
Tesla Burns Through Record Cash to Bring the Model 3 to Market - bipr0
https://www.bloomberg.com/news/articles/2017-08-02/tesla-burns-through-record-cash-as-musk-brings-model-3-to-market
======
princekolt
> The company burned through $1.16 billion in cash in the second quarter by
> spending on capacity for its cheapest model yet and boosting battery output.

This makes me very happy. It's very rare for a large company to literally risk
their existence to bring a new product to market. Most prefer to just sit in
the pile of cash and profit from margins...

~~~
jotjotzzz
I don't think it's much of a risk. They created a product that is way
differentiated from every other car out there and people want to buy it. It's
like seeing the iPhone for the first time, and all the other flip-phones out
there is simply just not enough anymore. They will succeed. If I'm in the
market for a new car, I would totally line up for this one.

~~~
dkrich
This is where I disagree with most people who are bullish on Tesla. I think
there's a huge risk for Tesla that most people don't factor in- that it's very
possible that most car buyers _simply don 't want one_. The interesting thing
about that is that most people seem to assume that making them at enormous
scale and meeting the overwhelming demand is the only risk. What a century of
observing the auto industry has taught us is that car buyers in huge
percentages have fierce brand-loyalty and that anytime a new model is brought
to market there's a huge uphill battle to create demand.

That's not to say that lots of people won't want a Tesla, clearly there's
evidence that there's a market. But it remains to be seen whether that's a
niche market or the better part of the auto market. To justify the current
valuation, you'd have to believe its the latter.

Comparisons to the iPhone seem oversimplified. The iPhone on pretty much every
metric was demonstrably better than every other phone on the market, and by a
huge margin.

Tesla is better on some metrics- doesn't rely on fossil fuels, has some cool
technology, and is a novelty because there aren't that many of them on the
road.

But on most other metrics, there are lots and lots of better options. Some
have more power, some are much cheaper, some have more storage space, and some
simply have better brand awareness and loyalty.

Again, not suggesting that they aren't developing a great product. But there
are huge risks to the survival of this company beyond cash burn that I don't
think people are taking into account.

~~~
mikeash
They have half a million reservations for the Model 3, despite putting
essentially no effort into signing people up, and spending the last year or so
actively _anti_ -selling it. They're currently adding 1,800 reservations a
day, despite the fact that someone reserving today probably won't receive
their car for 18 months or more.

I agree with your point as applied to a hypothetical generic car company
launching an unknown model, but in this particular instance there's good
reason to believe that Tesla will be able to sell every car they're capable of
building.

You compare it to the iPhone saying that the iPhone was better on pretty much
every metric. That wasn't the case at all. The original iPhone lacked 3G
connectivity, support for more than one wireless carrier, support for CDMA
networks, GPS, third-party apps, hardware keyboard, user-swappable battery,
decent camera, FM radio tuner, multitasking, and removable storage.

The iPhone eventually gained many of these features, and most of the others
turned out to be less important than people thought they were. But that was
very much not obvious at the time.

~~~
dkrich
_one wireless carrier, support for CDMA networks, GPS, third-party apps,
hardware keyboard, user-swappable battery, decent camera, FM radio tuner,
multitasking, and removable storage_

I don't know about you, but my clamshell Samsung flip phone didn't support any
of that except a user-swappable batter and removable storage, both of which I
would argue are not net positives, but negatives as they increase the form
factor of the phone.

Also, what of the 65k or so of cancelled reservations for the Model 3?

~~~
mikeash
Why are you comparing to your clamshell Samsung flip phone specifically? You
said "The iPhone on pretty much every metric was demonstrably better than
every other phone on the market" so I'm comparing to every other phone on the
market, not one specific low-end model.

Every feature I mentioned there existed in contemporary smartphones. I even
looked them up! The iPhone got a _ton_ of criticism at the time for missing
things like this.

65k cancelled reservations out of over half a million total, with net
reservations increasing rapidly... what of them?

~~~
dkrich
Right, on pretty much every metric. So do you think that the Motorola Razr was
a better product than the iPhone because you could buy an extra battery and
swap it out? I remember well when the first iPhone came out and people waited
in line for hours to be able to buy one. It was just so different than any
other phone available at the time. I don't really feel that applies to Tesla,
and I think most consumers (not people who read and report for Bloomberg News,
but the silent majority of people who are actually buying cars and keeping
these companies in business) would agree. Yeah, it's cool and it's battery-
powered. I get it. But pretty much every new car now is loaded with technology
and can reliably get you from point A to point B. So the main differentiator
is that it runs on a battery. Is that enough to get people to move en masse to
Tesla?

