Breakdown of some common Bear arguments

[Perfectlogic]

You mean the smartphones industry?

I mean the auto industry. Higher margins are much more attainable in the smartphone space because of the higher qualitative differentiation mainly in the software and the higher rate of innovation and the much larger brand significance.

 

[dha]

Did you honestly just claim that brand significance is larger in the smartphone industry than the auto industry?

Do you honestly not believe that Tesla is differentiating itself on software?

In case you missed it, they just wirelessly upgraded the software on 40,000 cars to add a suite of autonomous driving features. Pretty nifty stuff! You should check out some of the videos on YouTube. But I guess there's no differentiation here...all automakers are capable of this right now

 

[ChadFeldheimer]

Do you honestly not believe that Tesla is differentiating itself on software?

How much of the Model S's value is derived from software updates versus the electric powertrain?

The software updates are cool, no doubt. But to argue that it's the key differentiator is quite a stretch.

One upcoming headwind is that Tesla is quickly running out of $7500 federal tax credits. Each manufacturer is limited to 200k such credits lifetime. By the time the $35k+ Model 3 comes out, pretty much all of Tesla's $7500 credits will have been taken by $70k+ Model S, X, and roadster customers. This puts Tesla at a $7500 pricing disadvantage, everything else being equal. I would say the $7500 is not terribly significant in S, X, and roadster territory. But it represents a significant disadvantage for the Model 3.

 

[dha]

I fail to see how the loss of the Federal tax credit is a "disadvantage." The Model 3 will be competing from other entry-luxury offerings from BMW, MB, etc (think 3 series).

 

[sub]

How much of the Model S's value is derived from software updates versus the electric powertrain?

The software updates are cool, no doubt. But to argue that it's the key differentiator is quite a stretch.

One upcoming headwind is that Tesla is quickly running out of $7500 federal tax credits. Each manufacturer is limited to 200k such credits lifetime. By the time the $35k+ Model 3 comes out, pretty much all of Tesla's $7500 credits will have been taken by $70k+ Model S, X, and roadster customers. This puts Tesla at a $7500 pricing disadvantage, everything else being equal. I would say the $7500 is not terribly significant in S, X, and roadster territory. But it represents a significant disadvantage for the Model 3.

It also doesn't go directly to zero, it steps down.

 

[Perfectlogic]

Did you honestly just claim that brand significance is larger in the smartphone industry than the auto industry?

Do you honestly not believe that Tesla is differentiating itself on software?

In case you missed it, they just wirelessly upgraded the software on 40,000 cars to add a suite of autonomous driving features. Pretty nifty stuff! You should check out some of the videos on YouTube. But I guess there's no differentiation here...all automakers are capable of this right now

Brand value is much greater in the smartphone industry, the amount of apple fanboys is incredible. People are much more likely to change car brand vs smartphones. The price tags are also very different, people are more inclined to pick up another iphone because they are used to the OS and uses all the apple specific apps, even though they are probably overpaying by $100 compared to a different similar product, people are less inclined to overpay $10,000 when buying a new car.

Software is a much less defining part of a car than it is a smartphone so it doesn't matter nearly as much. It is pretty nifty that Tesla does over the air updates but this is not hard to do, if other manufacturers thinks its nifty too they can easily do the same.

 

[dakh]

Brand value is much greater in the smartphone industry, the amount of apple fanboys is incredible. People are much more likely to change car brand vs smartphones. The price tags are also very different, people are more inclined to pick up another iphone because they are used to the OS and uses all the apple specific apps, even though they are probably overpaying by $100 compared to a different similar product, people are less inclined to overpay $10,000 when buying a new car.

Software is a much less defining part of a car than it is a smartphone so it doesn't matter nearly as much. It is pretty nifty that Tesla does over the air updates but this is not hard to do, if other manufacturers thinks its nifty too they can easily do the same.

Brand value in smartphones, at this point, isn't that important. What's important is the ecosystem you will buy into. Sure some folks care if their phone is from Samsung or LG but not that much. They're essentially buying into Google's ecosystem. iPhone just represents a different business model where everything is vertically integrated and the experience is fully controlled by one company. So you're getting their device and their ecosystem.

It's not impossible for car industry to develop similarly. The sticky point is can Tesla become big enough, fast enough, to compete with the "PC" model. It looks to me that becoming "better enough" to justify higher margins they can do.

Ah well, what are we talking about. This all goes out the window once we stop using horses for transport.

