Indeed this is what happens when you are production constrained and can sell higher ASP models internationally.
Current estimated delivery time for a Model 3 in the US is “5 - 9 weeks”. Basically they reserve about 1/3rd of their production for US sales which is all the units in the last month of the quarter, in order to minimize the number of units in transit at the end of the quarter, because they do not recognize a sale until the car is delivered.
Do other automakers do that? Seems like you risk alienating a big chunk of your local market (wait goes from 1 week to 9 weeks based on the week in the quarter cycle you are in), to see a temp bump in earning reports?
They want to sell internationally so that the market is there and distribution is ready globally as their production capacity increases.
They also need to make enough money to be cash flow positive while they continue down the manufacturing learning curve.
Those are two good reasons why you can’t just keep all your supply in the US even if the demand could cover your production.
GF3 is online in Q4 and Tesla will no longer ship any US units into China as of a couple weeks ago. All that Fremont production that had been shipping to China will revert to EU/US going forward.
Tesla is trying to time production so that cars produced in one quarter are mostly sold in that quarter. So in the first month, oversea production gets prioritized. Musk has announced that they try to reduce the resulting effects, but so far they are still very dominant.
There's a tax credit in the Netherlands that phases out at the end of the year. Prioritizing delivery to the Netherlands will be greatly appreciated by those who can take advantage.
Tesla isn't hiding the fact, that production for oversea customers is done in the first month of a quarter, so the cars can be delivered in that quarter. Easy to imagine what the reporting would be, if they had large amounts of "unsold" cars in transit at the and of a quarter.
15,000 units in delivery in Q1 was part of the reason why Q1 was so bad for them.
They’ve said they would like to smooth out the delivery timing, and eliminate the dedicated delivery phase but I don’t see how that happens until you have more geographically distributed production (EU GF4 in 2021).
However, "production constrained" is not really accurate, as it implies they could sell more units for the same price if they could make them.
Tesla has bumped down the price many times, suggesting they're selling their whole inventory for the highest price they think they can get (which is still a great position to be in if that price is high enough).
The demand for the higher trims in the US has hit steady state, and it's less than they can make.
If they stuck with the launch prices and their revenue was 10% higher with no corresponding increase to COGS, they'd be laughing all the way to the bank. Every single quarter would be profitable and absurdly cash flow positive.
I believe Tesla when they say they are production constrained. I don't know why people commonly accuse them of lying with no proof. Changing prices is not proof.
It's true they have changed prices quite a bit. They have had many conflicting adjustments to work around. The phase out of the tax credits (at the beginning of the 2019 and in the middle of the year), the promise to deliver a $35,000 sedan. Also Models S/X demand has fluctuated due to osbourne effect, and model 3 cannibalization.
Furthermore, they have raised prices. The model 3 starts at $39,490. Up from a low of $35,000.
The tax credit phase out is a big part of the pricing analysis. It’s absolutely expected for ASP to go down dollar for dollar due to reduction of the tax credit, because the economic effect is that the credit is paid to Tesla.
Sticking with launch prices would have effectively meant rising the price $7,500 over the last year. That would imply that they massively underpriced their initial sales.
Aside from the credit effect, margins are also lower on the lower trims, and lower on Model 3 than S/X, so total blended automotive margin dropped from 25.8 to 18.9% Q3 2018 through Q2 2019 but has recovered to 22.8% in Q3 2019.
This is mostly due to production efficiency, but also worth nothing that they did recently raise the US price by $1,000.
I agree with everything you've written, but none of it addresses my point.
It is not accurate to say Tesla is production constrained, because if they were, they'd be focusing on higher end trims and charging more, and going from one spectacular quarter to another.
It’s a simple fact that they delivered more units than they produced in Q3 2019.
They can be production constrained across their full range of Model 3 ASPs, while it’s also true that they aren’t selling 100% fully loaded M3 Performance with FSDs each quarter.
The thing you’re missing is the SAM is bigger when you have lower ASP options. So you grow your SAM and then become production constrained. Yes, you could shrink the SAM to no longer be production constrained, but since it’s profitable to sell at all price levels that would be a big mistake.
Raising the price by $1,000 and a 10 week lead time is strong evidence of being production limited.
You are assuming any of the Elon companies are driven only by profit. I would hazard a guess that real M3 goal is to make a car that costs $35k while being profitable. Lowering price serves not only as incentive to sell more cars, but also internal incentive to figure out a cheaper way to make them.
Maximizing shareholder wealth and short term profits are very different things. De bears could flood the market with diamonds and make a lot of money in the short term, but it would be a terrible idea in the long term.
Yes I know. My point is that for profit, publicly owned companies are ran for profit where their ultimate goal is to maximize shareholder wealth. The parent seemed to imply that it may not be the case for Elon Musk's companies.
Margins are highest in the US market (especially considering ZEV credits). Model mix may differ, but they’re shipping their lowest end models to Europe and China; those would be more profitable to sell in the US.
Please don’t copy/paste answers. Tesla does not publish an ASP breakdown by market AFAIK. But what we do know is Tesla always sells highest margin SKUs first into new markets and then eventually sells down-market over time.
In their Q3 report they said “Despite reductions in ASP of Model 3 as global mix stabilizes, our gross margins have strengthened.”
In other words, their global deliveries benefit from higher ASP while they were initially delivering only the fully loaded models.
We can also look at base price of the SR Model 3 and see a basic case for higher ASP internationally, but it’s a very tricky analysis to try to back out taxes and transportation costs.
Current estimated delivery time for a Model 3 in the US is “5 - 9 weeks”. Basically they reserve about 1/3rd of their production for US sales which is all the units in the last month of the quarter, in order to minimize the number of units in transit at the end of the quarter, because they do not recognize a sale until the car is delivered.