 _65k cancelled reservations out of over half a million total, with net
reservations increasing rapidly... what of them?_

I think that's the question I posed to you. Doesn't seem like there's a good
answer for it.

~~~
mikeash
Why do you keep comparing to middling dumbphones? Compare the iPhone to
contemporary high-end smartphones and you'll see that the iPhone was behind on
pretty much every metric. The big exceptions were:

1\. UI.

2\. Web browser.

3\. AT&T unlimited data plan.

It turned out that those three metrics were _really important_ , and that
being ahead on a few _really important_ metrics is better than being ahead on
a bunch of less important ones, but it's just not the case that the iPhone was
ahead "on pretty much every metric."

> I think that's the question I posed to you.

Can you be more specific? I don't know what you're actually asking. Are you
asking why anyone would cancel? That's because sometimes people change their
minds, especially when it involves giving a $1,000 interest-free loan. Are you
asking if the cancellations are a counterpoint to the idea that the Model 3
will sell well? The fact that the cancellations are a small proportion of the
overall reservations, and net reservations are still rapidly increasing,
suggests the answer is "no." Or something else?

~~~
dkrich
Because the middling dumbphones are what comprised the majority of the market,
the market that Apple completely took over. How many people were using smart
phones as a % of overall market in 2007? The only real players that I can
remember were Palm and Blackberry, and both those were terribly executed in
comparison to the iPhone.

And yeah, more than 10% of reservations were cancelled but that couldn't
possibly be because people don't actually want the car at a large scale, could
it? I tend to pay attention to what people do and not what they say, and the
fact is that consumers purchase ICB autos at orders of magnitude higher
numbers than EV. When push came to shove, 65k people who actually made the
conscious decision to spend $1k to reserve a car suddenly decided they no
longer wanted it. But your only reason is that "sometimes people change their
minds." To me that's a nice way of saying a lot of people don't want to spend
$35k on this car.

~~~
mikeash
If you intended to say that the iPhone was far superior to the typical
dumbphone of the day, then I can accept that. I was responding to what you
wrote, though.

If 65,000 cancelled reservations translates to "a lot of people don't want to
spend $35k on this car," then the nearly half a million remaining reservations
must translate to "a _shitload_ of people want to spend $35k on this car." No?

~~~
dkrich
Not really. First of all, they are reservations, not purchases. And the
outstanding orders represent everyone who follows this company the most
closely and who are the most enthusiastic about these cars. Once that demand
is exhausted, can we be certain that the demand will continue?

I'm not saying that it's certain that it won't, but it does remain to be seen.
In the automotive industry, a half a million cars just isn't a lot. Certainly
not enough to proclaim that "a shitload of people" will want one for many
years to come. Ford sells 750k F150s each year. That's just one model. And
those aren't reservations, they're sales.

~~~
mikeash
I think you need to make up your mind here. If 65k cancelled reservations is a
lot, then so is nearly half a million remaining reservations. If half a
million remaining reservations aren't a lot, then 65k cancelled ones aren't
relevant.

------
simonsarris
> “He’s going to need capital,” said Ross Gerber, chief executive officer of
> Gerber Kawasaki Wealth & Investment Management, which holds Tesla shares.
> “That’s the one part of the financials that are a little bit troubling. To
> underestimate the cash burn over the next six months will be a mistake.”

It's not that troubling. Even massive companies (AMZN in 2014) need to raise
big capital. When you have something you want to do, you get the money and
spend it.[1]

This seems to be constantly framed as negative ("they aren't making any
money!"), but that's the correct growth strategy for what Musk wants to do.
Nobody adds tons of debt just to _not use it._ Cribbing from my comment
yesterday:

I've owned TSLA a long time and I hope they don't start making money, and
continue the Amazon model and actually build something with years of minimal
or no profits, re-investing vigorously. Amazon had almost 20 years in business
without "making any money" except a few quarters where they accidentally eked
out some non-trivial profit.

But without their spending, they wouldn't have become Amazon. Without Tesla's
spending, they won't be a _future_ company, they'll just be a tiny car
company.

For some historical comparison: Amazon added $6bn in debt as recently as 2014.
Even very large and very successful companies take on debt to fuel growth far
beyond "bootstrap" numbers. Both companies leverage as much investment money
as they can to build and expand as fast as they can. If you look at Amazon's
raises in the late 1990's you'll find something more comparable to Tesla today
relative to revenue. In 1999 Amazon raised $1.25 billion, and their revenue
for the year was $1.64 billion. So they raised proportionally way more money
than Tesla has so far this year. And spent it all!

full comment here:
[https://news.ycombinator.com/item?id=14915317](https://news.ycombinator.com/item?id=14915317)

[1] The flipside of this is that it's an indictment of companies that hoard
huge amounts of cash, like Apple. That they can't find a way spend it building
future stuff is a signal that they are out of big ideas, and (in the case of
Apple) have been for some time.

Musk and Bezos, on the other hand, have clear ideas of what to spend money on
to build something.