 

[ChadFeldheimer]

It also doesn't go directly to zero, it steps down.

You are correct. It steps to $3750 for the 6 months following the quarter in which 200k units are hit. Then $1875 for another 6 months. Then $0.

Also, I overestimated US sales to date. About 50k units have been sold to date, so the full credit will likely be in effect for the first year of Model 3 production. Perhaps gone after the second.

- - - Updated - - -

I fail to see how the loss of the Federal tax credit is a "disadvantage." The Model 3 will be competing from other entry-luxury offerings from BMW, MB, etc (think 3 series).

It will certainly be competing with other entry-level luxury offerings in terms of price. Will it be able compete with other entry-level luxury offerings in terms of value - especially after the $7500 credit runs out?

 

[Perfectlogic]

Brand value in smartphones, at this point, isn't that important. What's important is the ecosystem you will buy into. Sure some folks care if their phone is from Samsung or LG but not that much. They're essentially buying into Google's ecosystem. iPhone just represents a different business model where everything is vertically integrated and the experience is fully controlled by one company. So you're getting their device and their ecosystem.

It's not impossible for car industry to develop similarly. The sticky point is can Tesla become big enough, fast enough, to compete with the "PC" model. It looks to me that becoming "better enough" to justify higher margins they can do.

Ah well, what are we talking about. This all goes out the window once we stop using horses for transport.

Aside from Apple in the smartphone space I agree that brands are not particularly important, but there are still a lot of people who just buys everything Apple just because Apple.

Like I already pointed out there are huge differences between the smartphone and the auto industry, expecting Tesla to become the Apple of cars (will also have to compete with Apple themselves) is just a huge leap of faith.

"The sticky point is can Tesla become big enough, fast enough, to compete with the "PC" model."

This is another thing, it would take Tesla a decade of very fast growth just to reach the size of BMW. Even though Tesla has a headstart in the BEV space, like you could say Apple had a headstart on a proper smartphone, they can't capitalize on it the same way and gain a large marketshare quickly.It's far from certain that Tesla will be able to continue growing quickly by 2020.

Edit; Forbes list over most valuable brands seem to back up my view The World's Most Valuable Brands List - Forbes with Apple being by far the most valuable brand in the world and a huge difference compared to it's biggest competitor Samsung. The difference in brand value is very low among the top car manufacturers.

 

[dha]

It will certainly be competing with other entry-level luxury offerings in terms of price. Will it be able compete with other entry-level luxury offerings in terms of value - especially after the $7500 credit runs out?

The Model S has no problem competing in terms of value within its segment (S Class, 7 Series, S8, Panamera)

Model X performance compares favorability to the Cayenne and other luxury SUV's. I expect it to steal market share from Cayenne (see how Panamera sales fell off a cliff after Model S went into production)

I expect 3 Series drivers to switch to Tesla in droves.

 

[dakh]

The market dynamic going forward can be quite dramatic. I wouldn't be surprised to see traditional car manufacturers getting squeezed by both pollution regulations and EV that at that point they can't make any money off of (see Elon's comment on solving hard things being rewarded -- LG will be making money on Volts, not GM). Tesla already stated they are thinking about their factories and processes from the perspective of being able to productize them. So at that point it'll be just a question of capital. If a new GF and Fremont clone can pop up and reach production stage in say 3 years in any suitable location/country, I don't think Tesla will have much trouble making that happen.

- - - Updated - - -

there are still a lot of people who just buys everything Apple just because Apple.

Actually to specifically address this, yes that's true and it's justified. Apple's stuff just works, and their reputation for delivering good end to end customer experience is second to ... maybe Tesla's?

 

[Perfectlogic]

The market dynamic going forward can be quite dramatic. I wouldn't be surprised to see traditional car manufacturers getting squeezed by both pollution regulations and EV that at that point they can't make any money off of (see Elon's comment on solving hard things being rewarded -- LG will be making money on Volts, not GM). Tesla already stated they are thinking about their factories and processes from the perspective of being able to productize them. So at that point it'll be just a question of capital. If a new GF and Fremont clone can pop up and reach production stage in say 3 years in any suitable location/country, I don't think Tesla will have much trouble making that happen.

- - - Updated - - -



Actually to specifically address this, yes that's true and it's justified. Apple's stuff just works, and their reputation for delivering good end to end customer experience is second to ... maybe Tesla's?

