Why Tesla’s “giant money ovens” in Berlin and Texas do not worry investors – yet

Why Tesla’s “giant money ovens” in Berlin and Texas do not worry investors – yet

As books begin to close in Tesla’s difficult second quarter, CEO Elon Musk dropped a neutron bomb on the market.

The two new giant factories in Germany and Texas are “money kiln giants”, he confessed in the third part of a marathon interview with members of the YouTube channels Tesla Owners Silicon Valley and The Kilowatts.

“It should sound like a giant roar, which is the sound of money burning,” he said, adding, “Berlin and Austin are losing billions of dollars right now.”

Coming from a company that has abused shareholders with gross automotive margins north of 30% for three consecutive quarters – among the absolute best in the industry – these words are sure to worry investors.

Add to Musk’s words the weeks of lost production in Shanghai due to COVID lockdowns, which pushed analysts to cut their forecast for the second quarter to 250,000 vehicles, and it seems that Tesla’s high profitability level is simply not sustainable.

Then place a heavy charge on Tesla’s Bitcoin impairment that could easily exceed $ 400 million and one can see why the bears are licking their lips. Even a bull like Morgan Stanley’s Adam Jonas has lowered his target.

Not as dramatic as they sound

But before Tesla bears get too excited, it’s worth noting that the problems in Berlin and Austin don’t have to be as dramatic as they sound — despite Musk’s colorful description (Tesla CEO is notoriously demanding of the performance of the facilities).

Adding a new unit will always have a profit margin, due to the mismatch between the speed at which early revenue enters and the huge initial investments recorded over time as fixed costs.

The industry rule of thumb is that a manufacturing plant tends to operate with decent profitability when it uses about 80% of its installed capacity in two shifts. Only when this number drops to 60% does a plant usually lose money.

However, when a factory is just starting production, there is always a list of teething problems that need to be solved.

The supply chain must work perfectly. Machinery must be calibrated to the micrometer to ensure that the exterior panels of the body fit perfectly without gaps. and workstations must meet time targets so as not to hold up the assembly line — to name just a few.

If these issues are not addressed from the beginning, errors accumulate and eventually cost the manufacturer much more to correct the line – when thousands rather than hundreds of cars are built per day.

Thus, while the capacity utilization of Berlin and Austin is both minimal, Musk has previously stated that it will take about 12 months to reach a scale where they will operate more efficiently.

In fact, rival Volkswagen is trying to mimic the expected productivity of Giga Berlin, which aims to produce a Model Y crossover every 10 hours. This is twice as much as most factories thanks to new production techniques such as full front and rear body casting.

In addition, Tesla excels in part due to the very low level of production complexity. Virtually all of its volume comes from the Model 3 and Model Y, which have minimal choice in decoration options, such as paint color, rims and interior.

Slow for now

For now, however, Berlin has only recently reached the 1,000-vehicle limit per week earlier this month, which translates to about 10% of its half-million installed capacity — even after almost three months of operation.

“There’s a ton of spending and almost no spending,” Musk said.

However, the key is what Musk later said: “It will all be fixed very quickly, but it requires a lot of attention.”

His team expects to continue to grow Shanghai, Berlin and Austin to achieve a 50% (or higher) increase in sales volume this year. With earnings per share of 2022 believed to be close to $ 12, the stock is trading at a timeframe of about 60x — a high for most companies but is justified by the bulls as few companies around can respond to this type of growth.

In fact, bears may want to remember that second-quarter figures will almost certainly mark the year-end low for the company. Only if these problems in Berlin and Austin continue deep into the fourth quarter should investors be concerned.

Indeed, shareholders seem to take Musk’s warning very carefully. The stock is expected to open 1% higher on Thursday.

This story was originally featured on Fortune.com

Leave a Reply

Your email address will not be published.