TSLA - Tesla Master Plan 3: Substance And Noise

2023-03-07 12:22:28 ET

Summary

• The substance was there. The non-technical audience wasn’t ready/capable to hear it.
• Sandy Munro and Corey Steuben outlined massive technical change coming out of the site visit on Master Plan 3 day. Reference was made to these changes. Don’t bet against Tesla.
• Tesla is serious about scaling up to 20 million cars annually, for good reason. The Mexico Gigafactory will have scaled up manufacturing capacity.
• The car story, which was a core focus because that’s what the audience wanted, is repeated in the stationary battery storage area.
• My take on Master Plan 3 is that I’m confident that Tesla is still Tesla. I’m happy to stay invested.

I've recently published an article about "noise and reality" in relation to Tesla (TSLA). At the recent Master Plan 3 investor presentation it seemed to many there was lots of "noise," this time from the company. However, as is usual with Tesla, the investor day was very much about reality and that made some uncomfortable, perhaps because they didn't understand the significance of what they were being told. The Cybertruck will be released this year, manufacturing costs are under the microscope at many levels and the goal is scale up and reduce manufacturing costs by 50%, and a new Gigafactory is planned for Mexico. It seems from many knee-jerk responses that the reality wasn't what everyone was asking for. They just wanted to see a picture of a cheap car. Here I make some comments on what didn't and what did get discussed at the Master Plan 3 presentation. The share price fell 5.9% initially (below $190) as a result of the presentation, which made the stock more attractive but only for a short period as next day it was back above $200. Since then it has drifted below $195, so perhaps there might be a buy opportunity emerging? I'm happy to continue to ignore the noise and pay attention to reality, keeping the shares I purchased in early January at a significant discount to today's price.

The point is that there should be no surprises about where Elon Musk hopes to take Tesla. The company is on a mission to electrify everything on the basis that the world needs to exit fossil fuels urgently. So far its achievements are pretty impressive, with a major role in making electric wheeled transport a real thing. Tesla also is making progress on battery energy storage to address grid stability. These are tangible things and a key aspect of Tesla's progress is that it does so with products that are highly profitable. My take is that a lot of the dissatisfaction with the latest Tesla investor summary is from investors who want Tesla to be something else. They don't want the detail. Those of us who "get" what Tesla is doing are pretty happy with how things are working out and they expect that the share price will recover after the destabilisation that happened with Musk's Twitter adventure.

The Tesla Investor day has a 28-minute YouTube video that begins with the big picture context for Tesla's business, and, if you pay close attention, it gives clues to the revolutionary things happening within the company as it makes products and drives profitability. Key big picture issues made clear that a number of assumptions about the task of decarbonizing are different from reality. The point is that most of the energy harvested in fossil fuels gets wasted when it's deployed (cars use ~20% of the energy in the oil to drive the car, the rest being lost mostly as heat). This means that the amount of energy needing to be delivered from renewables is not the energy in the coal, oil and gas, but substantially less because use of electricity is really efficient. Another piece of misinformation is that the amount of mining needed will not be dramatically increased by exiting fossil fuels. Indeed mining will be dramatically reduced in a fossil-free world. Hence the way renewables get positioned viz a viz fossil fuels is not accurate.

Engineers commenting on the details in the presentation said it had a huge amount of information about what Tesla is doing and it's all about relentless pursuit of efficiency, cost reduction and scale up. This comes at every stage of the vehicle manufacturing process (and also in battery production for grid (stationary) energy storage and management). Cory Steuben summarized how Tesla plans to get 50% reduction in vehicle manufacturing costs. He said there are three elements : 1/3 is the design, 1/3 is battery and powertrain and the last 1/3 is manufacture at scale.

Musk's message was one of hope and optimism based on reality and not wishful thinking. The conclusion, from a group of "geeks" who follow Tesla closely, concerning the Master Plan 3 (see below) is that this presentation must have created headaches for Tesla's competitors. Tesla has passed needing to defend its position. The Master Plan 3 presentations make clear that Tesla is the acknowledged leader and presentations from more than a dozen senior Tesla technologists was a powerful demonstration of a cohesive team with a decade of execution under its belt.

The disappointments

i) No announcement about a cheap high volume vehicle?

