Dear Reader,
This Update in Product | Strategy | Innovation provides some personal context on the transition to sustainable energy. After following Tesla’s mission for many years, I decided to move to the next chapter of my own journey with sustainable energy. In late September 2021, I downloaded the Tesla app and set up a customer account. Ordering a Tesla vehicle is completed on the Tesla website or mobile app. If you know what you want, the process takes about 90 seconds. An estimated delivery date range is then provided.
In this Update, we will cover:
Tesla vehicle purchase & delivery,
Tesla vehicle driving experience, and
Tesla outlook for 2022.
1. Tesla vehicle purchase & delivery
Tesla requires a $250 payment to complete a vehicle order. As delivery approaches, Tesla reaches out by email or text message to confirm purchase and delivery with a desired date and time for a specific location. This is most likely the nearest Tesla Service Center in bigger cities. When purchase and delivery are confirmed, a vehicle identification number (VIN) is provided and the mobile app and online account are updated with this VIN, delivery details and 4 additional steps in a workflow.
These 4 steps include confirming the vehicle registration details provided during the order, vehicle insurance details to verify coverage for delivery, payment details and accepting terms/conditions for the sale on the day of delivery. Payment options include a cash sale, lease or financing with a loan. A trade-in offer requires a VIN on the vehicle and taking a photo of the vehicle dashboard with the engine running to confirm an operating range with the tachometer and current mileage on the odometer. Electric vehicles would require a different process. Tesla then provides a firm offer within a few hours so you can accept or reject the trade-in.
Tesla’s workflow to translate Brand awareness and the growing demand for battery electric vehicles (BEVs) into low-friction Tesla vehicle orders is centralized and uniform for all customers.
In Massachusetts, New England customers taking delivery of a Tesla vehicle are invited to participate in a weekly Tuesday evening Customer Success web-conference to review taking delivery and starting the journey as a Tesla vehicle owner. Questions tend to focus on service without dealerships and charging the vehicle at home. The whole communication process is relatively streamlined using multiple channels including the Tesla app. A text message chain for 2-way communication leading up to delivery augments what is covered in the web-conference and Tesla app. Delivery includes finalizing the transaction and product demo using the delivered vehicle. This whole delivery process takes about an hour.
Tesla’s workflow to translate brand awareness and the growing demand for battery electric vehicles (BEVs) into low-friction Tesla vehicle orders is centralized and uniform for customers. Legacy vehicle brands create best practice for dealers, but the customer purchase really depends on the process implemented by each dealer and is biased to sell vehicles already on the dealership lot. The Tesla process provides more visibility into customer demand with actual orders detailing vehicle model specifications for production. Tesla also drastically limits vehicle options to minimize variations in production builds. That is a current condition of early adoption, but streamlines orders for both Tesla and the customer.
The more Tesla can delight and exceed customer expectations, the greater the chance these new customers will share their positive experiences with friends and family to grow the brand.
The Tesla organization is flat and welcomes all feedback from any employee to improve both products and processes. Tesla’s total cumulative unit vehicle sales to date are approximately 2 million vehicles worldwide, but roughly doubled in 2021 and are expected to reach similar growth in 2022. As production expands to 3 continents in 2022 (North America, Asia & Europe), deliveries will become more uniform across a quarter instead of shipping vehicles abroad at the beginning of the quarter and within the same continent at the end of the quarter. Logistics will still play an important role in the production to delivery cycle, but more so within the same continent of the vehicle purchase & delivery.
This means there is greater opportunity with the increase in unit volume production and delivery direct to consumers to continuously test assumptions, workflows and customer experience with direct customer feedback. The more Tesla can delight and exceed customer expectations, the greater the chance these new customers will share their positive experiences with friends and family to grow the brand and accelerate the transition to sustainable energy.
This is a great time to transition from your ICE vehicle to a new BEV with a tight car market to sell a used vehicle.
