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Sunday, July 1, 2018

Tesla's Race With The US Tax Credit


Tesla has now opened the Model 3 design studio up to nearly everyone in North America with a reservation for the car. This has opened the floodgates for orders. Tesla is promising 2 to 4 months delivery window for the performance version of the car, 3 to 5 months for the dual motor, and 6 to 9 months for the first production versions.

With this glut of orders can they meet the promised delivery windows, and how will this impact the US federal EV tax incentive?

The Race Is On

Phase one of the US tax incentive applies to the first 200,000 plug-in cars from a manufacturer. After hitting the 200,000th delivery, the incentive changes. It goes from being a set number of cars, to a set time period. This is when the countdown starts. Now that July is here, Tesla has just entered this next countdown phase and is in a race against the clock. In this phase, two quarters after the 200k deliver, the incentive is cut in half, from $7500 to $3750. Six months later, it is again cut in half to 1/4 of the original amount.

Tesla is likely to cross the 200k US delivery mark in early July. That's the start of the 3rd quarter, which means that the clock starts in July and the incentive will be in full force in Q3 and Q4, through the end of 2018. Tesla has to deliver as many cars as they can during this race against the clock.

Many of the Model 3 reservation holders have been on the list for more than 2 years and they have an expectation of qualifying for the full incentive amount.

Will all of the people on the list be able to take delivery this year?

To answer this we'll have to estimate two things: One, how many people have configured and ordered a Model 3; and two, how many cars can Tesla manufacture and deliver before the tax credit is hobbled.

How Many Model 3 Orders? 

About 450,000 people reserved a Model 3. About half of these were in the US. This puts the potential US pool at ~225k.

The more affordable standard range version of the car is currently not available to order. This puts people in a bit of a dilemma. If you reserved a Model 3 in 2016 and wanted the $35,000 version of the car, you have a choice. Wait for the more affordable car and miss out on the incentive or order the long range car with premium interior. Only Tesla knows for sure what the reservation holders have done once they were given the option to order. For this exercise, I want to look at the more difficult case and assume that most people on the list have ordered from the currently available long-range options. I'm calling this worst case from the manufacturing perspective because of the volume of cars that would be required this year; whereas, from a profitability perspective, this is good news for Tesla, but we'll save that aspect for another day. Given this assumption, we'll estimate that 2/3rds of the available pool order a car and expect it to be delivered this year. That is 150k cars. Tesla has already delivered about 30k Model 3 in the US. This means that they'll need to produce and deliver ~120k Model 3 during the remainder of the year.

How Many Can They Deliver?

On July 1st, according to a Reuters article, Tesla has hit the promised 5,000 Model 3 produced per week milestone and they have plans to increase to 6,000 per week. Since we don't know when Tesla will hit 6,000 per week, we'll assume a worst case of 5,000 cars per week for the remainder of this year.

There are 26 weeks left until the incentive is halved. While production is ramping, it is common to take 1 week per quarter for equipment upgrades and maintenance. This gives Tesla 24 weeks of Model 3 production at a rate of 5k per week. This results in a surprisingly familiar number, 120k.

Summary 

Our (likely high) estimate of the number of people in the US that will order a Model 3 for delivery this year is 120k. Similarly, our (likely low) estimate of the number of cars that Tesla can produce during the remainder of this year is 120k.

These are just back of the napkin numbers, but they show that it's possible for Tesla to deliver cars to everyone in the US that's been on the waiting list if they order their car before the end of July.

If Tesla ramps up to 6,000 cars or more per week, this will allow them to fulfill orders in Canada or deliver cars to people who order later in the year.

Disclosure: I am a Tesla shareholder
http://ts.la/patrick7819