erha
Member
I think the model X will generate a crazy amount of media coverage with it's second row seats, doors and autopilot driving. This will increase the demand for both the model s and the model x
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jhm, this is a great point and thanks for enlightening me. I can see people walk in to the store and be impressed with both cars (S and X) and leave the store saying "man, those are some crazy nice cars!" (vs currently they leave the store saying, "that's a crazy nice car!"). And then when they go for a test drive, many people will want to test drive both the Model S and Model X and that will only highlight how much better Tesla cars are compared to the competition. And as you mentioned, people will have a more difficult time decided between an S and X and will spend more time researching. The end effect of all of this, is Tesla gets better brand recognition and appeal from consumers. And this helps stir even more demand.
jhm
Well-Known Member
chickensevil
Active Member
pz1975
Active Member
Agree. Instead of "should I buy a Tesla or a BMW/Mercedes?", it will become "should I buy an S or an X?"
Yep. And, although most people here already know this, I think the Model X is going to be an incredible car. The gap between the Model X and it's SUV competition is going to be HUGE (much bigger than the gap between the Model S and it's premium sedan competition). The main reason is because the low CG from the skateboard design is going to redefine how a SUV can perform. Prior to the Model X, people expected a significant compromise is handling/performance when choosing a SUV. But with the Model S, since the torque is instant and the center-of-gravity is so low, it's going to feel like an amazing car to drive and people will be shocked that a SUV can drive like that.
Here's a video from Feb 2012 when Tesla gave some test rides to people. Note how the Tesla engineer highlights the low center-of-gravity and it's performance in the slalom.
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I LOVE, I mean LOVE, watching EVs accelerate in videos. You can instantly tell it's an EV with how smooth the video picks it up and the feeling of driving one comes back again. So much better than ICE. hot damn!
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Raffy.Roma
Rome (Italy)
And we're giving it away for... FREE! (re: extended drive train warranty)
On Friday Tesla announced that they are extending the drive train warranty for another 4 years (in addition to the 4 year new car warranty) and there would be no mileage restrictions on the extended drive train warranty.
Here are some of my quick initial thoughts:
- great for owners, lessens worries/concerns
- increases value of used cars
- eases concerns of potential customers
- allow buyers to factor in cost of ownership over longer period thus lowering monthly cost of ownership estimates
- best drive train warranty (ie., even Hyundai’s powertrain warranty has limited miles and also is not transferrable)
- Tesla can do this because they own service centers, can keep costs down, can fix problems quick with tight feedback loop, can institute manufacturing changes quickly
Now that I’ve mentioned the basics, I’d like to focus in on this decision at a deeper level.
Tesla didn’t need to apply this extended warranty retroactively to all Model S’s ever produced. In fact, if they would have offered current Model S owners the option of purchasing a 4-year extended drive train warranty for $500, I think most owners would have been very happy. $500 is a great price to pay for 4 extra years of drive train coverage with no mileage restrictions.
If Tesla charged current customers for the extended warranty, then they wouldn’t need to have a one-time warranty expense to cover older cars (ie., perhaps $15-20 million added to Q3 expenses as a one-time charge, which might make it difficult for Tesla to be non-GAAP profitable in Q3).
However, Tesla decided to give the extended warranty for free to all Model S owners.
It reminds me of Oprah when she would do her annual pre-Christmas show of her favorite things and would give away a ton of cool things for free. Unexpected, generous, very cool.
What’s unusual about Tesla’s decision is while a typical business would focus on next quarters revenue/expenses and looks toward the bottom line, Tesla rather looks deeper and chooses to invest in their customers. In other words, Tesla is choosing the long-term reward over short-term gains.
Elon knows that the 40k+ customers who have purchased the Model S are his biggest fans and best evangelists. Sure, he could try to squeeze an extra $500 out of them by charging for the extended warranty, but he believed that investing that into those 40k+ customers in the form of a free upgrade would bear more fruit.
The free extended warranty not only addresses concerns of current owners, it also gives them more confidence in Tesla and the company’s values. In other words, it allows current customers to become even more enthusiastic about recommending buying a Tesla to their friends and acquaintances.