Global new vehicle production peaked in 2018 at 97 million units. The most recent data show global new vehicle production was down to 78 million in 2020. Tesla produced just under 500 thousand vehicles in 2020 and 936 thousand vehicles in 2021. So, Tesla customers are still early adopters when they are purchasing only about 1% of new car production. The percentage of global new car production resulting in Tesla vehicle sales will likely change dramatically over the next decade as BEVs (including Tesla vehicles) gain market share over internal combustion engine (ICE) vehicle sales. Legacy auto companies are accelerating their own transition to produce more BEVs.
One outcome as BEVs take more market share from ICE vehicle sales will be the eventual oversupply of new and used ICE vehicles relative to the demand for these vehicles and expected collapse of the ICE vehicle supply chain. Today’s tight vehicle supply is driving up the sales price for any vehicle. But when supply for a used ICE vehicle exceeds demand, the reverse will be true. In other words, this is a great time to transition from an ICE vehicle to a new BEV with a tight car market to sell a used vehicle.
2. Tesla vehicle driving experience
A Tesla vehicle is more than just a means to drive from point A to point B. Tesla vehicles have been described as computers on wheels. This allows the driving experience to be personalized for regular drivers using a specific vehicle. The Tesla app and user account allow the vehicle to recognize the user and unlock the doors with close proximity to the vehicle. Proximity of a known smartphone, app and user account also configures the driver’s seat and mirrors to their preferences and connects the smartphone for hands free phone calls and to stream content.
Data are communicated and controls are provided using the vehicle computer display mounted on the dash to the right of the steering wheel (for a U.S. build).
The Tesla Model Y vehicle dashboard does not include any dials or indicators. Data are communicated and controls are provided using the vehicle computer display mounted on the dash to the right of the steering wheel (for a U.S. build). Additional controls are provided with left and right stalks on the steering wheel. The right stalk selects Park, Reverse & Drive and is also used to activate Cruise Control, Auto-Pilot and Full-Self Driving (if enabled). The steering wheel also includes a left and right thumbwheel controls to adjust the selected Cruise Control speed up and down. The left stalk is used for the windshield wipers. Tesla vehicles include 2 foot pedals, but regenerative braking by the electric motor allows for more control of speed with one pedal and less need for using the brake pedal.
The center console has plenty of storage and includes wireless charging for 2 phones and 2 additional USB-C connectors to charge additional devices. The Tesla driver and passenger seats are very comfortable with good support. The seats include controls to adjust the position and fit. Tesla manufactures their own seats as part of their vertical integration and continuously improves the design. The Tesla Model Y includes a standard all-glass roof inside the structural frame. This improves visibility and the perception of larger space while in the vehicle.
The official EPA rating for range and efficiency with standard 19” wheels are 330 miles, 127 MPGe city, 117 MPGe highway and 28 kWh/100 miles.
The 2022 Tesla Model Y Long Range compact sports utility vehicle comes standard with 75 kWh battery size and dual motor all-wheel drive. The official EPA rating for range and efficiency with standard 19” wheels are 330 miles, 127 MPGe city, 117 MPGe highway and 28 kWh/100 miles. MPGe represents the miles per gallon equivalent for a BEV. The battery charge is also measured as a proportion of total capacity. The recommended operating range for daily use is between about 10-80%. For trips, the battery can be charged to 100% to start the trip.
Charging is faster when the battery charge is relatively low. The rate of charge slows considerably as the battery charges above 80%. The time to charge at 250 kW peak per vehicle on a V3 Supercharger is about 5 minutes for 75 miles of range. But V2 Superchargers are much more common with 150 kW peak per vehicle. My experience charging on these is about 50 minutes to charge from 10% to 90%.
On highway trips, it is faster to stop more frequently and then move on to another Supercharger 1.5-2 hours further down the road. A recent trip from Boston to Fort Lauderdale required 12 Supercharger stops spanning 3 days. But these stops were actually convenient to eat, stretch your legs, use the restroom and even shop at a Target. It does seem Target and Wawa convenience stores have partnered with Tesla on the east coast to put Superchargers in their parking lots to add customer traffic. Most of these Superchargers have 8 to 12 stalls, but one in Brunswick, Georgia had 24 Supercharger stalls.
The total trip from Boston to Fort Lauderdale was 1469 miles and required 707 kWh at a total cost of $234.
