Tesla Q3: Elon Musk; exploring options on battery plant with partners

Highlights from the Tesla Motors, Inc. “ Third Quarter 2013 Shareholder Letter
* Record 5,500 Model S deliveries
* Gross margin increased to 21% (non-GAAP) excluding ZEV credit’s
* Net income (non-GAAP-Generally Accepted Accounting Principles) of $16 million
* Major WW expansion of service centers, stores and Superchargers
* Cash balance nonetheless increased by $49 million to $796 million
* Ramping production to meet growing demand in 2014

2013_tesla_q3_new Tesla Q3: Elon Musk; exploring options on battery plant with partners Automobiles and Energy Automotive executives Battery Electric Vehicle (BEV) BRIC (Brazil, Russia, India, China) Europe Luxury vehicles Tesla Motors Travel & Leisure Zero Emission Vehicles (ZEV)

courtesy Tesla

Dear Shareholders:

Over 19,000 Model S owners are driving in excess of 700,000 miles per day in over 20 countries and have now driven their cars more than 100 million miles.

Model S Production, Deliveries and Gross Margin

We are now producing 550 cars per week with improved process controls which consistently result in high quality cars. Consequently, we finished the quarter with a record of slightly over 5,500 deliveries, including over 1,000 deliveries to European customers.

We recently expanded our 2011 supplier agreement with Panasonic. Under this new agreement, Panasonic will increase it’s production capacity of automotive-grade lithium-ion battery cells to supply Tesla with a minimum of 1.8 billion cells over four years, more than three times our previous agreement. This number should be viewed as more of a floor than a ceiling.

We made solid improvements in vehicle gross margin as our non-GAAP automotive gross margin (excluding zero emission vehicle or ZEV credit’s) rose to 21% from 14% last quarter. Strong average pricing, driven by more highly optioned European deliveries and a mix shift towards 85 kWh battery pack cars, also contributed to the gross margin improvement.

Growing Global Demand and Customer Infrastructure
We began to take reservations in China during the quarter and now anticipate our first Model S deliveries there in Q1 2014.Since the end of Q2, our combined global retail and service locations have expanded by almost 20% to a total of over 100 locations today.

2013_tesla_q3_london Tesla Q3: Elon Musk; exploring options on battery plant with partners Automobiles and Energy Automotive executives Battery Electric Vehicle (BEV) BRIC (Brazil, Russia, India, China) Europe Luxury vehicles Tesla Motors Travel & Leisure Zero Emission Vehicles (ZEV)

courtesy Tesla

During the quarter, we made dramatic improvements in our service operations. Our investments in staffing, training and locations are beginning to bear fruit. Tesla is pioneering a new approach to vehicle servicing that we believe will revolutionize the customer experience. An announcement about this will be forthcoming shortly.

Model S – Safety First
Results of independent testing done by NHTSA confirmed our engineering goals regarding Model S safety. Model S was awarded a 5-star safety rating as part of the New Car Assessment Program (NCAP), not just overall, but in every subcategory. While approximately 1% of all vehicles tested also achieve 5 stars in every category, NHTSA also provides a more precise statistical number to manufacturers regarding the probability of injury of any given car. By this metric, Model S has the lowest probability of injury of any car ever tested.

Supercharger Network Enhances Value
Supercharging has become a significant part of the Tesla value proposition. Customers cite the ability to supercharge as one of the top 5 reasons they choose a Tesla. As a result, 90% of our customers opt for supercharging capability when they order their Model S. So far, nearly a third of all Model S cars have been supercharged at least once, powering these cars over 4 million supercharged miles and saving nearly 200,000 gallons of fuel.

2013_tesla_q3_supercharger Tesla Q3: Elon Musk; exploring options on battery plant with partners Automobiles and Energy Automotive executives Battery Electric Vehicle (BEV) BRIC (Brazil, Russia, India, China) Europe Luxury vehicles Tesla Motors Travel & Leisure Zero Emission Vehicles (ZEV)

courtesy Tesla

We continue to rapidly expand the Supercharger network with 31 stations open in North America today. Our network now enables free long distance driving along the entire west coast of North America, from Vancouver to San Diego. By year-end, we expect to have a network that will allow cross country driving in the United States and a higher concentration of stations along the east coast.
We are also expanding our Supercharging network into Scandinavia and Europe. In August, Tesla opened a network of six Supercharger stations in Norway, allowing Model S owners to travel conveniently and for free across Norways most vital and commonly used roads and highways.

