Thread by @LeftHandPole

1\ The Polite Suggestion of Supply and Demand (if it’s not too much trouble): A thread on $TSLAQ ‘s Imminent Demand Cliff

As always, this is not advice. Conclusions drawn from the data shown are merely opinion. Short via put options.

2\ If you Google “US Passenger Car Demand Curve” I doubt you’ll find the neat data you’ve seen in economics textbooks. At least I haven’t. $TSLAQ Bears have been saying for a long time that the company will struggle with demand in 2019, but it’s hard been hard to quantify.

3\ I make an attempt to do so by applying heuristic analysis—namely, substituting a hard problem with a simpler one and accepting imprecision for the sake of expediency. We start with the data we do know: sales volume by model and entry pricing by model.

4\ Reference [1] lists 2017 and 2018 sales by model for US Passenger Cars. A Google search will return a model’s entry pricing. Here we make the assumption that all sales are attributed to the entry-level pricing (rather than unknown ASPs), which admittedly underestimates ASPs.

5\ Table 1 is a subset of this data, with 32 models representing about 75% of sales volumes in each year. There are 136 models total in this list.

6\ We can then lump sales into bins that are $10K wide. This partly alleviates deviations from true ASPs. The histograms below in Figures 1 and 2 show the results for 2017 and 2018, respectively. In 2017 there were 6.05M vehicles sold, and in 2018 there were 5.35M vehicles sold.

7\ As a general trend, passenger car sales were down by over 10% YoY. Consumer taste is shifting to SUVs/CUVs and macroeconomic factors are less favorable for new car buyers. It’s not a stretch to imagine sales falling again in 2019. Consider this a headwind.

8\ As it relates to $TSLAQ, it highlights some alarming realities. Below in Table 2 are unit counts for some relevant price ranges: $50-60K for current M3 pricing & $70k+ for MS pricing. Also included is $90k+ since the S100D will ostensibly be the cheapest variant at that price.

9\ First, $TSLAQ better have something to replace the mid-$70K base price vacated by the discontinuation of the S75D. Note how the $70K+ market is about 90K units. Tesla thrived here with 31% market share. See Figures 3 and 4 for market share breakdown at this price-point.

10\ But with a minimum price of $90K, its annual US Model S production is equivalent to the entire market for $90K+ cars. There is simply no way the market can absorb that many high-priced vehicles, least of all with Tesla capturing the majority market share.

11\ With the reduced FIT credit & increased base price, declining sales are almost guaranteed. $TSLAQ will also likely lose market share to competitors entering the luxury EV space. So what are the options? Some have speculated a larger battery replacing the 75D at the same price

12\ I find this to be the most likely scenario for the reasons stated above, although I suspect margins will suffer for it (they certainly won’t improve).

Let’s take a look at the M3 demand now and see what the chart portends.

13\ 2018 disrupted the normal demand for vehicles in the $50-60K range, mostly due to the M3 achieving production volumes & clearing 2 years’ worth of demand. Assuming steady-state demand is 150-175K units @ $55K, US deliveries of 35K M3’s/quarter would be 80% of total demand.

14\ This is not tenable, even with European & Chinese deliveries, each having its own bleak demand curve for such an expensive vehicle. The only recourse is to lower the sales price in an attempt to penetrate the mass market. Margins will suffer & some doubt it is even possible.

15\ Current reservations are meaningless. Most thought they were getting a $27.5K car. Look at the data for that range—the market can support 420K reservations at that price, or even into the $30-40K range. It is a fantasy that the US can support the demand at current prices.

16\ So it all comes down to what you believe. Will $TSLAQ find a way to sell the M3 for less than $40K? Barring that, can they find a worldwide addressable market at current prices and volumes? If you’re able to answer in the affirmative, you are far more sanguine than I.

17\ The smartest engineer I ever met once told me that you can bend the laws of physics, but you cannot break them. In 2018 we saw $TSLAQ bend the laws of supply and demand, but everything I have seen leads me to believe they will be unyielding and unmerciful in 2019.

18\
Reference [1]: goodcarbadcar.net/2019/01/decemb…

Reference [2]: The Google machine, “XXX base sales price”

19\ Appendix Eh:
For our neighbors to the north, here's the $TSLAQ Canadata. I'm afraid I'm too lazy to convert USD to CAD or look up prices in the native currency.

2017 Total: 624K (2400 MS)
2018 Total: 587K (2250 MS, 11000 M3)

2017/2018 Market for $70K+: ~7300

20\ Appendix B: European Demand.

This one was more difficult. I had to pull this data from several sources, some of which were conflicting, and make some judgment calls since Passenger cars were not broken out. Additionally, data is only through 11/30/2018.

$TSLAQ

21\ Appendix B Sources

Reference [3]: focus2move.com/europe-best-se…
Reference [4]: carsalesbase.com/european-car-s…
Reference [5]: cars-of-europe.com
Reference [6]: cartodrive.eu
Reference [7]: Various European Dealer sites, usually French or German