Most Supercharger stalls require backing the vehicle into the stall to charge. But some stalls allow charging by driving straight into the stall with the Supercharger on the left side. This is convenient with a bike rack on a vehicle as shown in photo above. Charging is streamlined with a credit card attached to your Tesla account to allow automatic pairing of the charge to the credit card without touching your phone.
The total trip from Boston to Fort Lauderdale was around 1469 miles and required 707 kWh with a total Supercharger cost of $234 including a full charge before starting the trip and after reaching the destination. The average costs were $0.33 per kWh and $0.16 per mile with 2 bikes on a bike rack on the back of the vehicle reducing energy efficiency. The highest cost per kWh to charge so far has been in Fort Lauderdale at $0.38 per kWh. The lowest cost charges have been in Chestnut Hill, MA and 2 stops in South Carolina at $0.29 per kWh. Electricity costs have increased with inflation just like gasoline. Charging at home is substantially less expensive even if through the utility grid. But the long-term plan should be to charge BEVs at home with solar panels or a solar roof for an even more sustainable energy option.
Tesla navigation is similar to Google Maps with an important, additional feature. Navigation to a destination estimates the optimum Tesla Superchargers stops and charging plan to maximize efficiency with available stops. With an adequate Supercharger network, you would probably stop at around 10% of capacity and charge to about 70% to reduce the charging time and then continue traveling to the next Supercharger.
3. Tesla outlook for 2022
2021 was a defining year for Tesla with unit production and deliveries exceeding Wall Street expectations in spite of a global semiconductor chip shortage that shut down production for most other automobile manufacturers. Tesla delivered 936,000 vehicles in 2021 (an 87% increase over 2020) with 308,000 vehicles delivered in Q4 2021 alone. This put Tesla’s annual production run rate for the first time above 1 million vehicles. The most recent earnings report is from Q3 2021. Gross margins improved to 30.5% for the automotive business in Q3 2021 and operating margins improved to 14.6%. Tesla’s Full-Self Driving expanded to 11,700 beta testers as of November 2021 with 150,000 Tesla cars in the broader Full Self Driving (FSD) beta enrollment program at that time using the Tesla Safety Score to prioritize scaling the beta deployment to the safest drivers in the queue. Tesla also officially moved its global headquarters from California to Austin, Texas in 2021.
2022 will mark a significant expansion in Tesla vehicle production capacity across 3 continents with 2 new gigafactories starting vehicle production.
2022 will mark a significant expansion in Tesla vehicle production capacity across 3 continents with 2 new gigafactories starting vehicle production. Giga Berlin and Giga Texas are expected to start commercial production for customer orders in 2022 Q1 to scale Tesla’s total global vehicle production 50% to around 1.5 million vehicles or even more with relief in the supply chain. This production estimate assumes a similar ramp in production in Giga Berlin and Giga Texas as compared to the launch of Giga Shanghai with about 150 thousand units produced in each factory in the first year of commercial operations. If recent learnings to scale production in Giga Shanghai translate into ramping a new gigafactory, Tesla’s 2022 global vehicle production could exceed estimates assuming recent growth in Giga Shanghai is also maintained.
Tesla’s Dojo supercomputer is also expected to be operational in 2022. Project Dojo is focused on improving and accelerating neural network training for machine learning. The primary use case is Tesla FSD which is developed on a growing database of Tesla vehicle data and then released to the growing fleet of Tesla vehicles. Dojo is designed to accelerate improvements to neural networks with more automation of routine training tasks to enable training on even larger datasets. Dojo can also be used to improve machine learning throughout Tesla’s operations like manufacturing processes and the supply chain.
Tesla is expected to combine city driving and highway driving into a single neural network with FSD beta v11 in 2022 for more generalized computer vision and vehicle control.
Tesla FSD beta v10.9 is the latest software release of autonomous driving for participating Tesla vehicles. These new releases can come every 2 weeks, but typically require 2-3 development sprints to achieve significant improvements and testing to warrant a new commercial release. Tesla recently raised the price for FSD from $10,000 to $12,000. Tesla is expected to combine city driving and highway driving into a single neural network with FSD beta v11 in 2022 for more generalized computer vision and vehicle control. This should also accelerate development and improvements on a single neural network.
