Tesla Reservations Model and Demand Generation

i've addressed reservations once or twice in the q1 earnings thread. but now that i'm convinced q1 earnings are going to be quite good, my focus shifts to the future. how will tesla do the rest of the year?

the shorts seem to be quite keen on the reservations issue. they cite high cancellation rates and quick turnaround times as reasons why the tesla reservations book has dwindled. i've been working on a reservations model, trying to take into account the various facts we know about reservations.

the cancellation rate is a slippery concept and it could be measured a number of different ways. the simplest is to take the number of cancellations and divide by the start-of-quarter reservation count. that misses some of the cancellations that would happen with people within the quarter. so i use a cancellation rate formula that incorporates the reservations from the current quarter. you can easily rework these numbers yourself using a simple spreadsheet.

basic formulas
quarter end reservations = start of quarter reservations + new reservations - sold vehicles - cancelled reservations
cancellation rate = cancelled reservations / (start of quarter reservations + new reservations - sold vehicles)

known facts
1. using the reservation numbers reported by users, it looks like q1 reservations in the eu were about 900.
2. reservations sequence numbers no longer exist in the us. using the last available data points, then extrapolating out the reservations rate gets you around 2500 q1 reservations in the us. i didn't add in canada because it seems small.
3. using the above and 100 reservations for the rest of the world (row) i arrive at 3500 reservations total for q1.
4. at the end of q4, "about 25% of the [15000] reservations were from outside north america".
5. cancellation rates are expected to remain elevated this quarter.
6. the tesla website has delivery times for north american customers in the range of 1-3 months, depending on the configuration. elon musk has said the average wait time in north america is down to two months.
7. unit sales this quarter will be 4750+.
8. eu production will start around june.
i have to make a few assumptions. in my initial attempt, i want to be conservative. i want to think like my opponents, the shorts. some of these assumptions might seem silly, but i can always make them more tesla-favorable later. i think i've taken every element of the model at made it go against tesla: cancellation rate skyrocketing, reservations stalling, and production climbing.

assumptions
1. cancellation rate will jump 100% above the 2012 q4 rate and then stay high the rest of the year.
2. reservations increase to around 4,000 per quarter, but tesla can't do any better than that the rest of the year.
3. production stretches over 5,000 per quarter, consuming reservations at a faster pace.

even with these horrible assumptions, the reservations model shows that we are clearly sold out through 2013, ending the year with around 2,500 reservations. numbers in bold italic are the estimates.

so how can usa production times average 2 months when there are supposedly 10,500+ reservations on the books? in order to make sure the model is logically consistent, i actually had to break out the north american and eu/rest of the world end-of-quarter reservations and track how they evolve.

the first thing to check is internal consistency. you'll see the total reservations and total production line up exactly in both tables. the next thing to check is logical consistency. you can see at the end of 2012 q4 there are 3400/15000 = 22.7% reservations outside north america. the production for 2013 q1 is entirely north america, and then europe gets added to the mix for a few weeks in q2 and more earnestly in q3. total production is kept near or above 5000 for all of 2013. so far, it's all consistent with the stated facts.

but how about the 2 month average wait time in north america? currently the model shows 6,270 north american reservations at the end of 2013 q1. since i am using a jump to a 20+% cancellation rate this is effectively only about 4,925 reservations. of those 4,925 i'd guess there are a bunch of deferrals, maybe 1,000 or so? that means only about 3,925 units of the remaining 6,270 north american reservations will be in queue for production. with production at 500 per week, that works out to around 8 weeks of production. so yes, it looks like this model is consistent with the 2 month average wait time for north american customers.

and no, the model shows that the shortened wait time isn't a major problem. as long as new demand generation keeps chugging along even barely above the q1 level, everything will be just fine because europe/row production will fill in the holes for a couple quarters. by the time we reach the 4th quarter, there will still be about 2500 reservations left even under these adverse assumptions. hopefully by then the tesla demand generation machine has reservations pushing well over 5,000 a quarter.

on the next earnings call i would expect to hear:
1. ended quarter with something more than 10,500 reservations with about 60% in the usa.
2. tesla affirming forecast of over 20,000 units during 2013 based on the existing reservations and pace of reservations.
3. european deliveries starting soon.
4. focus on demand generation, especially for 2014.
5. projecting q2 production of 5000 or more units.

i've just presented one approach for trying to reconcile all the information on reservations and production. hopefully someone else has some insights or thoughts regarding the latest decline in wait times? later i'll try to update with some more realistic numbers for the rest of the year. recent trends in european reservations indicate some pickup after a seasonally slow q1.

in conclusion, i agree with elon.

