On April 3, 2019, Tesla released its Q1 2019 Production & Deliveries Report from Palo Alto, California.
In Q1 2019, Tesla produced 77,100 vehicles, including 62,950 Model 3s and 14,150 Model S/Xs. They delivered 63,000 vehicles, including 50,900 Model 3s and 12,100 Model S/Xs.
Tesla stated in the report that delivering 63,000 vehicles increased by 110% compared to the same quarter last year, but decreased by 31% sequentially. Everyone is wondering what happened to Tesla with the 31% drop.
Model 3
Let’s first talk about Model 3. In Q1 2019, Tesla started delivering Model 3s to two of its largest overseas markets, China and Europe. According to the report, due to the release of three years of order demand, the delivery volume in some overseas regions reached more than five times the historical peak.
However, due to issues like incorrect label printing on Chinese Model 3s and a shortage of parts for European Model 3s at customs, in the last ten days of Q1, delivery volumes in some regions, such as Norway, Beijing, and Shanghai, reached more than ten times the average delivery volume.
The U.S. market was even more challenging. Starting from early January, Tesla’s factory line switched to producing Chinese and European Model 3s. According to Elon’s email, factory line switched back to producing U.S. versions only in March. As a result, Tesla’s U.S. delivery team had less than a month of effective delivery time in Q1.
The last-minute delivery failure of some orders in Q1 was observed in China, the US, and Europe. Therefore, I believe that the delivery volume of Model 3 represents the low-level errors of Tesla’s manufacturing and quality inspection team, and the excessive pressure of US domestic time management, rather than the genuine quarterly market demand and team delivery capacity of Model 3.
In the end, a total of 50,900 units of Model 3 were delivered, which was slightly lower than the market’s expected 51,750.
Model S/X
The delivery of a total of 12,100 units of Model S/X is what truly raises doubts. I think there are several primary reasons for the significant decline in Model S/X sales.
- Seasonal Factors:
Q1 is traditionally a low season for sales, and this is true for any car manufacturer. Both traditional automakers such as Mercedes-Benz and emerging automakers such as NIO have experienced a QoQ decline in Q1, apart from Tesla.
- Subsidy Factors:
In Q3 2018, Tesla’s cumulative sales reached 200,000 units, according to US regulatory requirements. From Q1 2019 onwards, Tesla’s vehicle subsidies will be decreased from $7,500 to $3,750. In Q4 2018, Tesla repeatedly hinted to consumers that the US domestic subsidies would expire soon and thus brought forward some demand to Q4 2018, outweighing the market demand in Q1.
- Overseas Factors:
As mentioned earlier, Tesla launched Model 3 deliveries in both China and Europe in Q1, thereby to some extent affecting the delivery efficiency of Model S/X.
Therefore, the significant decline in Model S/X sales is due to the combination of these three factors? Things might not be as simple as that.
Regarding overseas factors, it is true that some vehicles are still on the way. According to Tesla’s announcement, the specific number of such vehicles was 10,600. It should be noted that this is not the historical peak time of Tesla’s delivery. By the end of Q3 2018, Tesla had 11,824 vehicles on the way. Considering that Tesla had not yet launched the Model 3 in China and Europe at that time, it can be said that the first overseas delivery of Model 3 did not have a substantive impact on Q1 sales volume.
Finally, China and Europe delivery teams are not to be blamed.
Secondly, regarding the subsidy factors, Tesla has officially explained that the sales decline due to subsidy expiration is true. However, this explanation is somewhat suspicious, combined with Tesla’s various abnormal strategies, which makes it more difficult to understand.
New Model S/X Coming?
Strategy One: In the forward guidance of Q4 2018 financial report, Tesla has specifically warned of the subsidy expiration problem.
Due to the reduction of federal subsidies for pure electric vehicles on January 1, 2019, the market demand for Model S/X may have been met earlier in 2018. The market share of Model S/X has reached the highest level in history, with Model S accounting for 38% of the same class of cars in the American market. As this high demand may represent an early overdraft, we expect that the number of Model S/X deliveries in Q1 2019 may be lower than that in Q1 2018.
Let’s take a look at this paragraph. It is undoubtedly that the reduction of subsidies will overdraft demand. However, the market law should be such that the impact of the reduction of subsidies on the market demand of the lowest-priced models is the greatest. The lower the price, the more sensitive the consumer group is to price fluctuations.
