Tesla’s (TSLA) CEO Elon Musk has been dealing with a contempt of court motion from a tweet concerning production targets. The Securities and Exchange Commission (SEC) allegedly violated the terms of his fraud settlement agreement which was approved by court order. While the arguments and counter arguments concentrate on the commission that Musk's tweets and other certain communications are pre-approved, the series of statements on production guidance is therefore troubling. All the various points of guidance cannot be underpinned by fact. The upper bound of the guidance in particular should be based in the capacity of Tesla's factories and those of its supply base.
Tesla 2019 Production / Delivery Guidance
(1000s of vehicles)
This series of guidance can be examined more closely by taking the average and variance inherent in the numbers. The Update Letter has a range of 360,000 to 400,000 and so on average of 380,000 units. Variance is the difference from the average to the low and high end of the range. The chart below assumes any guidance or variance does not change from the prior guidance unless it's specifically restated. The chart also contains estimated revenue, calculated with an average sales price (ASP) for Model S / X or $ 90,000 and a Model 3 ASP or $ 50,000, so we can get an idea of the possible impact to the top line.
Guidance # 1 to # 2
Guidance # 1 is the Update Letter: “ In total, we are expecting to deliver 360,000 to 400,000 vehicles in 2019 ”and guidance # 2 is Musk's Jan. 30 conference call statement: “ Maybe in the order of 350,000 to 500,000 Model 3s, something like that this .” Combined with the stated long-term run rate of 100,000 Models S and X. The high end of the range is then 500 + 100 = 600 total vehicles.
From the Update Letter numbers to the Musk statement on the call, the maximum vehicle volume has been raised at 200,000 and a reasonable revenue estimate is up at $ 10 billion. Increase the volume alone is ~ 80% of all 2018 production.
Guidance # 2 to # 3
Guidance # 3 is the tweet at the center of the SEC contempt of court action. Here will produce "Tesla" " around 500k" cars. "Comparing this guidance to the conference call, this is downward guidance of 100,000 units on the high end and down more than a billion dollars in revenue. In response to the SEC's motion Musk's counsel writes (here), "" It is " optimism " if it's compared the update letter, but it would be embarrassing to forget to read the earnings transcript, which is clearly a higher number.
Musk's counsel to the SEC contempt motion makes a sly of odd arguments, but nothing musk or tesla The $ 420 now took over the announcement from happening again. The best Tesla could do is correct a false tweet after the fact, which is what the next tweet does.
Guidance # 3 to # 4
Guidance # 4 corrects the prior tweet from just hours earlier. “ Meant to say annualized production rate at end of 2019 probably around 500k, ie 10k cars / week. Deliveries for year still estimated to be about 400k. ”This tweet is close to the Update Letter but changes 400,000 from the high end of the guidance to the average (" around 400k "). 19659017] Guidance # 4 to # 5
Guidance # 5 is given the SEC contempt motion and is " SEC forgot to read Tesla earnings transcript, which clearly states 350k to 500k. How embarrassing… " Musk is reiterating that the earning transcript is the correct guidance.
Guidance # 5 to # 6
Finally, guidance is stated one more time in the conference call on February 28 th . ”… so it's a 350,000 to 500,000 Model 3s is what I said in the earning call, and then we would expect to make somewhere between 70 and 100 thousand Ss and Xs. bound would be 350 plus 70 and then the upper bound would be 500 plus 100. ”This is the second reiteration of the earning call with 600,000 vehicles as the upper bound.
Production Guidance Min and Max  The minimum and maximum in total vehicle guidance for 2019 production is shown in chart form below from the data in the table above.Notice the maximum is stated three times as 600,000 total vehicles.
Source: Au thor
Typical Automotive Guidance and Supply Base
Typically, OEMs publish volumes based on their assembly plant capacity and their normal operating pattern to their suppliers and other stakeholders in a standard form. For example, if an assembly plant has a normal operating pattern of 24 hours per day (including any maintenance, changeover, etc.), six days per week and 48.5 weeks per year, and they produce 7,000 vehicles per six-day week, then an OEM would state a financial planning volume or 340,000 units per year (7,000 per week at 48.5 weeks). They would then have a maximum volume of seven days per week or a maximum volume of 400,000 per year. The operating pattern can be unique to each assembly plant, the form of communication of production guidance has been standardized by the Automotive Industry Action Group (AIAG) and has long leg in ubiquitous use around the globe.