There it is. This was true in the very early innings of the industry, but judging by the industry coverage I have seen Apple hasn't had a reliability advantage in a while when compared to a similar product from a competitor. Since the early days many have just stuck with the Iphone because it's what they know and furthermore wrongly assumes that it has objective advantages compared to the competition.

 

[dakh]

There it is. This was true in the very early innings of the industry, but judging by the industry coverage I have seen Apple hasn't had a reliability advantage in a while when compared to a similar product from a competitor. Since the early days many have just stuck with the Iphone because it's what they know and furthermore wrongly assumes that it has objective advantages compared to the competition.

It still is the case, Apple still controls the whole vertical so unless they really mess up they'll be better than the Android based stuff that's all a hodge-podge of various hardware, OS customizations, versions, less stringent app requirements, etc. There's a strong parallel with Tesla that controls the whole experience from showrooms to superchargers, and is able to deliver superior value using strong mission statement and a matching internal culture. Microsoft tried to enter the smartphone market (multiple times!) but didn't have the right culture or mission. Maybe the next iteration is going to work out better but as it stands it's a good example of why even having all the resources necessary it's far from guaranteed that a runaway vertically integrated competitor, or an established ecosystem, can be successfully challenged.

 

[bh1783]

It still is the case, Apple still controls the whole vertical so unless they really mess up they'll be better than the Android based stuff that's all a hodge-podge of various hardware, OS customizations, versions, less stringent app requirements, etc. There's a strong parallel with Tesla that controls the whole experience from showrooms to superchargers, and is able to deliver superior value using strong mission statement and a matching internal culture. Microsoft tried to enter the smartphone market (multiple times!) but didn't have the right culture or mission. Maybe the next iteration is going to work out better but as it stands it's a good example of why even having all the resources necessary it's far from guaranteed that a runaway vertically integrated competitor, or an established ecosystem, can be successfully challenged.

Average iphone price = $687
Average android price = $254

http://www.forbes.com/sites/amitchowdhry/2015/02/03/average-iphone-price-increases-to-687-and-android-decreases-to-254-says-report/

 

[Perfectlogic]

It still is the case, Apple still controls the whole vertical so unless they really mess up they'll be better than the Android based stuff that's all a hodge-podge of various hardware, OS customizations, versions, less stringent app requirements, etc. There's a strong parallel with Tesla that controls the whole experience from showrooms to superchargers, and is able to deliver superior value using strong mission statement and a matching internal culture. Microsoft tried to enter the smartphone market (multiple times!) but didn't have the right culture or mission. Maybe the next iteration is going to work out better but as it stands it's a good example of why even having all the resources necessary it's far from guaranteed that a runaway vertically integrated competitor, or an established ecosystem, can be successfully challenged.

I don't want to go further into discussion about Apple vs competitors as I know I won't be able to convince you of anything. I'm just going by the consensus of industry commentators that I'm sure knows the details much better than both you and I.

 

[dakh]

I don't want to go further into discussion about Apple vs competitors as I know I won't be able to convince you of anything. I'm just going by the consensus of industry commentators that I'm sure knows the details much better than both you and I.

Fair enough, note though I'm not trying to make predictions, I'm playing the bull side advocate to point out that the growth story is not that out there as some of these "industry commentators" think. The industry is about to get disrupted by not one but two major shifts (EV and self-driving) and the environmental agenda is getting stronger by the day. Personally, I would pay more attention to what people who have a lot of experience with disruptive events get to say (tech is an obvious first choice) than the crusty auto industry dudes that only know how to deal with a world that is flat.

 

[Perfectlogic]

Fair enough, note though I'm not trying to make predictions, I'm playing the bull side advocate to point out that the growth story is not that out there as some of these "industry commentators" think. The industry is about to get disrupted by not one but two major shifts (EV and self-driving) and the environmental agenda is getting stronger by the day. Personally, I would pay more attention to what people who have a lot of experience with disruptive events get to say (tech is an obvious first choice) than the crusty auto industry dudes that only know how to deal with a world that is flat.

I was talking about the commentators on the smartphone space. No doubt the auto industry will see an acceleration of innovation going forward (computing power is pretty much revolutionizing every industry). I am just arguing that the competition is very cut throat in the auto space which is why margins are very slim across the board and this won't change. Tesla is already priced to outperform the industry by a very large margin. For TSLA to be a great investment they will have to both grow very fast and somehow achieve margins higher than any other competitor, that is a very tall order, especially when you consider their lukewarm execution lately.

 

[electracity]

Tesla can cut price on the M/X when the rebates run out and still have nice margins.

