Tesla's Doctored Numbers in IR Day Presentation

Desperation is high at Tesla with fudged numbers; Musk thinks 11x growth by 2030 is possible with only 2 extra models

Tesla’s first-ever IR Day disappointed investors as the carmaker didn’t unveil any new models, not even the upcoming refreshed Model 3, which is said to go into production in autumn. Instead, Tesla focused on future cost cuts from a new model platform that won’t be out for another 3 years.

The goals presented on how Tesla would cut production costs by 50% with this new platform were impressive (if achieved), but the problem at hand is that Tesla relies on two aging models for 95% of their global deliveries. And demand for these two models is waning, so much so that Tesla slashed prices by up to 20% globally in January and started another 6% round of cuts in Europe just yesterday.

Below are two key takeaways from Tesla’s IR Day, but first, it’s worth mentioning how Tesla’s CFO, Zach Kirkhorn, fudged some numbers in his presentation to make things look better than they actually are. This throws all of the other data presented at the event into question.

SCOOP: Tesla’s CFO Uses a “Bendy Ruler” for His Charts

The brunt of Tesla’s 3-hour presentation at IR Day was devoted to how much costs have come down up to now and how they’ll further be reduced in several years.

It is important to point out CFO Zach Kirkhorn’s brazen attempt to pump cost cutting achievements on the Model 3 during his presentation (slide 156 here).

Zach shows that the Model 3 has seen 30% cost reductions between 2018 and 2022 (see Figure-1). Given that the Model 3 has seen a 230% increase in sales during that time, a decline in unit costs is no surprise as depreciation expenses have declined and economies of scale have kicked in.

What’s astounding about the graph Zach presented is the fine print on the bottom, which says the 30% cost reduction “includes material costs, manufacturing costs, inbound and outbound logistics & warranty. Normalized for changes in market rates of lithium, nickel, steel & aluminum”.

Figure-1: Always Read the Fine Print on Tesla Graphs

Normalizing raw material costs over the past five years is an egregious adjustment to make for an EV maker, given how much commodities have spiked, especially lithium. Figure-2 shows how much the cost of these raw materials have risen per Model 3, based on their average spot prices in 2018 and 2022 and their weight per vehicle. It implies a 169% cost increase just from the raw materials mentioned as “normalized”, or a $4,682 higher cost per Model 3 now, versus 2018.

Figure-2: Key Commodity Costs for Tesla’s Model 3

The reduction of warranty costs per Model 3 is likely one of the largest factors behind “30% cost reductions”. Warranty provisions at Tesla have fallen by 54% from $2,315/unit on average in 2018 to $1,056/unit in 2022. Slashing warranty provisions is highly risky when you rank near the bottom of quality surveys and are seeing hundreds of Autopilot crashes per month. Ford’s rise in recalls recently have led to its warranty provisions to spike from $594/unit in 2018 to $4,295 in 2022—a huge blow to profits.

In the end, the “30% cost reductions” in the Model 3 between 2018 and 2022 include “normalizing” the $4,682 increase per vehicle in key input prices, while seeing warranty provisions provide another tailwind of $1,260/unit. Rather than any unique cost-cutting measures, the Model 3 production costs most likely have declined due to (1) reduced warranty costs, (2) lower depreciation per unit and (3) heavy “decontenting” by removing things like lumbar support, radar, and ultrasonic sensors.

Another slide that also requires reading the fine print is the one in Figure-3, which claims that Tesla has a “60% to 70% lower SG&A” per vehicle than the industry average (slide 161 here).

Figure-3: Tesla Adds Expenses to Rivals’ SG&A per Vehicle

It’s amazing to see Tesla, which can boast a market value higher than the world’s top-8 volume producers combined, make outlandish calculations in order to make itself look better than rivals. In the fine print of this graph, Tesla adds the average SG&A of 8 listed US car dealerships (why not include Chinese and European dealers as well?) to the SG&A/unit count at rival automakers.

This is utterly meaningless, as Tesla’s competitors recognize revenues upon shipments to dealerships. What happens thereafter, such as dealer mark-ups—which have been rampant due to the chip shortage—has zero impact on the carmakers’ income statements.

It would be great to see how Tesla calculated the SG&A for the German carmakers in this graph, as they have yet to publish their 2022 annual reports. Figure-4 shows Tesla’s SG&A per vehicle versus the industry average, without adding independent dealers’ SG&A to the numerator. Tesla is only 4.8% lower than the industry average, despite its rivals’ spending on advertising (Tesla barely does) and Tesla not spending enough on service centers or quality control (a key cause of rising consumer complaints).

Figure-4: Tesla’s SG&A per Unit is only 4.8% Lower than Rivals’

All based on 2022 results; China JV unit sales not included at rivals; German carmakers’ SG&A numbers are from 12 months through Q3 2022 as their annual reports have not yet been published

Capex Plan for 20 Million Units by 2030 Implies Financing

Tesla said its plans for capex over the next 7 years would range between $150 billion to $175 billion in order to reach its 2030 delivery target of 20 million vehicles (see Figure-3). Based on 2022 global vehicle demand of 80 million units, this implies a 25% share of the global auto market, whereas Toyota had a 13% share and VW had a 10% share last year.