It also appears that Elon took the lead for this decision. He personally wrote the blog post and signed it. It reminded me of when he announced that he would personally guarantee the buy-back guarantee with Tesla financing.
It’s refreshing to see a CEO take this kind of leadership. Making smart moves based on strong values and beliefs that benefit the company and customers in the long-term, even if it means some short-term sacrifice.
On Friday Tesla announced that they are extending the drive train warranty for another 4 years (in addition to the 4 year new car warranty) and there would be no mileage restrictions on the extended drive train warranty.
Here are some of my quick initial thoughts:
- great for owners, lessens worries/concerns
- increases value of used cars
- eases concerns of potential customers
- allow buyers to factor in cost of ownership over longer period thus lowering monthly cost of ownership estimates
- best drive train warranty (ie., even Hyundai’s powertrain warranty has limited miles and also is not transferrable)
- Tesla can do this because they own service centers, can keep costs down, can fix problems quick with tight feedback loop, can institute manufacturing changes quickly
Now that I’ve mentioned the basics, I’d like to focus in on this decision at a deeper level.
Tesla didn’t need to apply this extended warranty retroactively to all Model S’s ever produced. In fact, if they would have offered current Model S owners the option of purchasing a 4-year extended drive train warranty for $500, I think most owners would have been very happy. $500 is a great price to pay for 4 extra years of drive train coverage with no mileage restrictions.
If Tesla charged current customers for the extended warranty, then they wouldn’t need to have a one-time warranty expense to cover older cars (ie., perhaps $15-20 million added to Q3 expenses as a one-time charge, which might make it difficult for Tesla to be non-GAAP profitable in Q3).
However, Tesla decided to give the extended warranty for free to all Model S owners.
It reminds me of Oprah when she would do her annual pre-Christmas show of her favorite things and would give away a ton of cool things for free. Unexpected, generous, very cool.
What’s unusual about Tesla’s decision is while a typical business would focus on next quarters revenue/expenses and looks toward the bottom line, Tesla rather looks deeper and chooses to invest in their customers. In other words, Tesla is choosing the long-term reward over short-term gains.
Elon knows that the 40k+ customers who have purchased the Model S are his biggest fans and best evangelists. Sure, he could try to squeeze an extra $500 out of them by charging for the extended warranty, but he believed that investing that into those 40k+ customers in the form of a free upgrade would bear more fruit.
The free extended warranty not only addresses concerns of current owners, it also gives them more confidence in Tesla and the company’s values. In other words, it allows current customers to become even more enthusiastic about recommending buying a Tesla to their friends and acquaintances.
It also appears that Elon took the lead for this decision. He personally wrote the blog post and signed it. It reminded me of when he announced that he would personally guarantee the buy-back guarantee with Tesla financing.
It’s refreshing to see a CEO take this kind of leadership. Making smart moves based on strong values and beliefs that benefit the company and customers in the long-term, even if it means some short-term sacrifice.
I think this is the real driver. Tesla now has the capacity to deliver more Model Ss in the next 9 months than they have to date. Musk is looking at the only reasons people would have against purchasing a Tesla and erasing them. No other automaker looks at their next 12 months of business considering the same level of growth relative to their current size.
Because Tesla only produces one vehicle (soon to double), they can focus (all the way up to the CEO) at maximizing the value proposition of the offering.
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adiggs
Well-Known Member
In the "Limits to Growth" archetype from systems theory (http://en.wikipedia.org/wiki/System_archetype) I believe that we can find the explanation for what Elon is consciously doing throughout the business. The key learning from the "Limits to Growth" archetype is that all reinforcing feedback loops (buy Model S, more Model S get sold in the vicinity, leading to even more Model S's being sold) have some natural restriction to their growth.
For the Model S, you might think of that as the road trip / range anxiety problem, where the car is amazingly useful for out and back day trips and around town use, but not so much for long trips.... absent the Supercharger.
In the Limits to Growth archetype, the way you keep getting the good stuff you want (sell more Model S), instead of focusing on the feedback loop that is naturally reinforcing, you identify the limiting feedback loops, and you eliminate or push back those limits wherever you can.
Can't go long distances in an EV as conveniently as a gas car? Design the car so it can be recharged in the time that you would take during a regular pit stop, and build a network of chargers (we'll call them "Superchargers") so that people can drive their EV's long distances.