~~~
flexie
Whether Tesla survives or not, these billions are some of the best spent money
on the planet in the last 50 years.

What are the accumulated losses so far? $5-10B? Even if Tesla were to spend
another $50B and go bankrupt, I would still maintain it's great.

What Tesla has achieved is so important in the long run for the environment,
for ending the strategic dependence on oil dictatorships, and for renewing the
belief in technology. And the cars are really nice too.

Speculating, as some do, that the EV revolution would end with a Tesla
bankruptcy is silly, not just because Google and Apple (and probably other
companies) would be more than happy to take over before or after a bankruptcy,
but also because consumers and the the auto industry have now been shown where
to go. None of us can unlearn what Tesla has taught us. There is no way back
now. Tesla has already won.

~~~
j7ake
So what has been the net reduction of CO2 usage because of tesla to date?

~~~
reallydontask
I'm going to venture that it's not even a rounding error.

In fact, in places it will likely have __increased __the CO2 emissions, again
rounding error figures, due to the electricity generation mix and associated
losses with generating that electricity (30-60% efficiency), plus transport
losses (0.5 - 10%), plus charging loses, plus the efficiency of the motor
itself.

~~~
amaranth
The internal combustion engine in a car is around 20% efficiency while a coal
power plant is around 55%. Gasoline powered drivetrains are also fairly
inefficient leading to around 16% "tank to wheel" efficiency. Electric motors
are about 90% efficient. An electric car is making more efficient use of the
energy. It's also centralizing the source of the pollution rather than having
to try to deal with it in every car on the road.

~~~
reallydontask
A coal power plant can reach up to ~60% if coupled with steam turbines,
otherwise it's ~30%.

Petrol cars can do a lot better than 20%

There is a study, link below, showing what the subsidy should be for electric
cars and in a lot of places in the US the subsidy should be negative.

Granted things might've changed since then, but probably not to overturn the
gist of it, which is the point I'm making. In places, EV cars are not the
solution.

Quite happy to be proven wrong, at the of the day I've only got a passing
interest on the topic so I'm not exactly 100% up to speed with any new
studies, etc ...

[https://www.citylab.com/environment/2015/06/where-
electric-v...](https://www.citylab.com/environment/2015/06/where-electric-
vehicles-actually-cause-more-pollution-than-gas-cars/397136/)

~~~
heygrady
City Lab has debunked that notion twice [1, 2].

"[I]t’s important to realize that the situation reflected in this data
represents the past, not the present. States across the country are rapidly
cleaning up their grids, thanks to cap-and-trade programs, investments in
renewable energy, tightened air quality standards, and more coal plants put to
sleep." [2]

"Here’s the cool thing about electric vehicles in the U.S. right now: In many
areas, the longer you own one, the cleaner it gets." [1]

[1] [https://www.citylab.com/life/2017/06/electric-vehicles-
are-c...](https://www.citylab.com/life/2017/06/electric-vehicles-are-cleaning-
up/528822/)

[2] [https://www.citylab.com/transportation/2016/12/the-
surprisin...](https://www.citylab.com/transportation/2016/12/the-surprisingly-
unequal-benefits-of-electric-vehicles-mapped/509390/)

------
bmh_ca
People often think of the electronic-nature of their cars as Tesla's key
advantage.

Other elements factor into share/debt cost analysis:

1\. Culture — They appear to still have a startup "let's solve the problem"
mentality

2\. Distribution — There are no networks of dealerships taking a cut

3\. Marketing — They don't need to pay for it at all right now

4\. Legacy — There are no pension funds and other obligations on them

5\. Environmental icon — There is a lot of political support for them

Tesla is still high risk, but they have a big potential upside.

Contrast with e.g. GM:

1\. Old-school Culture of "if you build it, they will come"

2\. Mandatory dealerships

3\. Big marketing costs

4\. Pensions are underfunded and they have a huge inventory buildup (and
defaulting subprime leases are mounting)

6\. They have a lot of political support, but it's not for environmental
reasons

That's pretty cursory, but illustrates a few factors besides just the product.

Tesla's burn rate is a marginal-risk long factor, if/when they get past their
manufacturing bottlenecks.

[edit]: Newlines.

~~~
adventured
> Pensions are underfunded

That contrast issue is very weak. GM's pension was underfunded by $7.2 billion
at the end of 2016. They had $24.7 billion in cash at that point. It's around
7% underfunded. It's a non-issue, particularly since GM has continued to
successfully work at reducing it and has been solidly profitable since the
great recession.

~~~
bmh_ca
You may be right, and GM's revenue remains massive so it's a fraction of
revenue.

The only area of concern is the growth presumptions in the pension fund. They
are often around 7.5%, whereas real growth was 0.5%, putting a potential
damper on the profit line (but I do not know that relative magnitude of that).

------
bmcusick
BREAKING: Building a car factory and battery supply chain requires a lot of up
front capital.

------
melling
“You’re holding it wrong”

Wonder if Tesla will have that moment. Recalling the Model 3 is probably their
greatest fear. No product is perfect and they’re about to ship tens of
thousands a month within a very short period of time

~~~
annerajb
Which is one of the reasons why I agree with their strategy to sell to its own
employees and investors first. Their feedback loop is so quick and they have a
financial and personal interest in the product being perfect.