I didn't know the tax credit was by manufacturer in the U.S. That certainly is a disadvantage to Tesla as it will decrease just as the m3 sales really get going.

Perhaps the tax has the unintended effect on some manufacturers of delaying EV deployment until the competition in the space becomes significant. A better tax credit structure would have probably been all in one pot, first come, first served. The whole point is to encourage early adoption, as is true with net metering caps on home solar.

As far as brand, Tesla certainly has value. But I would buy EV from any major manufacturer based on price and features. Comparing Tesla to Apple ignores the reality of iphone making high margins on massive volume of a premium priced product. Tesla is the car company with the least capability to do volume. Suggesting Tesla will be Apple also probably requires explaining how Tesla will increase its capex many billion each year to grow into a company that can have large market share.

I would like to see the projected growth and balance sheet when Musk claimed Tesla could be worth 700 billion in ten years. What does each year leading up to ten years look like? I think he picked the astronomical valuation simply because he is negotiating for more capital.

 

[ChadFeldheimer]

The Model S has no problem competing in terms of value within its segment (S Class, 7 Series, S8, Panamera)

Model X performance compares favorability to the Cayenne and other luxury SUV's. I expect it to steal market share from Cayenne (see how Panamera sales fell off a cliff after Model S went into production)

I expect 3 Series drivers to switch to Tesla in droves.

The value proposition of a Model S against the S Class, 7 series, A8/S8, Panamera is, to me, its amazing drivetrain. I view the Model S as a $50,000 luxury car (comparable to E-class, 5 series, A6/S6, etc) with a $50,000 drivetrain upgrade. It hits a sweet spot in providing "good enough" luxury for most, but with an epic power unit.

Will this model work at the $35,000 (or more likely, $50,000 with options) level as well? Suppose they get the drivetrain price (not cost) down to $25,000 and integrate it with something akin to a Camry/Accord/Fusion. Will people pay $50,000 for this product in droves?

I don't know if this is what the Model 3 will be. Maybe Tesla will be able to make a comparable car to the 3-series/C-class/A4 while still having an epic drivetrain - all at the same price point. That would be amazing. Time will tell, and I can't wait to find out.

- - - Updated - - -

I didn't know the tax credit was by manufacturer in the U.S. That certainly is a disadvantage to Tesla as it will decrease just as the m3 sales really get going.

Perhaps the tax has the unintended effect on some manufacturers of delaying EV deployment until the competition in the space becomes significant. A better tax credit structure would have probably been all in one pot, first come, first served. The whole point is to encourage early adoption, as is true with net metering caps on home solar.

Just another unintended consequence / market distortion!

Perhaps the lawmakers were concerned about a small set of automakers taking all the credits early on - and thus not providing sufficient incentives to the others.

 

[AB4EJ]

No thread about Responding to the Bears would be complete without an exposition of the ongoing war of words with Bob Lutz. He claims Tesla is headed for bankruptcy - a topic he should know something about, because both car companies he worked for filed for bankruptcy at some point (GM & Chrysler). Here is an initial article about this, and a counterpoint:

Is Tesla Doomed?

Bob Lutz is Wrong about Tesla, Right about the Volt

Lutz's comments about Tesla can be boiled down to:

“Tesla’s showing all the signs of a company in trouble: bleeding cash, securitized assets, and mounting inventory. It’s the trifecta of doom for any automaker.”

He is assuming that Tesla is a typical, old-line automaker (which it is not). Consider this:

Bleeding cash - this is typical for a start-up (which Tesla still is), and this is especially true in the capital-intensive auto industry. Also, every new auto plant and model bleeds cash for years before it turns a profit. At Mercedes, we usually considered that a new plant with a new model would not turn a profit for 6 to 7 years after startup, due to the high cost of the equipment, the startup itself, and then high warranty costs for a while until all processes are operating cleanly (including all suppliers).

Securitized assets - same comment: Tesla is a startup, same root cause.

Mounting inventory - this sounds like fiction - I don't know where it comes from - Tesla builds to order. What inventory do they have? The only inventory I can imagine is a few cars people turned down after ordering them and CPO vehicles. If you analyze all the CPO vehicles, you get a list of about 100 cars. This is not much inventory, even if you assume that the CPO cars listed in Tesla's web site represent only 25% of the total (because the others are in prep).

Anyone who listens to Bob needs to consider the source; he worked for GM and Chrysler, which are much different companies than Tesla, and still operate on a 100-year-old business model. That's his background.