Analysts complained that Tesla did not announce details of its planned cheap new Tesla, but two engineers who were in the invitation-only audience at the Master Plan 3 event saw plenty of evidence to support the technical stuff that a host of Tesla experts revealed. My biotech background informs me that if you don't have receptors for a signal, you don't receive it. See below for what Sandy Munro and Cory Steuben saw.

Sandy and Cory didn't stay for the Q&A because they could see that the questions were going to be about stuff that was of little relevance to what Tesla has embarked upon, basically because the analyst audience was not equipped to understand the significance of what they had been exposed to.

The reality is that Tesla is well aware of a number of very high quality Chinese companies that are well advanced with plans to produce outstanding low cost vehicles as a near term goal. Tesla showed that they have taken to heart what Toyota's founder said a long time ago about how a company should behave when they are in front: "Current success is a big reason to change." Change was all over the Master Plan 3 event and I'm convinced that Tesla has largely solved the problem of how to stay ahead by focusing on not one but a number of key engineering steps. It will be really interesting to see what comes out of the Mexico Gigafactory!

A Tesla-focused expert panel not only discussed how Tesla plans to get to $25K but who the market is (college kids, the elderly, everyone) and what it might look like. The point is that the market is global and different from what the other Tesla models serve. When full self-driving gets sorted out, it's likely this could change what the car looks like. Sandy Munro says there will be a huge number of these $25K cars sold (8-10 million, maybe even up to 75% of Tesla output?) with, by his estimate, a 20% gross margin. This looks like another very profitable product. Tesla's challenge will be how to make enough of these $25K cars. The market is global but less relevant to the US where people want big cars… except think of all those young adults deciding between a second hand "clunker" and a $25K Tesla. Figures thrown around in the panel indicated that the real overall cost of a $25K Tesla is an ICE (Internal Combustion Engine) vehicle costing $17K.

The above panel saw the first production in the Mexico factory but the market is global. It will be interesting to see where the first $25K cars get sold. Mexico will do 2-3 million vehicles, so they need a whole lot more gigafactories.

ii) No clear announcement about share buybacks

With the share price still at a substantial discount (down 27.7% year on year), now is as good a time as any for announcing a share buyback program, but why use cash that you have better uses for?

The reality overlooked

i) A lot of information about cutting costs and scaling up production

Sandy Munro and Cory Steuben have a YouTube video that is a " must see " because their conclusion was that there were a number of amazing new inventions that were hiding in plain sight (not seen or not understood by non-technical people). These together give hints about how Tesla is scaling up and dramatically reducing the cost of vehicle manufacture. The new Mexico Gigafactory is a key part of the new developments.

In summary these were some of the things that Corey and Sandy saw:

i) Tesla is doing everything, motors, batteries, they even make the seats! Outsourcing is dead, too costly. The amazing thing is that Tesla is seen as an IT business, yet it's rewriting the rules of manufacture.

ii) Tesla has a new 20%-30% more powerful, permanent magnet motor that has no rare earth elements and costs $1,000.

iii) Tesla has new battery manufacture based on automated dry coating at scale. This change is revolutionary. They do it all in house.

iv) Tesla will own 100% of controller manufacture in house in the $25K car; the number for the Model 3 was 50%, for the Cybertruck 85%.

v) Tesla is moving to 48V controllers for everything (the end of 12V which is central to the entire car industry); this is a really big deal.

vi) There's a 40% reduction of manufacturing footprint, and the manufacturing steps are massively simplified.

Sandy Munro said the new vehicle in the Mexico Gigafactory will be simpler and smaller and that factory might have a 2-3 million vehicle annual output.

One of the things about Musk is that he has a knack of identifying "must dos" long before many people are ready for them. His view about exit from fossil fuels means getting serious about the low hanging fruit (electrifying transport and power generation). Cars are a big part of the emissions story and he is clear that the ICE (Internal Combustion Engine) has to go. This goes most further than most investors perceive. If car emissions are to stop, this doesn't just mean replacing ICE with BEV in an evolutionary fashion. It means rapid exit (and consequently a lot of stranded assets in the form of ICE cars).

The point is that the increasing popularity of SUVs, which are larger than sedans with 20% more fuel consumption, means increasing emissions ! Total car sales fell 0.5% in 2022 to ~75 million units. Tesla's 20 million goal is about addressing the emissions problem head on.