"tesla doesn't have a demand problem."

hcsharp said:

Have you thought about the possibility of a highly publicized safety recall that's basically a non-issue but the press goes on a feeding frenzy?

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ya i think about a recall all the time. it would be bad. every estimate would have to get tossed out the window. every car maker has recalls. it's just with a new company that has only one product, the impact would be disproportionate. even for what you might see as a non-issue. since there's no way to predict when or if a recall would happen, if it happens i'll have to adjust depending on what it is.

Norbert said:

Where did the "2 month" info come from?

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i think that's the average wait. some configurations are down to 1 month, some are at 3 months. sources: a recent bloomberg article, log on to the tesla website and start configuring, or just look at the model above. they all point you the same way: the north american backlog should be down to a quarter or so.

Norbert said:

This would be 5 months. On Bloomberg TV was someone who ordered a 85 kWh in Dec 2012 and got it in March, I think, which is 3 months. If those were representative numbers, they would point to an average of 4 months between 85 kWh and 60 kWh, but there are obviously a lot of variations. (All of these numbers are excluding european orders, of course, and specific options such as red body color.)

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the exact quote: "North American customers are waiting as little as “two to three months” for their cars, Musk said. That’s less than the current average of five months, including international customers, he said" from bloomberg.

i agree there is plenty of upside. the main point i was trying to make is that model s will likely sell out all available 2013 production. elon and crew have until next year to bring the average reservations up over 6000 per quarter. that's a long time!

Futurist said:

But on the other hand, this does not leave very much room for further expansion with only one Model in one segment.

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i follow twitter feeds on model s pretty closely, and from what i see they are cannibalizing sales from other segments too. i mean, logically how can one car with limited market reach and brand awareness suddenly become the #1 large luxury car in america? it has happened, but it's not logical. they have to be reaching outside their segment.

of course the luxury sedan segment is the natural segment where model s fits, and of course they try to sell directly to the panamera, bmw-7, or benz-s customers. but i see buyers coming from:

1. mid-range luxury buyers with either high-mileage or green tendencies
2. performance car enthusiasts
3. higher income hybrid (i.e. prius/volt) buyers
4. smaller suv buyers

there's more stories over at the tesla forum, here's a quick sample:

"Personally, I'm not particularly rich nor green. The most expensive car I've ever purchased was a GMC Yukon XL for $42K, and that was out of necessity (I have 5 kids). My wife has been begging me to consider Solar Panels for years, but we never pulled the trigger until, well, after we reserved our MS. But after driving my Prius for 2.5 years, I realized how much I enjoyed saving money, especially when running the A/C while waiting to pick up my kids for basically no cost (unless they took >10 minutes, in which case the engine would kick on. I hate that!). In fact, I realized that most of my arguments with my kids were about wastefulness -- wasting their food, wasting their money, wasting their time, wasting their lives! So when I started looking around for a mid-life crisis car, I considered the Audi TT (wife's idea), Porsche Cayman, BMW 3 or 5, Nissan 370Z, and even the Subaru BRZ. We got a vacation home about 100 miles away last year, and I realized that I would never drive any of those there because, once again, I'm too cheap! I'd still drive the Prius, in spite of a total lack of any driving dynamics whatsoever. Then came the Model S. Ooooooh......"

"how did i decide to buy a tesla? it sort of went like this:Conversation with a friend on 04/15/11 -
Me: "So I'm trying to decide what car to buy. I really want an Audi S4 but then I feel bad for the environment so maybe I should get a Prius..."
My Friend: "Why don't you get both?"
Me: "Wait, what?"
My Friend: "Check out the Tesla Model S. Tesla is making an electric sedan!"
** google search interlude **
Me: "Holy $&@#!" I reserved one 2 days later on 04/17/11."

"Then a friend got a Volt, which he loved (and has since dumped for a Model S...)
My wife and I went to test drive a Volt, and we both walked away saying that considering the price, we'd rather start thinking about the base-model Tesla for "only" 20k more. Of course, as we know now, that rarely remains the final decision. We upgraded to the 60, got pearl white, Supercharger capability, air suspension, leather seats, and ultimately spent almost two Volt's worth.
And we're ecstatic about it."

the other interesting thing here is that tesla is mostly going after the urban markets. but as they get further along i think you'll find a pretty good pool of buyers in the rural markets as well. gas stations are a bit further apart in the rural markets, and sometimes the drive to a town could be inconvenient or expensive. one facebook photo had shown a guy who parked his john deere and used a model s for a tractor (hee-haw!).

http://www.facebook.com/virginiacleancities/posts/245511588925879

i think this is why tesla has catapulted to the #1 large luxury car in america. it's large luxury but it is captivating buyers from other segments. it changes the modeling substantially when you are no longer limited to that segment.