For Tesla, the Model 3, which should be most adversely affected by the reduction of subsidies, is the one whose demand has truly been overdrafted. However, Tesla did not mention anything about the Model 3, and has always emphasized the demand issue of Model S/X.
Strategy Two: On January 10, 2019, Elon Musk announced that the 75kWh version of Model S/X will be discontinued. Discontinuation further suppressed the market demand that had already been overdrafted for Model S/X.
Tesla has repeatedly made clear the sales target of 100,000 Model S/X globally per year. In the past 8 quarters, the quarterly sales volume of Model S/X has fluctuated around 25,000 units, and the global market demand has remained stable for a long time. However, the discontinuation of the 75kWh version has significantly narrowed the market demand.
At the same time, the sales target of 100,000 Model S/X in 2019 has not been adjusted.
Strategy Three: On March 1, 2019, Tesla’s largest overseas market, China, experienced an unprecedented price cut. The flagship Model S P100D was priced at only RMB 813,500, far below the price of the entry-level Model S 75D in August 2018, which was priced at RMB 887,600.It is well known that Tesla has always insisted on unified global pricing for Model S/X. When it first entered China in 2014, Tesla wrote an article titled “A Fair Price” to explain the logic behind unified pricing. However, the above-mentioned large-scale price reduction was specifically targeted at China.
In addition, in Tesla’s Q4 2018 outlook guidance, it was mentioned that the gross margin (25%) for Model S/X was expected to remain unchanged in 2019. However, such a significant price reduction has completely wiped out the previous gross margin.
The price reduction greatly stimulated demand. By the end of Q1 2019, Tesla’s two flagship models in China had been sold out, and only the 100kWh version was available for custom production.
“Sold out inventory and reduced inventory to the lowest level” is not uncommon in Tesla’s history. This depends on the company’s needs. When there is a need to boost sales data in the current quarter, the entire sales, delivery, and service team will make some adjustments to push the sales of inventory cars and boost sales.
The same was true in Q1. Tesla stated in the announcement that the inventory level for North American Model 3 was very low (the vehicles in China and Europe are still pending delivery), with a delivery cycle of about two weeks. By comparison, the industry average is 2-3 months.
So, what achievements have Model S/X made with such aggressive pricing adjustments to stimulate demand and exchange for sales volume? Only 12,100 units. This concept is that since the launch of Model X in September 2015, Tesla’s two high-end models have never had such a poor quarterly sales volume.
It is also worth noting that Elon announced on January 10 that the 75kWh version would cease production over that weekend, but in the price adjustment in the Chinese market on March 1, the adjusted price for Model S 75D was still listed, while Model X 75D had been removed from the shelves. This gives people the feeling that Tesla China is “selling what it has and clearing inventory with price reduction.”
Finally, in the case of such unexpected sales volume, Tesla reiterated the sales guidance of 360,000-400,000 vehicles for the whole year in the announcement. This means that the sales guidance for 100,000 Model S/Xs for the whole year remains unchanged, and the average quarterly sales volume of Model S/X in the next three quarters needs to reach 29,300 units. Such sales performance has never appeared in Tesla’s history.
Taking all the above analysis into consideration, the only reasonable explanation is that a new version or a completely new generation of Model S/X will be released in Q2.
You may wonder whether it is just that the demand for Model S/X in the market has dried up. In Tesla’s history, there have indeed been similar situations.In mid-February 2013, Model S orders were difficult to come by and the Tesla factory faced the risk of shutdown. For a startup company, weak demand and a large inventory backlog were fatal.
At this critical moment, Elon’s iconic all-or-nothing style kicked in. He summoned the design, engineering, finance, and recruitment teams and spoke to them.
If we don’t deliver these cars, we are fucked. So, I don’t care what job you were doing. Your new job is delivering cars.
All employees were forced to pick up the phone and make appointments one by one, promoting new orders. Meanwhile, negotiations between Elon and then Google CEO Larry Page on Google’s acquisition of Tesla were underway.
But in the last 15 days of Q1, more than 500 employees completed the conversion of 4,900 Model S orders, and Tesla turned the danger into safety.
At that time, Tesla faced a reputational avalanche caused by the first batch of Model S owners, pre-order customers refusing to place orders due to the release of new car paint and configurations, and the entire luxury EV market in the United States had yet to truly develop, which is entirely different from today.
Will Tesla have to make phone inquiries to all its staff again, or is the new Model S/X coming?
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This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.