Here's something from left field, Dave Lee suggests that the next vehicle to be released by Tesla will be a van and that this is close to being fully developed. He suggests that a van will be released as the next vehicle soon (maybe H2 2023) and well before an announcement concerning a cheap new car.

ii) New Gigafactory in Mexico

Dave Lee has an interesting take on the significance of the planned Gigafactory in Mexico. He argues that the new Gigafactory is not for Model 3 or Model Y builds nor for the US or European markets. He argues that the big overlook from Investor day is that the Mexico Gigafactory is to service big new markets for Tesla in Mexico, Central and South America that require a cheaper vehicle than the Model 3 and Y. So in his view this combines a new pricepoint vehicle with new geographical directions for Tesla. He expects the timing of the Mexican Gigafactory and new vehicle will most likely merge around 18-24 months away. This might be how Mexico started out, but reviewing the technical discussions, I'm unconvinced that the $25K vehicle is going to be limited to Mexico, Central and South America.

iii) More on stationary energy batteries

Tesla has a soft spot for the South Australian grid because this is where a number of Tesla innovations in the big battery space first saw the light of day. It started with the Tesla Hornsdale big battery (100MW/129MWh) in 2017, followed by the first acceptance of a big battery as a synthetic inertia service in 2022. South Australia was also where the first Tesla VPP (Virtual Power Plant) was put together by accessing Powerwall batteries in 5,000 homes. Renewable energy provided more than 70% of South Australia's power in 2022.

The new development which is yet to be widely acknowledged is an increasing number of renewables-based power projects that guarantee and agreed level of power 24/7/. These projects are enabled by the use of batteries to smooth out the intermittent power. This is occurring both in corporate projects as well as in overall grid planning.

An example of a corporate project involves provision of power that is matched for an agreed level of energy needs of a huge mine. The project involves French energy development company Neoen ( OTC:NOSPF ) which is working to supply an agreed 70 MW power 24/7 to the BHP ( BHP ) Olympic Dam project, which is one of the biggest global copper developments. Neoen has a track record with Tesla batteries as the owner of the first Tesla big battery in South Australia and also the Victorian (Tesla) big battery, at this time the largest in Australia at 300 MW/450 MWh.

The second project is more ambitious as it involves smoothing out power needs in major projects involving exit from fossil fuels with concomitant smooth introduction of renewable energy plus batteries. There are two such projects in Australia currently as the exit from coal power is planned to be partnered with two major offshore wind precincts (in Victoria and New South Wales ).

The above projects challenge the claims of the fossil fuel industry that renewables are not a solution to decarbonization. This is a really big deal and part of the reason that Musk claims that Tesla's battery business will eventually exceed its 4 wheeled transport (BEV) business. Currently Tesla's battery business is growing faster than its car business. The breakthroughs in Tesla battery manufacture for wheeled transport are relevant to the stationary battery area too.

Conclusion

So much about Tesla is based on "noise" rather than reality. Tesla dropped 5.9% to $190.63 in premarket trading in response to the Master Plan 3 investor presentation. It was undoubtedly too visionary , not focused enough for a sound bite audience, too long, too many presentations and too much/not enough detail. But of course if it had been kept short and involved a single concrete outcome, like announcing a Gigafactory in Mexico, no doubt there would have been furious complaints about lack of disclosure. My take is that there's such huge and passionate interest (both positive and negative) in the company that "Sturm and Drang" is the order of the day. However digging for what really happened led me to several YouTube videos which I've summarized here. I'm convinced that the analyst audience (with exceptions of course) largely missed the real significance of the Master Plan 3 presentations. It was a big eye opener for me to read what a group of technology geeks saw in Master Plan 3.

I remain confident about the overall Tesla business, noting that Tesla is more than a car company and I'm not moved to sell my recently acquired shares, even though the share price has almost doubled. I think that the company is worthy of interest to investors wishing to invest in the energy and transport revolution that is coming fast. But one does need to dig a bit into reality and not just hope to see a glossy picture of a new vehicle.

I'm not a financial advisor but I follow closely the enormous changes that are happening as the end of the fossil fuel era approaches. My take on Tesla is that it is both a key player in the transition and a company that has an uncanny knack of identifying profitable business opportunities that it executes on. I hope my perspective is of interest to you and your financial advisor.

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