An examination of Tesla's Q3 2020 production numbers, spin doctors, and screaming buffoons
On October 2nd, 2020, Jim Collins, a so-called "analyst" and contributor to Forbes magazine, somehow managed to slip an article entitled "Analyzing Tesla’s Disappointing 3Q20 Unit Sales Data" past the Forbes editorial desk.
Now, we're all pretty used to the fact that Tesla short-sellers, competitors, and oil and gas enthusiasts engage in a relentless campaign of misinformation against Tesla. This barrage of deceptive spin and out-and-out lies is affectionately known in the industry as "FUD" (fear, uncertainty, and doubt).
While it's one thing to see FUD flowing over social media from strange, anonymous Twitter accounts, it's quite another to see a mainstream media outlet, such as Forbes, willing to print material that can easily be debunked within just a few minutes of fact checking.
It's a higher level still when the author of such an article essentially asserts a new point of spin and misinformation within virtually every second paragraph of the article. That kind of pattern shows not only a wanton disregard for journalistic integrity, but also reveals an underlying objective. What exactly that underlying objective is will have to remain the subject of speculation for the time being, but the truth - as they say - tends to come out sooner or later.
Beyond all that, Collins repeats a strange mantra throughout his article wherein he derides Tesla supporters as "screaming buffoons." Not kidding. He refers to the "screaming buffoons" who "pump Tesla stock" a total of five times throughout his article.
Enough said. Let's start fact-checking Mr. Collin's numerous... ahem, claims.
In his article, entitled "Analyzing Tesla's Disappointing 3Q20 Sales Data," Collins chooses to present the following as his very first sentence: "First and foremost, it was a miss."
Collins then embarks upon what can only be described as a weird, disjointed ramble wherein he attempts to suggest that, apparently, some people on the Internet were suggesting numbers that were marginally greater than Tesla's actual production numbers.
No. I'm not kidding. Collins literally writes, "The Internet was full yesterday of buffoons screaming about a deliveries number 'in the 140s'"
Meanwhile, back in the "real" world, we see that the actual survey of analysts by FactSet expected Tesla deliveries for Q3 of 2020 to be around 137,000. The estimates of these various analysts ranged from 123,000 to 147,000 deliveries for the third quarter of 2020.
Tesla actually delivered 139,300 vehicles in the third quarter of 2020.
139,300 is a bigger number than 137,000.
Collins says this was a miss.
That's what this so-called analyst wrote... in his very first sentence.
By the way, I suppose it's worth pointing out that none of the estimated or projected numbers were ever presented by Tesla. This was simply a case of a manufacturer's actual numbers beating a FactSet consensus.
Anyway... let's move on.
Collins then goes on to present all kinds of numbers about Tesla's stated production capacity. Attempting, presumably, to put some sort of negative spin on the fact that Tesla's production numbers actually grew by 43% year-over-year in the third quarter of 2020... during a pandemic.
Collins decides to suggest that this was still shy of what Tesla could have produced. He states, "Tesla sold 43% more units but added 57% more capacity. The corporate utilization rate continues to decline."
Gee whiz. Tesla is expanding both production and production capacity... at the same time.
Goodness! What a failure.
And while I probably don't need to explain the basics of manufacturing to most of my readers, perhaps someone close to Jim Collins might explain what "capacity" actually means.
That term refers to what a production line has the physical ability to produce if all aspects of its supply chain feed the line at 100% over a sustained period of time.
Back in the "real" world, people understand that capacity is a theoretical benchmark: essentially, it's what could be produced by a production line operating at full speed over a period of time. Such a feat is, of course, impossible in the real world, but it serves nonetheless as a benchmark against which to judge actual production. This is kind of like comparing a runner's average long-distance speed to that runner's best time for the 100 metre dash. The issue, however, is that a three-month period of time is much more like a marathon than a sprint.
You're probably wondering, well... what would be considered a realistic sustained production rate?
In fact, the Federal Reserve publishes data on capacity utilization in the U.S. economy every year, and it has done so since the 1960s. In the time period between 1972 and 2019, the US economy averaged a capacity utilization rate of 80.1%. All-time highs of capacity utilization of around 90% were achieved in the late 1960s and the early 1970s.
"No system can operate at full capacity for a prolonged period." At the factory level, a typical manufacturing plant runs at about 60% OEE (Overall Equipment Effectiveness). 85% OEE is considered best in class. Ergo, any sustained production capacity - at the national or plant level - in the neighbourhood of 90% is considered miraculous.
I know, I know... this is all boring businessy stuff, but it's important.
You see, according to Jim Collins' own numbers, Tesla produced 139,300 units out of a stated capacity of 172,500 units.
That works out to 80.8% - almost precisely the average capacity utilization rate for the US economy. Perhaps more importantly, this is a number that approaches a best in class OEE for a manufacturing plant.
And did I already mention that this was during a pandemic... and the worst economic downturn the US economy has ever witnessed.
Ah yes... I believe I did mention that. My apologies.
