to make them economically feasible. Long downtimes for charging would be a marked disadvantage.
The discussion is worth a listen as, indeed, is the entire interview. Listening to Thai-Tang certainly dispels the assumption, so often seen in comments here, that Tesla has some sort of monopoly on talented people who have set about to formulate creative solutions for the future of transport.
What’s Happening at the Gigafactory?
There was a lot of buzz last week when CNBC reported on problems at the Gigafactory. Old news? Yes, I suppose so. Seeking Alpha readers learned about those problems almost three months ago, from yours truly.
Have the problems been solved, though? Here’s what Tesla said in responding to the CNBC report:
To be absolutely clear, we are on track with the previous projections for achieving increased Model 3 production rates that we provided earlier this month.
As has been well documented, until we reach full production, by definition some elements of the production process will be more manual.
Translation: We are still a long way from alien dreadnought or battery cells shooting out of the Gigafactory at machine gun rapidity.
Obviously, I have no front-row seat at the Gigafactory. The best I can do is offer what appears to be an informed comment made last week at an Insideevs forum by someone calling himself HVACman:
In my research for the "machine gun belt" bandolier assembly process for the Model 3 packs that George and I wrote about a while back, an insider at the GF clarified that Tesla only has one automated line set up for assembling the cells & cooling tubes into bandoliers and then assembling the bandoliers into modules.
Elsewhere (where, I can't remember) I recall that the cell/cooling tube assembly process took 10 minutes per bandolier manually and only 10 seconds via automation. With that data, we can estimate how many packs per hour Tesla can produce with one automated line (when operating at 100% efficiency).
7 bandoliers per module x 4 modules per pack = 28 modules x 10 seconds/bandolier = 280 seconds per pack = 4.667 minutes/pack = 12.8 packs per hour.
Assume two 8-hr shifts per day & 6 days per week. 12.8 packs/hr x 8 hrs x 2 shifts x 6 days = 1,228 packs/week.
Assume 80% efficiency (15% machine down time plus 5% scrap rate). 1,228 x 0.8 = 983 packs/week.
So if the information about the cycle time is true and that there is currently one line working, then Tesla can only build about 1,000 packs per week until they duplicate the 1st line and get it commissioned….
The inside source said the space was set up for 4 lines at full capacity. With 4 lines, Tesla could build about 4,000 packs per week and therefore build 4,000 Model 3s per week. The ramp-up beyond 1,000 will require a) bringing on new lines and b) getting them properly commissioned. Since they hopefully learned a lot from the first line's problems, the 2nd (and 3rd and 4th) lines should be able to (be) assembled, commissioned, and producing much quicker than the 1st.
Why did I assume just two shifts (no graveyard shift) and why not 7 days per week? Cleanup and maintenance. The cleanliness required to maintain the tolerances of this fine assembly is very high. A thorough cleaning has to be done daily.
And service, calibration, etc. required on these automated precision systems are horrendous... Frequently one full day each week (like Sunday) is reserved for handling the bigger maintenance issues that can only be done when all lines are down. And then there are the multi-day shut-downs, usually over holiday breaks and then a 1-2 week summer shutdown for serious maintenance and/or retooling.
Assuming HVACman’s report is accurate, Tesla is not yet planning to install battery assembly equipment that would enable it to reach a production rate greater than 4,000 Model 3 cars per week. That, of course, is 1,000 per week fewer than the 5,000 per week Tesla has promised by the end of Q2.
Has Tesla, unbeknownst to HVACman, ordered equipment for more a fifth battery assembly line at the Gigafactory? And, if so, when will it arrive and be installed?
Given the "5,000 Model 3s per week by end of Q2" promise, these would seem like important questions. Perhaps someone will ask about this at the forthcoming conference call.
My Interview with cparmerlee
Several years before I joined Seeking Alpha, cparmerlee was here, commenting about Tesla (and, no doubt, other investments as well).
Cparmerlee’s comments and Fearless Forecast blog were among the things that drew me in to the Tesla discussion. So, I asked cparmerlee to elaborate on Tesla and other matters at length.
You can find the Q&A here. I’ll offer as an excerpt the answer to my request for a summary of cparm’s short thesis on Tesla:
Like most people, I came to study Tesla because I was intrigued by what it was doing. I was pre-disposed to be a supporter. Over time, I have come to several fundamental opinions:
The technologies on which Tesla depends (batteries, driving automation, and fast charging) are not evolving nearly as fast as the company claims. Of the three, only fast charging has been moderately successful, but is still not nearly competitive with liquid fuel.
This leaves Tesla with an impossible business model, and no real opportunity to establish a big first mover advantage
As a result of these fundamental problems, the company leadership has created a financial overhang that will eventually put the company into bankruptcy. The question is when, not if.
The management really doesn’t care about profits – at least not for the shareholders. But it is extremely adept at feathering its own nest.
So, Is it Finally Safe to Short Tesla?
I leave you with a recent comment by Krypto, with which I find myself in agreement:
In my mind, Tesla is the best case history ever made to not short stocks. If anything should be a slam dunk short, with pitiful financials and obvious self-dealing regarding SolarCity, a major cash burn, and a completely flubbed Model 3 ramp, Tesla should go down in flames.
But it hasn't, and they can probably raise more cash from more idiots to keep it going. It is a futile short.
It is not a question of whether it is a going concern - it obviously isn't without more cash. But it is an almost certainty they can get more at this point.
Yes, Krypto. We have not yet found the Tesla kryptonite.
If you want to short Tesla, make sure you have a plan that includes extensive due diligence, patience, discipline, and staying power.
Please, take steps to limit your downside and, by all means, wager no more than a small percentage of your portfolio.
Disclosure: I am/we are short TSLA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am short Tesla via long-dated options, and contemplating establishing a long position in Ford
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