At the end of March, Tesla Motors [NASDAQ:TLSA] unveiled its next mass-produced car, Tesla Model 3 electric sedan. Probably the most highly-anticipated car in recent automotive history thanks to its pedigree, promised 215-mile range, Supercharger compatibility and $35,000 pre-incentive launch price, Tesla has already received more than 400,000 pre-reservation deposits for Model 3, many of which were made by fans on the morning of the official Model 3 unveiling, hours before Tesla showed the world what Model 3 would look like.
But while Tesla’s growing Model 3 reservation list seems to have broken all pre-sales records for both the electric car world and the wider automotive industry, it’s worth remembering that the final design and specifications for Model 3 haven’t yet been set in stone.
That fact has been no secret. Indeed, Tesla Motors CEO Elon Musk has reiterated that fact multiple times in the past two months, both during official Tesla events and press calls and via his Twitter account. Now it’s been reiterated yet again, this time in official quarterly documents filed yesterday by Tesla Motors with the U.S. Securities and Exchange Commission.
The document in question — one that Tesla is obligated to file just as any other publicly traded business in the U.S. — can be viewed over at Tesla’s investor relations web portal, and lays out Tesla’s current financial position as well as the various milestones both already achieved by the company to date and set as future targets. It sets out the good bits… and the potential bad bits.
As is often the case with official investor documentation, Tesla’s latest quarterly report to the U.S. SEC — officially known as Form 10-Q — makes for some heavy reading if you’re not an investor or Wall Street professional. However, it’s well worth a read for those with enough time and patience to digest, as it goes into a little more detail than the standard shareholder letter most enthusiasts read at the end of every quarter.
Page 32 — and a few pages following — will be of most interest to those concerning themselves with Model 3 news. That’s because as part of Item 1A — termed ‘Risk Factors’ — Tesla lays out some of the challenges which could pose a threat to Tesla’s future profitability and bottom line. A standard part of any form 10-Q report, this section is devoted to the issues that a business identifies it may face in the future that could have an adverse affect on the company’s future, and we should note at this point is essentially a series of worst case or ‘what if?’ scenarios designed to highlight to investors the age-old adage that past performance does not always indicate future potential.
With that in mind, Tesla’s latest 10-Q doesn’t seem quite as scary, and it’s also not possible to misinterpret the statements made therein. For example, although Tesla discusses the fact that it may be unable to meet its growing vehicle production and delivery plans and that its inexperience in mass-volume production could push back the Model 3 launch, or that it needs Model 3 to succeed in order to secure its long term future, there’s nothing unexpected listed among potential risks. At least, there isn’t that we can see.
But hidden within the risk factors, there are some important reiterations made by Tesla. Firstly, the car we saw back in March was a working alpha prototype. It wasn’t a fully-fledged pre-production model.
If you’ve been paying close attention to what Musk and Tesla has been saying about Model 3 thus far — especially given Musk’s insistence that the March Model 3 was just part one of a multi-stage reveal event we’ll get to see the rest of later this year — that fact won’t be a surprise. Indeed, given the rumors surrounding a potential head-up display for Model 3, we’d suggest that Tesla has far more to show us on Model 3 before we’re even close to knowing its full production specifications and feature set.
“We have no experience to date in manufacturing vehicles at the high volumes that we anticipate for Model 3, and to be successful, we will need to develop efficient, automated, low-cost manufacturing capabilities, processes and supply chains necessary to support such volumes,” form 10-Q states. “Final designs for the Model 3 are not yet complete. Additionally, plans for the build out of our production facilities for Model 3 at the Tesla Factory are still in process, and various aspects of the Model 3 component procurement and manufacturing plans have not yet been determined. We are currently evaluating, qualifying and selecting our suppliers for the planned production of the Model 3. We will also need to do extensive testing to ensure that the Model 3 is in compliance with our quality standards and applicable regulations prior to beginning mass production and delivery of the vehicles.”
Second, it notes that while it has managed to secure hundreds of thousands of pre-reservations for Model 3, those reservations are fully-refundable. If it fails to meet customers’ expectations or those deposits do not turn into confirmed orders, it acknowledges that it will need to ensure it can refund customers who decide not to push ahead with a Model 3 order. Tesla’s official 10-Q representation of this fact can’t be put any better.
“As Model 3 will have a significantly lower price point than our previous vehicles and we do not expect to achieve volume production and deliveries of Model 3 before late 2017, we will for a lengthy period of time be subject to a number of factors that may result in cancellations of these reservations, including potential changes in customer financial position and preferences, competitive developments, and any unanticipated deviations from the expected price point, vehicle features or performance characteristics,” it states. “There can be no assurance that any reservation will ultimately result in the sale of a vehicle, or that our number of reservations at any given time will accurately reflect the future demand for and sales of the Model 3.”
Or in other words, until Model 3 pre-reservations are converted to orders, Tesla hasn’t sold a single Model 3.
Of course, there’s nothing unusual about Tesla’s Form 10-Q if you’re the kind of person who regularly delves deep into a company’s future prospects for investment purposes. Look at any Form 10-Q from any major company from Apple to GM, and you’ll see similar statements acknowledging all perceived (and theoretically possible) risks that could affect a company.
Traditionally, a car like the Model 3 — an alpha prototype that some in the industry would call a ‘driveable concept car’ — wouldn’t be drawing so much attention at this point in its life. Moreover, Tesla is the only automaker we can think of that has managed to make quite so much money from selling pre-reservations of a car that has yet to be finalized in its design or specifications.
Traditionally, a car like the Model 3 would still be covered in a tarpaulin in a workshop somewhere in Detroit, or perhaps covered in camouflage wrap undergoing extreme weather testing somewhere in the road. Traditionally, a car like Model 3 would, at this point in its life, be kept away from the general public as much as possible.
And while Tesla’s latest Form 10-Q filing reminds us just how early on in its development cycle the Model 3 really is — and how far away it is from its promised production start date of late 2017 — it also reminds us of something else that we think many readers will find empowering.
Tesla isn’t like any automaker we’ve seen before. And in some ways, that’s a very good thing.
Some would say Tesla’s challenge now is bringing Model 3 to market on time and on budget. Others would say that Tesla’s challenge is ramping up its production volumes to the annual 500,000 unit production target it now wants to achieve by 2018.
Us? We think the biggest challenge is ensuring those ‘what if’ scenarios listed in its 10-Q never happen. And if Tesla can manage that, we think the rest will take care of itself.
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