Claim that the car is more reliable than an ICE, but it's new enough that we don't yet KNOW that (we have another 6-12 years to see how it develops)... extend the warranty out to 8 years on the core component people are worried about, so that owners are left with risks that are well understood and known (car bodies / interior breaking down is well understood, not so much how EV drive trains age, though we have a good hunch).
And so forth.
I believe that if Tesla stays focused on these secondary limits to their growth, they'll be able to keep growing as fast as they can build 'em, without advertising money. At least for the rest of this decade anyway, and maybe the next one too.
chickensevil
Active Member
Plus, every time someone shouts about a limit, the company gets to come out with a nice and elegant solution to that limit which not only reassures people already interested in the car, but also helps raise more awareness about the brand and the product.
#11 Demand as a Result of Product Excellence (Tesla’s Competitive Advantage #4 part2)
(This is post #11 in a series explaining my long-term TSLA investment philosophy. For previous posts, see Articles/megaposts by DaveT)
In my last post I shared how product excellence was one of Tesla’s competitive advantages. In this post, I’ll focus more specifically on the results that Tesla enjoys from having a stellar product.
The main result from having a stellar product is strong and growing demand.
Tesla naysayers claim that U.S. demand has plateaued or is decreasing. But this is not the case. Tesla has reiterated many times that U.S. demand is strong and that they are in fact intentionally holding back demand since wait times are already very long.
In the most recent Q2 2014 quarterly conference call Elon said:
“Demand will not be a problem. An interesting little item, like how many stores are we building? Well, we're building hardly any. We're building lots of service centers. We can drive demand up at will. But if drive it up too much, then people would get upset with us because they waited too long for their car.”
Barclays sent out a report to their clients after attending some Tesla-sponsored investors meetings in Europe in March 2014. They wrote regarding demand:
“Although some of have raised concern that Tesla demand in the U.S. has stalled, Tesla pointed out that it has held back on spurring demand – i.e. it has withheld marketing and opening store locations (i.e. BMW has 7x the number of stores as Tesla in the U.S.). Similarly, although Tesla is aiming for Model S wait-time between order and delivery to be two months, wait-time is currently running above that.”
In other words, demand is strong in the U.S. and Tesla isn’t able to meet that demand currently (as it scales production), so they are withholding marketing efforts and new store openings so not to stir too much new demand. (Note: demand in Europe has been slow in some countries so Tesla is trying to stir new demand via new store openings and other marketing efforts, which I believe will pay off. Tesla is very bullish on China, and Tesla still has quite a few new markets to enter.)
Another area that Tesla benefits from having a stellar product is with owner enthusiasm. Many of Tesla’s skeptics would be well-served to spend a few dozen hours surfing the TMC forums to gauge how satisfied people are with their Model S purchases. This is one of the first things I was monitoring back in summer of 2012. I was looking at every single post I could find from new owners and seeing how they liked or disliked their purchases. Tesla owners are generally very, very happy with their purchase.
Sometimes owners decide to sell their cars for various reasons. As a result, I’ve been monitoring the used car market fairly closely for the past 2 years. I’ve often emailed or called people who are selling their Model S’s to ask why they were selling and what their next car would be. Out of the dozens of people I’ve spoken to I did meet some that preferred a different car (ie., smaller car or smoother, etc). However, the vast majority of Model S sellers were looking to upgrade and buy another Model S. Also, the used car market for the Model S remains incredibly strong (beyond my initial expectations).
I’ve also monitored owner satisfaction over time. The key is to watch whether owners grow to like their car more over time or if they like their car less over time. This is important because if they grow to like the car less over time they will have little incentive to become product evangelists. I’ve talked to probably over 100 owners personally regarding their satisfaction over time, and the vast majority are enjoying their car more and more.
In my personal experience there’s something about a stellar product, especially a product so stellar that you enjoy it more and more over time. The Model S definitely fits into this category.
This is good news for Tesla as it illustrates that Tesla has laid a great foundation for strong and growing demand.
A lot of Tesla’s insistence on product excellence comes from Elon’s value and insistence that Tesla produces a car that is significantly better than what’s out there. He knows Tesla needs to do that to survive as an auto maker, and he also knows that it’s the best way to speed the transition to electric cars.
