How does the Tesla earnings report and subsequent delivery slip affect the tax credit?

Tesla released their 4Q17 earnings report yesterday and subsequently changed the delivery estimates for reservation holders.  How does this affect deliveries and Tesla’s progress towards the EV tax credit phaseout?

Let’s start by taking a look at the delivery estimate shift.  A few days ago, a few reservation holders that had Nov ’17-Jan ’18 delivery estimate windows noticed that their windows had slipped to Feb-Apr ’18.  In and of itself this was not surprising since January had already passed and they still did not have vehicles in their driveways!  In fact, the only surprising thing was that they hadn’t done this shift in early January.  With an approximately 4 week time from order to delivery, if they hadn’t configured by the first week of January, it wasn’t likely they would hit their window anyway.  The community on the various Tesla forums had already pretty much considered the delivery estimate windows to mean not delivery, but invitation to configure, with the invitation itself coming during the last few days of the window.  This caused many reservation holders to mentally add one month to the end of their window for the earliest possible delivery of their vehicle.

Also recall that delivery estimates were generally shifted by a month after the 3Q earnings call.  The single month slip was surprising because at the time they had announced a 3 month delay in their initial ramp estimates.    At the time I noted the discrepancy, but technically with a 3 month window, they could potentially absorb a 4 month delay.  When Tesla further announced another 3 month slip to the ramp, holding the one month delayed delivery windows seemed impossible, but hope was held out that Tesla was sandbagging on their ramp estimates and they would be able to bring production back into the windows.

The net is, given the fact that the delivery estimates were clearly not going to be hit, it really should not come as any big surprise that the windows were reset.  Taking into account the original one month slip and the current three month slip, we are now at a four month delay compared to original estimates.  And with a three month window, we are at least in the neighborhood of Tesla’s estimated six month slip in production ramp.  Hopefully this means we can go back to treating the delivery window as a delivery window and not an invite window.

So for example, my delivery estimates are shown above.  Before yesterday, the First Production estimate read Dec 2017 – Feb 2018, Standard Battery Mid 2018 and Dual Motor All-Wheel Drive had a specific Aug – Oct 2018.  It may have appeared that First Production moved out three months, but at this point the best I was hoping for was an invite on February 28th.  I knew my car would not arrive until late March at the earliest, and probably later than that based on my position in line.

It remains to be seen whether people in the Mar – May window start getting invites in March, but I think they will.  This would confirm that really nothing has changed, but rather that they just reset the delivery windows to more realistic values.  At least for First Production.  The SR and AWD options have apparently moved out more significantly, and this is troubling for those that were waiting for those options as it may mean it will not arrive in time for the full tax credit to be in effect.

So that brings us around to what Tesla said in their earnings report.  Basically they re-affirmed their production estimates of 2,500 vehicles per week by the end of March, and 5,000 vehicles per week by the end of June.  And they gave a specific timeline and explanation of the solution to the bottleneck at the Gigafactory.  The issue, they say, is in moving product between the Zone 1 and Zone 2 stations in the battery module assembly area.  They have built an automatic system at the Tesla Grohmann subsidiary in Germany that is up and running well.  It now has to be taken apart, shipped, re-assembled and brought up to speed at the Gigafactory.  Tesla offered a timeline of late March for this activity to conclude, and this will bring them to the 2,500 vehicle per week level.  Hopefully this is a conservative estimate on Tesla’s part, because that is a significant amount of work to do, and I’m sure there will be hurdles along the way.

After that point, they will start the climb to 5,000 vehicles per week.  The bottleneck then becomes the parts conveyance system at the Fremont factory–basically the machinery that brings all the parts to the assembly line to be added to the car.

This should produce a ramp that looks somewhat like the following:

I believe they have probably gotten to peak throughput using the semi-automatic method described at the Gigafactory, so we are likely to see a fixed limit of about 1,000 vehicles per week until the new equipment from Germany arrives.  Then the rate should shoot up to 2,500 and be more or less fixed until improvements to the conveyance system in Fremont are worked out, at which time we will see a few more steps on the way to 5,000 vehicles per week.

While the total number of vehicles built is somewhat lower than most estimates, it only makes a difference of about 2,000 vehicles (or less than half a week) by the end of June.  So I don’t think this is really the huge deal that the news is making it out to be.

What is significant, however, is Tesla’s apparent decision to prioritize AWD over the Standard Range battery.  I know that there are probably a lot of reservation holders out there that reserved based on the opportunity to get a $35,000 base model vehicle.  However, I think that the feedback Tesla has received so far from reservation holders that are deferring is that the AWD option is actually even more in demand.  So it would appear that they are moving availability of that option up at the expense of the SR option.


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