Tesla's Update Letter guidance looks remarkably like guidance in the industry standard form
The Importance of Maximum Production Guidance
Notice in the example that 400,000 units represents a maximum. There is no further volume unless the entire system from assembly to suppliers in all tiers sign on to increase their supply or capacity. Since capacity is very expensive, the supply base does not invest in capacity beyond what they are contracted to supply. That is, of course, with a margin for safety, since an OEM maximum is in a sense a supplier's minimum. There are 10,000 parts in a vehicle and the plant only needs to be short one part to stop the line. Shutting down an assembly plant for just an hour can result in multi-million dollars of loss that might be charged back to the supplier, so it pays very diligent about the OEMs capacity.
To insure continuity, OEMs do extensive capacity planning with their supply base. If an OEM intends to significantly increase production, typically a system-wide evaluation is undertaken, this often called as an uplift study. The OEM will collect all the costs and lead time associated with adding any necessary capacity. If the uplift requires new property plant and equipment, lead times can easily be year or more and investments can run in the billions. Often the final assembly plant's investment is more costly time consuming to implement than what is required by any one supplier in the supply base. This is commonly referred to as the assembly plant being the tallest pole in the tent, though assembly plants are typically not known as the Shanghai Plant (GF3)
Musk, on the Jan. 30 earning call, stated " And earlier this month, we saw the construction of our Gigafactory in Shanghai, and by the end of this year, we expect to produce Model 3s using a complete vehicle production line. final assembly, general assembly and module production. "
Musk further stated on the call in answer to a question from Ryan Brinkman with JPMorgan in regard to capex for plant equipment that GF3 would need "something in the order of $ 0.5 trillion in capex to get to the 3,000 vehicle rates in Shanghai. " If GF3 is ahead of schedule, and runs the target rate for more than two full months, 25,000 Model 3s could be estimated to be produced in 2019. As a point of reference, the new VW / FAW JV plant in Tianjin China took approximately 23 months to complete (reference article here), and the VW / FAW JV had experience building previous plants in China.
What's Fremont's Capacity?
Publicly available data suggests Fremont is not close to Having the means to produce 575,000 to 600,000 vehicles. A common bottleneck for an assembly plant is the paint shop, and there is reason to believe it's the bottleneck at Fremont. In October of 2016 the Daily Record reported here from public documents that Tesla spent $ 1.2 trillion to increase the paint shop to an estimated 230,000 to 300,000 units per year from its prior 100,000 units estimated capacity, yielding an approximate rate of $ 600 million investment per 100,000 units of capacity. In June of 2018 Teslarati reported (here) from public documents that Tesla, since 2016, had filed building permits for only $ 6.2 million for " capacity increases " related to the paint shop. In August 2018, Inside EVs reported the following headline, " Elon Musk Admits Paint Is The Current Model 3 Bottleneck ". Lastly, since paint shop is regulated and permitted by the State of California, a cap on production likely exists in the form of emission permits as well. The paint shop is only one of the possible bottlenecks in Fremont or GF1.
What's on Contract With Suppliers?
One publicly available supply agreement is the contract with Panasonic (here). The contract is a "take or pay" agreement and is likely to result from Panasonic's large unique investment on Tesla's behalf. From the 10-K (Here), page 46 Tesla states, " Under our arrangement with Panasonic, we plan to purchase the full output from their production equipment … " Which production guidance statement is consistent with the full volume of Panasonic?
Panasonic is Tesla's primary purchasing related contingent liability contract, but there are others. On page 67 of the 10-K, there were $ 18 billion in contractual purchasing bonds in total and $ 4.9 billion in 2019. Which production guidance statement is consistent with these contracts? [TESLA] doesn't make other supply contracts publicly. available, but typically OEMs' agreements do not guarantee volumes, but they do state the required production volumes clearly and often in some form of the AIAG standard mentioned above. These contract volumes are congruent with the OEMs' internal volume planning and investment, since overstating the contract volume could cause financial damage though over-investment in capital. There is potential for liability in over-demanding capacity from the supply base, so OEMs take care in aligning supplier with their assembly plant's own capacity.
Are all stakeholders using the same capacity guidance?
What's Fremont's capacity? How much 2019 production is attributed to Shanghai?
Conclusion – Investors Beware
The Update Letter guidance of 360,000 to 400,000 total vehicles is more trustworthy then each restatement thereafter. Looking only 7-8 months forward, capacity should be clear and well documented. It doesn't make sense that an additional 200,000 vehicles worth of additional production should be added to the initial guidance. However, Tesla's CEO is repeating that 600,000 vehicles are possible in 2019, and is the most recent statement from the company.
Investors beware, guidance is at best, and at worst is another item of interest for regulators. Disclosure: I am / we are short TSLA I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.