The next car from Tesla, the Model X, will show once again how strongly Tesla is committed to product excellence. The Model X will be best-in-class and will show what a SUV should be like. It will become the new standard of SUVs that ICE SUVs simply can’t compete with (ie., low center-of-gravity, instant torque, AWD handling, huge cargo space, etc). The result will be strong and growing demand.
Let’s also not forget that Tesla’s cars are getting better. Quality is improving, features are being added, more superchargers are being made available, and in the future battery cost savings will enable an increase in range. All of this will also have a positive impact on demand.
(This is post #11 in a series explaining my long-term TSLA investment philosophy. For previous posts, see Articles/megaposts by DaveT)
In my last post I shared how product excellence was one of Tesla’s competitive advantages. In this post, I’ll focus more specifically on the results that Tesla enjoys from having a stellar product.
The main result from having a stellar product is strong and growing demand.
Tesla naysayers claim that U.S. demand has plateaued or is decreasing. But this is not the case. Tesla has reiterated many times that U.S. demand is strong and that they are in fact intentionally holding back demand since wait times are already very long.
In the most recent Q2 2014 quarterly conference call Elon said:
“Demand will not be a problem. An interesting little item, like how many stores are we building? Well, we're building hardly any. We're building lots of service centers. We can drive demand up at will. But if drive it up too much, then people would get upset with us because they waited too long for their car.”
Barclays sent out a report to their clients after attending some Tesla-sponsored investors meetings in Europe in March 2014. They wrote regarding demand:
“Although some of have raised concern that Tesla demand in the U.S. has stalled, Tesla pointed out that it has held back on spurring demand – i.e. it has withheld marketing and opening store locations (i.e. BMW has 7x the number of stores as Tesla in the U.S.). Similarly, although Tesla is aiming for Model S wait-time between order and delivery to be two months, wait-time is currently running above that.”
In other words, demand is strong in the U.S. and Tesla isn’t able to meet that demand currently (as it scales production), so they are withholding marketing efforts and new store openings so not to stir too much new demand. (Note: demand in Europe has been slow in some countries so Tesla is trying to stir new demand via new store openings and other marketing efforts, which I believe will pay off. Tesla is very bullish on China, and Tesla still has quite a few new markets to enter.)
Another area that Tesla benefits from having a stellar product is with owner enthusiasm. Many of Tesla’s skeptics would be well-served to spend a few dozen hours surfing the TMC forums to gauge how satisfied people are with their Model S purchases. This is one of the first things I was monitoring back in summer of 2012. I was looking at every single post I could find from new owners and seeing how they liked or disliked their purchases. Tesla owners are generally very, very happy with their purchase.
Sometimes owners decide to sell their cars for various reasons. As a result, I’ve been monitoring the used car market fairly closely for the past 2 years. I’ve often emailed or called people who are selling their Model S’s to ask why they were selling and what their next car would be. Out of the dozens of people I’ve spoken to I did meet some that preferred a different car (ie., smaller car or smoother, etc). However, the vast majority of Model S sellers were looking to upgrade and buy another Model S. Also, the used car market for the Model S remains incredibly strong (beyond my initial expectations).
I’ve also monitored owner satisfaction over time. The key is to watch whether owners grow to like their car more over time or if they like their car less over time. This is important because if they grow to like the car less over time they will have little incentive to become product evangelists. I’ve talked to probably over 100 owners personally regarding their satisfaction over time, and the vast majority are enjoying their car more and more.
In my personal experience there’s something about a stellar product, especially a product so stellar that you enjoy it more and more over time. The Model S definitely fits into this category.
This is good news for Tesla as it illustrates that Tesla has laid a great foundation for strong and growing demand.
A lot of Tesla’s insistence on product excellence comes from Elon’s value and insistence that Tesla produces a car that is significantly better than what’s out there. He knows Tesla needs to do that to survive as an auto maker, and he also knows that it’s the best way to speed the transition to electric cars.