After Norway, we are putting specific emphasis on Germany where we plan to upgrade to even faster 135 kW Superchargers. By March 2014, we plan that more than half of Germany should be covered, with complete coverage by mid-2014. By the end of 2014, we expect that the entire population of the Netherlands, Switzerland, Belgium, Austria, Denmark and Luxembourg and about 90 percent of the population in England, Wales and Sweden will live within 320 km of a Supercharger station.

2013_tesla_q3_europe Tesla Q3: Elon Musk; exploring options on battery plant with partners Automobiles and Energy Automotive executives Battery Electric Vehicle (BEV) BRIC (Brazil, Russia, India, China) Europe Luxury vehicles Tesla Motors Travel & Leisure Zero Emission Vehicles (ZEV)

courtesy Tesla

Q4 Outlook
We are continuing to expand production and plan to deliver slightly under 6,000 Model S vehicles in Q4, which increases our total expected deliveries to 21,500 vehicles worldwide for 2013. ASPs are expected to be relatively flat sequentially as we continue to see a rich mix of options on incoming orders.

Notes from the webcast:
Constraints:
Elon Musk: We are production constrained and will be till next year. The Main constraint is the cell supply construction constraint.
pricing to parody of conventional competition:

Elon Musk:
We want to price the Gen 3 around $35,000. That would be about the same as buying a gasoline vehicle around $28,000. I see leasing the path to go for electric cars. Our expansion will be in model X and in Europe. The design/styling will be done in 2014 for the next generation.
We will need more cell capacity.

Current level of demand:
Elon Musk: Q3 versus Q2 – U.S. continued to increase in demand. – We’ve had to stop U.S. sales to meet Europe demands. We could continue to We are in Europe where we were in the U.S. in Jan/Feb of this year. It doesn’t make sense to create demand if we can’t meet it. It’s 6-7 weeks from the time ordered to the time received in the United States. In Europe the wait time is about 3-4 months. In China, if you order a car right now you might get it mid-to-late Q2 of next year. The longer you wait (for China) the longer you will have to wait.

production ramp-up:
Elon Musk: next few quarters; deliveries to Europe/Asia increase we have more vehicles in transit. 60% of sales going outside of U.S.
These cars are going to customers, they are not speculative.

Beijing auto constraints to PHEV/ZEV:
Would Tesla qualify?
Elon Musk:I believe we would qualify. We have a Beijing store and will start delivering cars in the first quarter. We have passed all homologations from China. We’re not really even trying, it’s word of mouth (in China) but it seems like things are going to pretty well there.

Have you considered building your own battery cell plant:

Elon Musk: We’re not ready to make a big announcement but we’re exploring our options from soups to nuts, with partners. That would probably be in North America. Cell production is the biggest constraint, the critical path item. Raw materials are not an issue.

Model X timing:
Elon Musk: aiming for a few unit’s at the end of next year,high volume production Q2 2015.

Daimler:
Mercedes B-Class EV, the most affordable electric car on the market

battery capacity for Gen 3 timeframe:
Elon Musk: Not the right time to talk about the giga factory but we acknowledge that one needs to be built. We would want a green factory, no emissions coming out of the plant, lots of recycling. What’s the right way to do Gen 1 factory? We want to be thoughtful about it.

There is still a huge untapped demand for electric vehicles in North America

Free cash flow:
We will give 2014 guidance in the next call. It depends on how much we accelerate programs.
Elon Musk: If we generate cash flow while we have a growth rate that’s a good thing.

Watch for the Musk family to do a cross-country trip during spring break, late March.

About the Author:

Lou Ann Hammond is the CEO of Carlist and Driving the Nation. She is the co-host of Real Wheels Washington Post carchat every Friday morning and is the Automotive, energy correspondent for The John Batchelor Show and a Contributor to Automotive Electronics magazine headquartered in Korea. Hammond is a member of the North American Car and Truck of the Year (NACTOY), Women's World Car of the Year (WWCOTY), and the Concept Car of the Year.