Let's see... what's next?
Oh yeah... then Collins explores a weird train of thought wherein he suggests the pandemic should have been a good thing for Tesla's third quarter because the shutdown of their Fremont and Shanghai plants would have created a "pent-up demand effect."
Of course, Collins never explores the fact that the worst economic downturn in US history might possibly impact demand.
No. Apparently, the pandemic should just spell good news for Tesla.
And, thus, in a bizarre display of mental acrobatics that one could only describe as heroic, Collins essentially suggests that even though Tesla did quite well in a quarter that took place during the first business-shuttering pandemic the modern world has ever witnessed, well... they should have done better... so it's a fail.
Let's see what Collins has to say next.
In the paragraph that follows the bizarre pent-up demand theory, Collins explores his strangest train of thought yet: channel stuffing.
No... I'm serious... he actually makes this claim.
Collins states, "Tesla employees go on a mad rush every quarter-end to maximize the reported deliveries figure. Channel stuffing is fine, (emphasis added) but it leads to 'hangover' periods in the first month of any quarter."
Gosh... more boring businessy stuff.
Well, okay then... I'll explain what channel stuffing is, and then I'll explain why Tesla does not - indeed, cannot - engage in channel stuffing.
Channel stuffing is a rather unscrupulous business tactic used to boost a given quarter's sales by delivering unsold, unordered product to distributors before those distributors actually order the inventory. If the unscrupulous business can sweet talk the distributors into accepting the inventory early and agreeing to pay for it later, then, under GAAP (Generally Accepted Accounting Principles) rules, the business can actually record the early delivery as a sale... in this quarter. Of course, as Collins points out, such a tactic isn't really sustainable because it just eats into the next quarter's sales.
But here's the problem... there's one thing missing in Tesla's business model that actually completely prohibits them from engaging in channel stuffing.
Yeah... you guessed it: distributors.
A little thing that most people already know and love about Tesla is the fact that consumers buy their cars directly from Tesla. Tesla does not have a "middle man" network of dealerships. Those slick-looking Tesla stores you see in malls are just that: they're stores... owned by Tesla. These stores exist only to educate the public about Tesla vehicles and to help facilitate the online ordering process. A process, I should mention, that a customer can simply do by themselves over the Tesla website.
I know... I've done it.
Tesla stores have no capacity to take possession of newly manufactured, unsold inventory. Every car recorded as a sale on Tesla's financial statements has not only been sold to an anxiously awaiting customer... it has been delivered. That's right. Tesla cannot count a sale until the vehicle has been delivered to the customer.
Channel stuffing is impossible under the Tesla business model.
Nice try, Mr. Collins. Weird... but nice try.
Let's see what other dimensions of weirdness Mr. Collins explores in his train wreck of an article.
Well, next we have a unique set of paragraphs wherein Collins attempts to say that it's unfair for Tesla to claim that their days of inventory figure is lower because - get this - they provide this metric during a record-setting sales quarter.
Again... I'm not kidding.
In analyzing Tesla's assertion that "new vehicle inventory declined further in Q3 as we continue to improve our delivery efficiency," Collins literally states, "That statement is misleading since Tesla produced a record sales volume this quarter."
The quarter was record-setting, so... really, Tesla shouldn't provide any metrics to illustrate just how good the quarter was because, well... it's just unfair.
Okay... let's move on.
As we near the end of the article, Collins takes his biggest risk, and make his boldest claim.
He states, "Tesla’s originally stated dreams of 'comfortably exceeding' 500,000 units delivered in 2020 are dashed" as "Tesla would have to deliver over 181,000 units in the fourth quarter to exceed 500,000 units for the year. They won’t."
Gee whiz, Mr. Collins... if you say so.
Of course, Collins never points out that this target for 500,000 units delivered in 2020 was actually forecast back in January of 2020, long before the pandemic took hold, and long before Tesla's main production plant in Fremont, California was shuttered for seven weeks, from March 23rd until May 11th, owing to the state legislated COVID-19 shutdown. Tesla's Shanghai plant was also ordered closed by the Chinese government for two weeks, starting at the end of January, in a similar effort to stem the spread of coronavirus.
Given the impact that COVID-19 has had on the world economy over the course of 2020, and given the fact that the pandemic actually shut down Tesla's factories for a combined nine weeks during the year, some analysts might cut Tesla some slack on their original forecast of 500,000 cars in 2020.
Not Jim Collins.
I've got to say, it takes balls to make bold claims about a company not meeting a forecast it made before its plants were shut down for nine weeks owing to a pandemic.
But that's alright...
...because one guy whose got even bigger balls than Jim Collins is Elon Musk.
Even after his factories were shut down for a combined nine weeks, Elon Musk has not backed down from his original goal of delivering half a million cars in 2020. He has not let up... not for one minute.
We've got two and a half months to go.
Let's just wait to see the numbers.
Then we'll see who's the screaming buffoon... Mr. Collins.
When it comes to the environment, we are all neighbours.