The next car from Tesla, the Model X, will show once again how strongly Tesla is committed to product excellence. The Model X will be best-in-class and will show what a SUV should be like. It will become the new standard of SUVs that ICE SUVs simply can’t compete with (ie., low center-of-gravity, instant torque, AWD handling, huge cargo space, etc). The result will be strong and growing demand.
Let’s also not forget that Tesla’s cars are getting better. Quality is improving, features are being added, more superchargers are being made available, and in the future battery cost savings will enable an increase in range. All of this will also have a positive impact on demand.
Yes, a, great post. The cynic in me says your posts are like a pep rally for investors but everything you say is true, nothing is blown out of proportion or exaggerated, if anything you are often conservative yet it still has a pep rally-like affect.
Please keep them coming...I just hope the next rise to new ATH does not take as long as the last one (6 months from Feb to Aug).
#12 Vertical Integration (Tesla’s Competitive Advantage #5)
(This is post #12 in a series explaining my long-term TSLA investment philosophy. For previous posts, see Articles/megaposts by DaveT)
In this post I’ll cover another competitive advantage of Tesla, namely vertical integration.
Vertical integration is one of Elon Musk’s favorite approaches to drive down costs. He’s done it with SpaceX, with SolarCity, and now is doing it with Tesla.
In Tesla’s Q3 2014 conference call, Elon Musk notes:
“I don't think outsourcing decreases the cost. That tends to increase the cost in our experience. It's just like the reason we outsource stuff is just because we had too many fish to fry. But it's almost always the case that when we've in-sourced something, it got cheaper. I mean the thing that would make us really efficient or for any given technology level, is to say, how far did that molecule move? And if the molecule is taking several round trips around the world, that's expensive. If it's just moving from one station to the next, then that's obviously lower cost. And so the vertical integration just means that the molecule doesn't move as much and it's not being put in a box and then put in a truck and then on a boat, and then, you know, going through customs and stuff like that. So I mean I think that's generally true that vertical integration and doing things at large scale results in cost reduction.” [emphasis mine]
Vertical integration is one of the key components in order to meet the cost reduction efforts required for Tesla’s 3rd generation vehicle.
In fact, it’s my belief that Tesla is well along the path of vertical integration. They started with the key, large components first, like the battery pack and drive train. Then, they started producing other auto parts in-house (ie., they have their own plastics department and make most of their own plastics). They are expanding their in-house production of auto parts, as shown by their expansion into the Lathrop facility that is dedicated to in-house auto part production.
When asked about the Lathrop facility at the 2014 shareholder’s meeting, Elon replied:
“We are actually expanding our activities in the Stockton area. Lathrop's a city near Stockton, so in the greater Stockton/Lathrop area we are setting up a lot of manufacturing activity to supply components to the Fremont factory. So as we expand production at Fremont and plan to get to the sort of 1/2 million level we have to move a bunch of manufacturing that is done at Fremont to other factories, some of which are our own, some of which are our suppliers. We can't be at the half million mark and be as vertically integrated as we are at Fremont. So we expect to do substantial expansion in Lathrop/Stockton area to supply the Fremont factory."
It’s interesting to note that Tesla is entering the market of production of auto parts. Now, I need to probably explain this more clearly. Every auto maker that makes cars also makes some auto parts like the engine, transmission, body, etc. However, most auto makers rely on a very large supplier network to provide them with hundreds of auto parts. It can be a massive supply chain and much of the auto industry has revolved around managing and negotiating supply chain agreements, as well as keeping a check on quality control.
In Tesla’s case, they started out contracting with auto parts makers to secure hundreds of auto parts. However, over time Tesla has a vision to remove inefficiencies by increasing in-house production of parts (although they will likely always rely on a number of suppliers for certain parts). I’m considering this a new market for Tesla because typical auto makers aren’t producing most of their own auto parts. The auto parts industry is a huge industry with many companies. So, as Tesla becomes more vertically integrated they become a hybrid of sorts - an auto maker and an auto parts maker (where typically these two functions were separate companies and separate markets).
The result of Tesla’s aggressive vertical integration is mainly a reduction of costs. By producing parts in-house, Tesla is able to save on production, shipping, logistics, supply chain management, and other costs.
The Gigafactory will be a massive display of vertical integration - raw material enter at one end of the factory and finished battery packs leave at the other end. The cost savings will be tremendous.
