Analysts at Goldman Sachs hosted a field visit to Tesla Motors Inc (NASDAQ:TSLA)'s manufacturing facility in Fremont, California, that included a plant tour and a meeting with Elon Musk (CEO and Product Architect). The key takeaways of the tour and meeting are as follows:
Demand For Tesla Motors' Model S
Tesla Motors Inc (NASDAQ:TSLA) highlighted that demand for Model S remains strong. In North America current order rates are running at around 20K units on an annualized basis with the company seeing increased demand from geographies where they have already delivered multiple vehicles, implying a positive "word-of-mouth" impact. In Europe, the current order rate is about 200/week with the highest per-capita demand from Nordic countries. Tesla Motors Inc (NASDAQ:TSLA) sees a lot of opportunity in this region and sees upside to the current booking rate once they start marketing in Germany, which management expects will be one of their largest markets longer term. Not surprisingly in Asia, the company sees China as the key demand driver. The company expects that global demand for Model S could exceed their initial expectations of 40K-50K units annually.
Longer term, Tesla Motors Inc (NASDAQ:TSLA) envisions selling around 500K units through a combination of the Gen 3 sedan (around 200K units), Gen 3 SUV (about 150K units), Model S/X (roughly 90K units) and the next Gen Roadster. From a timing standpoint, the company intends to start deliveries of the Model X in 2015 and hopes to start the Gen 3 production by 2017.
Production at Tesla Motors Inc (TSLA)
Tesla Motors Inc (NASDAQ:TSLA) remains on track to achieve its target of 21K units this year. However, the company is targeting to exit the year at a 23K-25K annualized run rate, which should help them get to their gross margin target of 25% in Q4’2013. The company also highlighted a number of meaningful improvements in the manufacturing processes, which should drive margins higher, including: (1) a reduction in temp workers since the beginning of the year, (2) increased efficiencies and reduced scrappage both at supplier and in-house production sites, (3) a streamlining of operations leading to a further reduction in full time employee man-hours from 60-70hrs/week previously to 40-50 hrs/week currently, and (4) a significant improvement in logistics costs. The main goal of the production team currently is to get production levels of 20K on a single shift across most processes (currently body assembly and finished assembly are still running on a 2 shift basis) and then ramp up to 40K units in 2 shifts. For the ramp up beyond 40K, the Tesla Motors Inc (NASDAQ:TSLA) will require only $25-$50mn of additional capex to take the volumes to 50K units annually.
Tesla Motors Inc (NASDAQ:TSLA) is pleased with the battery performance and has not encountered any major issues thus far. In terms of battery costs, Tesla Motors Inc (NASDAQ:TSLA) envisions that the cost per KWhr will decline to less than $100 over the next 10 years which is a roughly 75% reduction from the current levels. They will continue to build charging infrastructure based on their customers’ geographic profile. Tesla Motors Inc (NASDAQ:TSLA) is expected to make another announcement regarding the charging infrastructure next week. Longer term, Tesla Motors Inc (NASDAQ:TSLA) envisions a technology that would reduce the time spent at a charging station to be less than the time it takes to fill up a gas tank of a standard internal combustion vehicle.
Some other points on Tesla
Service quality - Tesla Motors Inc (NASDAQ:TSLA) is still working on improving the quality of service to their customers. The company hopes to reach the desired levels by 3Q’2013, which should be another positive for demand.
GHG/CAFÉ credits - Tesla Motors Inc (NASDAQ:TSLA) believes that revenues from these credits are far more reliable and sustainable than from the sale of ZEV credits. TSLA has $17.1mn in revenues from these credits in Q1 and expects them to continue to remain a source of revenues in the long term.
R&D/SG&A costs - The company believes that given the product pipeline, R&D costs wilremain at elevated levels for the next few years. However, they will enjoy leverage benefits of increased volume, which should drive SG&A as a percentage of sales down materially.
Power-train business - Tesla Motors Inc (NASDAQ:TSLA) is not clear about the future trajectory of this business as volumes of their customers have not been meaningful thus far. However, the company remains ready to service their customers if demand picks up.
Yen impact - Tesla Motors Inc (NASDAQ:TSLA) sees minimal P&L impact from the current movements in the Japanese Yen.