Consumer Discretionary / Industrials

Henry Kwon

Equity Bottom-Up

TSLA's 3Q earnings call Q&amp;A was not so much about the minutiae of financial numbers but about the production bottleneck on the Model 3.  Whether the fault lies with Panasonic or with Tesla, it was clear from management's discussion that Tesla management underestimated the complexity of mass production at product launch, given Tesla has not been a mass production Auto assembler up to this point.  It is this point, in my opinion, that makes me think that management, despite their brilliance, is nonetheless still green as far as running an auto company is concerned.<div class="content-highlight">Tesla Management's Story on the Model 3 from 3Q earnings callWhile production bottlenecks are apparent at the general assembly level, the primary bottleneck comes from the first 2 zones of a 4 zone battery module assembly process at the Gigafactory.  Management blamed subcontractor as "dropping the ball" and the company having to completely rewrite the software from scratch, mentioning that there is a substantially higher level of automation for the Model 3 battery module assembly than for S and X.  Media focus on lack of production line prototypingLeading up to earnings release, media pointed to Tesla skipping prototyping the Model 3 assembly, which is a 6-12 month norm in the automotive industry when introducing a new product in the interest of time.  Media articles pointed to Tesla's own in house validation system that was not working, leading to substantially less production volumes in 3Q than what had been planned.Impressions: Management is GreenIt is not just the cars that are green coming off of Tesla's assembly line, but the 3Q earnings call made management look green in execution.  It is not a question of whether the bottleneck comes from the Gigafactory or the general assembly line in Fremont (or both).  The point is that whatever internal prototyping or validation process that TESLA chose to follow, bottlenecks should not have been there at product launch.  The fact that Mr. Musk mused on whether TESLA will choose to go the high capex, high growth or the low capex, low growth route in 2018 makes it seem that cash flow has now become a greater concern than before at the company, and the success of the Model 3 production ramp in 2018 will likely determine TESLA's long term direction.</div>

TSLA's 3Q earnings call Q&amp;A was not so much about the minutiae of financial numbers but about the production bottleneck on the Model 3.  Whether the fault lies with Panasonic or with Tesla, it was clear from management's discussion that Tesla management underestimated the complexity of mass production at product launch, given Tesla has not been a mass production Auto assembler up to this point.  It is this point, in my opinion, that makes me think that management, despite their brilliance, is nonetheless still green as far as running an auto company is concerned.Tesla Management's Story on the Model 3 from 3Q earnings callWhile production bottlenecks are apparent at the general assembly level, the primary bottleneck comes from the first 2 zones of a 4 zone battery module assembly process at the Gigafactory.  Management blamed subcontractor as "dropping the ball" and the company having to completely rewrite the software from scratch, mentioning that there is a substantially higher level of automation for the Model 3 battery module assembly than for S and X.  Media focus on lack of production line prototypingLeading up to earnings release, media pointed to Tesla skipping prototyping the Model 3 assembly, which is a 6-12 month norm in the automotive industry when introducing a new product in the interest of time.  Media articles pointed to Tesla's own in house validation system that was not working, leading to substantially less production volumes in 3Q than what had been planned.Impressions: Management is GreenIt is not just the cars that are green coming off of Tesla's assembly line, but the 3Q earnings call made management look green in execution.  It is not a question of whether the bottleneck comes from the Gigafactory or the general assembly line in Fremont (or both).  The point is that whatever internal prototyping or validation process that TESLA chose to follow, bottlenecks should not have been there at product launch.  The fact that Mr. Musk mused on whether TESLA will choose to go the high capex, high growth or the low capex, low growth route in 2018 makes it seem that cash flow has now become a greater concern than before at the company, and the success of the Model 3 production ramp in 2018 will likely determine TESLA's long term direction.

TESLA's 3Q Earnings Call Impressions: Management Is Green