Tesla’s aggressive approach to vertical integration (ie., in-house production of auto parts, Gigafactory, etc) will allow Tesla to release a truly compelling mass market electric vehicle at an affordable price.
And after Tesla releases their 3rd generation vehicle, Tesla’s aggressive vertical integration will allow them to continue to remove inefficiencies, improve their product and increase their competitive edge in the market.
Tesla’s vertical integration doesn’t stop at vehicle production. Rather, vertical integration continues on to Tesla owning their own service centers, owning their own retail stores, and also owning their own supercharger network. Vertical integration outside of vehicle production results not only in cost reduction but also in improved quality. For example, by owning their own service centers Tesla is able to quickly gather feedback on possible issues and implement a series of fixes to see what’s the best solution. And when they roll out their solution they’re able to do so economically because the service centers aren’t charging a large markup like independent dealers would. In the case of a recall, Tesla is able to keep costs down to a minimum and this is a huge advantage as well.
By owning their own retail stores, Tesla is vertically integrating the sales and eduction experience of the customer. Tesla is able to directly control how the potential customers is treated. With independent dealers, the temptation is to push hard for a sale to everyone who walks in the door. However, Tesla has a strong value to allow visitors to explore and learn about their vehicles without a heavy-handed sales approach. The result is that Tesla is seeding relationships for the long-term while independent dealers try to squeeze sales in for their end-of-month deadline. Over time Tesla’s approach will win over fans and will prove to be a unique and large distinguishing factor.
Lastly, by owning their own supercharger network Tesla is able to control the experience and deliver the fastest charging times in the industry. Tesla is able to continuously improve charging times by optimizing how their battery packs are charged by the superchargers. Early on Tesla realized that they needed to face range anxiety head on with a creative solution, rather than waiting for others to create a charging network. Tesla realized that charging speed was going to be crucial and they pushed for a solution that would allow them to push the limits of charging speed. This required them to own, maintain, and improve on their own charging network. Further, they made the bold decision to not charge for supercharging on each charge but rather include it in the upfront cost of the car. They were able to make that decision financially viable because they took responsibility to negotiate cheap (or no-cost) deals to lease land and they decided to make a bet that solar panels would offset charging costs in the long-run.
Overall, Tesla has been super aggressive in pursuing a vertical integration approach to vehicle production, battery production, in-house auto parts production, service centers, retail stores and superchargers. Not only will the vertical integration approach give Tesla significant cost savings but also it will win people over with the advantage of quality and customer experience.
Tesla is building a very compelling customer experience for the end-customer. Customers probably won’t be interested in the vertical integration behind-the-scenes, but that’s the beauty. To the customer it will all work like magic. Tesla’s retail stores will be cool and friendly, their cars will be awesome, their service centers convenient and not greedy, the supercharger network fast, etc. It’ll all be summed up when people say, “Tesla is awesome!”. Everything will just work and it will be compelling. The pieces are being put into place. The big launch is Gen3 (Tesla's 3rd generation vehicle). Watch out.
(This is post #12 in a series explaining my long-term TSLA investment philosophy. For previous posts, see Articles/megaposts by DaveT)
In this post I’ll cover another competitive advantage of Tesla, namely vertical integration.
Vertical integration is one of Elon Musk’s favorite approaches to drive down costs. He’s done it with SpaceX, with SolarCity, and now is doing it with Tesla.
In Tesla’s Q3 2014 conference call, Elon Musk notes:
“I don't think outsourcing decreases the cost. That tends to increase the cost in our experience. It's just like the reason we outsource stuff is just because we had too many fish to fry. But it's almost always the case that when we've in-sourced something, it got cheaper. I mean the thing that would make us really efficient or for any given technology level, is to say, how far did that molecule move? And if the molecule is taking several round trips around the world, that's expensive. If it's just moving from one station to the next, then that's obviously lower cost. And so the vertical integration just means that the molecule doesn't move as much and it's not being put in a box and then put in a truck and then on a boat, and then, you know, going through customs and stuff like that. So I mean I think that's generally true that vertical integration and doing things at large scale results in cost reduction.” [emphasis mine]
Vertical integration is one of the key components in order to meet the cost reduction efforts required for Tesla’s 3rd generation vehicle.