What’s intriguing is that Tesla plans to fund this capex—which is on average $19.2 billion per year versus only $7.2 billion in 2022---from operating cash flow, which came to only $13.5 billion (ex-leases) in 2022. The operating cash flow this year and next should likely be much lower due to the 20%+ price cuts since January and 2024’s ramp up of both the Cybertruck and the refreshed Model 3.

Figure-5: Tesla’s $135 billion Capex Plans

And if Tesla’s new German factory—valued at $3.54 billion in the 2022 10-K—is a benchmark, it implies Tesla will build another 38 factories, for a total of 42 factories worldwide (Toyota has 33 manufacturing plants with output of 11 million vehicles per year). If Tesla had a large product pipeline like Toyota, building this many factories might make sense, but there were only 2 new models shown in Tesla’s line-up for 2030 (a compact car and what looks like a commercial van).

This implies that Tesla is confident that its existing models will see greater demand than 1.8 million units this year (Tesla’s official guidance) or that the 2 new models (one of which appears to be a commercial vehicle) will sell an incremental 18.2 million units. Both scenarios are unrealistic.

Musk Shuns New Model Variants—a Huge Red Flag for Growth

The biggest risk for Tesla over the next three years is its lack of new models despite a doubling of its production capacity in 2022 for what is the fastest aging model line-up in the industry.

Figure-4 shows that, aside from the Cybertruck—expected to go into mass production in 2024—Tesla has only two new models on their line-up schedule (note that the Roadster 2.0 sports car has been left off the list).

The Cybertruck will mostly sell in North America as pick-up trucks aren’t popular in China and Europe. This means that the 6 year-old Model 3 and 4 year-old Model Y will be the only models Tesla has to compete with in China and Europe, where competition is intense.

Figure-6: Tesla Shows only 2 New Models by 2030

The average age of a carmaker’s line-up is calculated by multiplying the number of unit sales of each model by its age (since launch or since last full model-change), and taking the average of the sum. Figure-5 shows how much older Tesla’s model line-up is versus the industry average. This may not have had as big of an impact on Tesla during the chip shortage (Tesla was nimbler in sourcing non-automotive chips, while rivals idled production), but supply is recovering as can be seen in stronger US vehicle sales in January and February.

Figure-7: Tesla’s Model Line-Up is Older than Rivals’

Source: Tesla & BofA data

Musk has focused more on building new factories than how new models or full makeovers of aging models could drive continued growth. On the Q4 2022 earnings call in January 2022, everyone was clamoring for details on new model launches. Musk said “no new models this year” and instead said Tesla would focus on new factories and its humanoid robot, which he claimed would be worth more than the car business one day. Tesla’s stock fell by 11% the next day.

After Tesla wouldn’t even show a computer-generated image of the highly anticipated “Model 2” (a $25,000 entry-level Tesla) at IR Day, the stock fell by 6% the following day. During the Q&A session of IR Day, Musk actually became visibly irritated by one analyst who asked when Tesla will show their next-generation model. Musk curtly declined to answer him and asked the audience if there were any other questions.

Elon Musk made it clear on IR Day that he actually believes that Tesla can grow its global sales from 1.8 million units this year to 20 million units in 2030 with only two new models. This is either destructive hubris or utter ignorance.

Musk spurned the idea of having too many model variants on IR Day:

“Conventional carmakers are running out of things to do and they’re just reshuffling the deck with all their hundreds of variants, which are mostly not good. They’re just variants for the sake of variants. There used to be hundreds of flip-phone (variants). Now how many do we have?”

From an automotive standpoint, this is pure ignorance. Porsche had 5 models in 2013 and now has 10. It’s sales during the 9 years through 2022 doubled. Musk actually believes that Tesla’s sales will grow 11x over the next 7 years by only adding 2 new models. This dogma of Musk is what could lead to Tesla’s demise if other risks like class-action lawsuits or Autopilot/FSD recalls don’t.

The lack of new models in the future is clearly evident from Tesla’s industry-low R&D as a percentage of sales, which came to 2.7% in Q4 2022 versus an industry average of 5%. To see how little Tesla is investing in its future pipeline, refer to Figure-8. To see how many new Model Y rivals are hitting the market between 2022 and 2025, refer to Figure-9, which shows the Bank of America’s estimates from their “Car Wars” report last year. According to that report, Ford and Toyota have the strongest new model momentum through 2025.  

Figure-8: Tesla has the Lowest R&D as a % of Sales

R&D/sales for the German carmakers is 12 months through Q3 2022 as full-year numbers have yet to be published

Figure-9: The Wave of Model Y Competition Ahead

Source: BofA; Note: columns are listed by model years, so 2023E are models launched CY22; 2024E are models expected to be launched in CY23 & so forth