If they see any issue they will already have a lot of knowledge to debug
it/know immediately who to contact to get it debug and have a financial and
personal interest for it to be done quickly and correctly.

Which is also part of the reason why the ramp up is really slow at the
beginning.

------
Animats
Cash flow is not a big problem as long as the product is selling well at a
profit. The question with the Model 3 was whether Tesla could make money at
$35K per unit. In practice, the cars are going out the door above $50K with
options, and it's much easier to be profitable at that price. (This is an old
Detroit strategy, called "more car per car". Profit comes from the add-ons.)

------
adamvalve
Fast Good Cheap. Choose two.

------
awkwarddaturtle
Jesus. Look at the top comment and the replies in this thread. I find it hard
to believe it is real HN commenters and not a TSLA PR campaign here.

"What are the accumulated losses so far? $5-10B? Even if Tesla were to spend
another $50B and go bankrupt, I would still maintain it's great."

Seriously? This is being voted up?

Also, the top commenter here "simonsarris" is a top commenter in the other
TSLA thread.

[https://news.ycombinator.com/item?id=14914310](https://news.ycombinator.com/item?id=14914310)

It's like a TSLA/Elon cult meeting in this thread.

~~~
tpolischuk
The comment you are quoting is a snippet out of context. I'm not sure why
you're so upset.

'Whether Tesla survives or not, these billions are some of the best spent
money on the planet in the last 50 years. What are the accumulated losses so
far? $5-10B? Even if Tesla were to spend another $50B and go bankrupt, I would
still maintain it's great. What Tesla has achieved is so important in the long
run for the environment, for ending the strategic dependence on oil
dictatorships, and for renewing the belief in technology. And the cars are
really nice too. Speculating, as some do, that the EV revolution would end
with a Tesla bankruptcy is silly, not just because Google and Apple (and
probably other companies) would be more than happy to take over before or
after a bankruptcy, but also because consumers and the the auto industry have
now been shown where to go. None of us can unlearn what Tesla has taught us.
There is no way back now. Tesla has already won.'

~~~
whatok
Putting Tesla anywhere near a list of factors for "ending strategic dependence
on oil dictatorships" is pure hyperbole at best.

~~~
tpolischuk
Maybe, but what about what Musk has done as a whole? If he can drive home-
battery adoption, solar, and electric vehicles, and create markets where
companies like GM, Ford, and the Euro manufacturers have to chase the new
market, that has to make a huge impact. Obviously it's not going to completely
remove our dependence (mainly plastics and shipping) but it will absolutely
hit the bottom line of the most oppressive regimes funded by oil (Saudi
Arabia). Also this will help us you know stop destroying entire mountain
ranges and the largest CO2 sinks in North America for tar sands mining (Boreal
Forest).

~~~
orclev
On the plastics front, just look at the news from earlier this week of Lego
working to replace all of the plastics used in their toys with bio-plastics
(or other non-oil based polymers). A few more efforts like that and plastics
won't be anywhere near the driver of oil consumption they are now. That
doesn't address shipping (which is horrendously polluting), but if that's the
last one standing that's still a massive improvement.

~~~
dotancohen
Commercial aviation as well will never be electric. It would require two
orders of magnitude energy to weight density, and quadruple flight times.

~~~
tpolischuk
People also thought we would never get man into space :)

~~~
dotancohen
There is a big difference between simply thinking that something is too hard
and having numbers to back it up.

------
aiyodev
Elon Musk's empire is a house of cards built on self promotion and empty
promises. It's only a matter of time before the whole thing comes crashing
down.

~~~
elsonrodriguez
I'll take the house of cards jab, but the "empty promises" thing means I'll
have to see a shrink about all the imaginary Teslas I see every day, and the
SpaceX landings that are obviously a hoax.

------
lafar6502
The harder they will hit the wall

~~~
frenchie4111
Would much prefer to run into a wall driving a Model 3 than a Prius

~~~
dingo_bat
Is Prius a bad car safety-wise? I thought Toyota cars are very reliable and
well-engineered.

~~~
bryanlarsen
I think it's less that the Prius is bad but that the parent is assuming that
the Model 3 will be great.

Which is a good assumption based on Elon's statements and the track record of
the S, but the Model 3 is an amazingly light car for something with more
steel, a glass roof and so many pounds in batteries, so it may not be the
class leader that the S is.