In fact, it’s my belief that Tesla is well along the path of vertical integration. They started with the key, large components first, like the battery pack and drive train. Then, they started producing other auto parts in-house (ie., they have their own plastics department and make most of their own plastics). They are expanding their in-house production of auto parts, as shown by their expansion into the Lathrop facility that is dedicated to in-house auto part production.
When asked about the Lathrop facility at the 2014 shareholder’s meeting, Elon replied:
“We are actually expanding our activities in the Stockton area. Lathrop's a city near Stockton, so in the greater Stockton/Lathrop area we are setting up a lot of manufacturing activity to supply components to the Fremont factory. So as we expand production at Fremont and plan to get to the sort of 1/2 million level we have to move a bunch of manufacturing that is done at Fremont to other factories, some of which are our own, some of which are our suppliers. We can't be at the half million mark and be as vertically integrated as we are at Fremont. So we expect to do substantial expansion in Lathrop/Stockton area to supply the Fremont factory."
It’s interesting to note that Tesla is entering the market of production of auto parts. Now, I need to probably explain this more clearly. Every auto maker that makes cars also makes some auto parts like the engine, transmission, body, etc. However, most auto makers rely on a very large supplier network to provide them with hundreds of auto parts. It can be a massive supply chain and much of the auto industry has revolved around managing and negotiating supply chain agreements, as well as keeping a check on quality control.
In Tesla’s case, they started out contracting with auto parts makers to secure hundreds of auto parts. However, over time Tesla has a vision to remove inefficiencies by increasing in-house production of parts (although they will likely always rely on a number of suppliers for certain parts). I’m considering this a new market for Tesla because typical auto makers aren’t producing most of their own auto parts. The auto parts industry is a huge industry with many companies. So, as Tesla becomes more vertically integrated they become a hybrid of sorts - an auto maker and an auto parts maker (where typically these two functions were separate companies and separate markets).
The result of Tesla’s aggressive vertical integration is mainly a reduction of costs. By producing parts in-house, Tesla is able to save on production, shipping, logistics, supply chain management, and other costs.
The Gigafactory will be a massive display of vertical integration - raw material enter at one end of the factory and finished battery packs leave at the other end. The cost savings will be tremendous.
Tesla’s aggressive approach to vertical integration (ie., in-house production of auto parts, Gigafactory, etc) will allow Tesla to release a truly compelling mass market electric vehicle at an affordable price.
And after Tesla releases their 3rd generation vehicle, Tesla’s aggressive vertical integration will allow them to continue to remove inefficiencies, improve their product and increase their competitive edge in the market.
Tesla’s vertical integration doesn’t stop at vehicle production. Rather, vertical integration continues on to Tesla owning their own service centers, owning their own retail stores, and also owning their own supercharger network. Vertical integration outside of vehicle production results not only in cost reduction but also in improved quality. For example, by owning their own service centers Tesla is able to quickly gather feedback on possible issues and implement a series of fixes to see what’s the best solution. And when they roll out their solution they’re able to do so economically because the service centers aren’t charging a large markup like independent dealers would. In the case of a recall, Tesla is able to keep costs down to a minimum and this is a huge advantage as well.
By owning their own retail stores, Tesla is vertically integrating the sales and eduction experience of the customer. Tesla is able to directly control how the potential customers is treated. With independent dealers, the temptation is to push hard for a sale to everyone who walks in the door. However, Tesla has a strong value to allow visitors to explore and learn about their vehicles without a heavy-handed sales approach. The result is that Tesla is seeding relationships for the long-term while independent dealers try to squeeze sales in for their end-of-month deadline. Over time Tesla’s approach will win over fans and will prove to be a unique and large distinguishing factor.
Lastly, by owning their own supercharger network Tesla is able to control the experience and deliver the fastest charging times in the industry. Tesla is able to continuously improve charging times by optimizing how their battery packs are charged by the superchargers. Early on Tesla realized that they needed to face range anxiety head on with a creative solution, rather than waiting for others to create a charging network. Tesla realized that charging speed was going to be crucial and they pushed for a solution that would allow them to push the limits of charging speed. This required them to own, maintain, and improve on their own charging network. Further, they made the bold decision to not charge for supercharging on each charge but rather include it in the upfront cost of the car. They were able to make that decision financially viable because they took responsibility to negotiate cheap (or no-cost) deals to lease land and they decided to make a bet that solar panels would offset charging costs in the long-run.
Overall, Tesla has been super aggressive in pursuing a vertical integration approach to vehicle production, battery production, in-house auto parts production, service centers, retail stores and superchargers. Not only will the vertical integration approach give Tesla significant cost savings but also it will win people over with the advantage of quality and customer experience.
Tesla is building a very compelling customer experience for the end-customer. Customers probably won’t be interested in the vertical integration behind-the-scenes, but that’s the beauty. To the customer it will all work like magic. Tesla’s retail stores will be cool and friendly, their cars will be awesome, their service centers convenient and not greedy, the supercharger network fast, etc. It’ll all be summed up when people say, “Tesla is awesome!”. Everything will just work and it will be compelling. The pieces are being put into place. The big launch is Gen3 (Tesla's 3rd generation vehicle). Watch out.
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chickensevil
Active Member
Yeah, the really great thing about targeting the high purchase buyer and going down from there is it is also giving Tesla time to make all the underlying magic be set up correctly without needing to worry about handling a large volume of cars just yet. Making their expansion of everything work and be funded just by the sales of low volume high GM products allows this rapid expansion while staying net neutral leaning positive and not burning themselves into a hole in the ground.
"Watch out" indeed, because by the time 2017 comes around there will likely be over 1000 charging stations, 500 stores and 500+ service centers ready to handle the load of demand year one and beyond. And us initial buyers are immensely helping with product visibility and awareness. I was down south away from the big city and metro area of DC at a Sonic and one of the young guys came over to me and asked if he could take a picture of my car because his friends wouldn't believe that this car even existed outside of CA. Many people I have talked to have pretty much already committed to the Model 3 thanks to my talking to them and I actually have people asking for how and when they will be able to make a reservation for the Model 3... and that thing is still at least 3 years away without even seeing what it looks like or knowing anything about the car! I find myself turning product envy very quickly into a tool to tell people about Model 3 and how they will be able to get something very soon. Most people I talk to I don't even talk about how to get my car, unless they ask because it is far easier to just assume that most people (even in my area and line of work) just can't afford it (or it would be such a huge stretch that they aren't willing to suck down the financials on the car) and just highlight how awesome this 35k car is going to be.
Anyway, tangent done. I just wanted to reflect that I don't think Tesla could have planned and executed on this whole thing in any better of a path than how they are doing it... everything just makes sense that I still can't believe no other company has tried this (although Audi is making talks of doing something similar...) And they don't have all that extra expensive overhead of building out a sell and service network since that is already funded through their normal car sales.
Thanks for the write-up as always Dave!
"Watch out" indeed, because by the time 2017 comes around there will likely be over 1000 charging stations, 500 stores and 500+ service centers ready to handle the load of demand year one and beyond. And us initial buyers are immensely helping with product visibility and awareness. I was down south away from the big city and metro area of DC at a Sonic and one of the young guys came over to me and asked if he could take a picture of my car because his friends wouldn't believe that this car even existed outside of CA. Many people I have talked to have pretty much already committed to the Model 3 thanks to my talking to them and I actually have people asking for how and when they will be able to make a reservation for the Model 3... and that thing is still at least 3 years away without even seeing what it looks like or knowing anything about the car! I find myself turning product envy very quickly into a tool to tell people about Model 3 and how they will be able to get something very soon. Most people I talk to I don't even talk about how to get my car, unless they ask because it is far easier to just assume that most people (even in my area and line of work) just can't afford it (or it would be such a huge stretch that they aren't willing to suck down the financials on the car) and just highlight how awesome this 35k car is going to be.
Anyway, tangent done. I just wanted to reflect that I don't think Tesla could have planned and executed on this whole thing in any better of a path than how they are doing it... everything just makes sense that I still can't believe no other company has tried this (although Audi is making talks of doing something similar...) And they don't have all that extra expensive overhead of building out a sell and service network since that is already funded through their normal car sales.
Thanks for the write-up as always Dave!
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