Tesla’s global fleet of BEVs should reach 3.5 to 4 million vehicles in 2022. This scale accelerates all learnings associated with the mobile app, FSD, vehicle computer, user interfaces, software services, Tesla Service Center operations, roadside assistance, etc. FSD in particular with Dojo and the growing fleet size should enable development to reach feature complete status for level 4 autonomy in 2022. Level 4 indicates full autonomy in defined geographic areas. Regulatory approval would then be required for commercial release. Florida has already approved Level 5 full autonomy, but a vehicle manufacturer would need to provide evidence for regulatory approval that a specific vehicle meets the requirements for Level 5 autonomy without geographic or zone limitations. Tesla may decide to pursue Level 4 autonomy for specific Florida highways and routes for early adoption by a regulator. Fort Lauderdale and Miami are actively working on plans to implement tunnels limited to EV use. Those routes when completed would certainly be candidates for Level 4 autonomy if Level 5 is still not approved.
Tesla can raise vehicle prices now in a tight market, but will also be able to cut prices in the future using the tailwind of strong gross margins to take market share with adequate unit production capacity.
Gross margin should continue to expand in 2022 beyond the 2021 Q3 30% with the significant ramp in unit production by the second half of this year. The mix of vehicles produced in China and price increases globally due to Tesla pricing power should further help gross margins. This gross margin expansion will become a critical enabler to drive growth in the future with greater unit production capacity. Tesla can raise vehicle prices now in a tight market, but will also be able to cut prices in the future using the tailwind of strong gross margins to take market share with adequate unit production capacity to meet demand generation.
This lower priced Tesla vehicle design will make BEVs affordable to a much larger group of owners to further accelerate the transition to sustainable energy.
2022 will also provide more insight into an updated product roadmap. Tesla will start a limited launch of the Tesla Semi with the first 15 all-electric trucks delivery to PepsiCo expected in Q1 and some other customers over the rest of 2022. Semi deployments also includes the installation of Tesla Semi Megachargers connected to Tesla Megapack batteries at the site(s) using these all-electric trucks. The scaled commercial launch for the Tesla Semi is expected in 2023. But the most anticipated detail on the product roadmap is the new Tesla vehicle with a target $25k base price. This lower priced Tesla vehicle design will make BEVs affordable to a much larger group of owners to further accelerate the transition to sustainable energy.
A key milestone for Tesla’s 4680 battery will be the transfer of technology and best practice developed at the 4680 beta production site in Fremont, CA to scaled production at Giga Texas in 2022 for Model Y vehicles produced there.
Batteries will be the primary bottleneck to scale BEV production over the next decade. Tesla identified this bottleneck years ago. This led to the design of the 4680 lithium ion battery plus scaled production of this battery design with new technology and processes. Tesla will bring production of these batteries in-house at each gigafactory, but has also shared the design and process specifications with third party battery manufactures to expand the supply of these batteries beyond what Tesla can manufacture on its own. A key milestone for Telsa’s 4680 battery will be the transfer of technology and best practice developed at the 4680 beta production site in Fremont, CA to scaled production at Giga Texas and then Giga Berlin in 2022. Tesla has told battery manufacturers they will buy every battery cell they can make at a reasonable price even though Tesla will be scaling production of their own batteries.
Tesla will also be working to optimize the battery chemistry based on the use case and raw material supply chain. Tesla started prioritizing the lithium iron phosphate (LFP) chemistry in 2021 for non-vehicle battery storage and standard range vehicles in China. Nickel chemistries will focus on use cases like high performance vehicles, Tesla Semi and Tesla Cybertruck where energy density is a key requirement. Iron ore is in abundant supply for the LFP batteries. But graphite and nickel are the primary materials in short supply. Tesla will work directly with mines for nickel and graphite and synthetic alternatives for graphite to contract the supplies they need for these raw materials to meet production goals. Tesla may even partner with governments like Indonesia and a mining operator like Vale or BHP to facilitate the upfront investment needed to realize the mining development required over 7-10 years.
Conclusion
Tesla is executing it mission to accelerate the transition to sustainable energy. Tesla will scale production in 2022 from 2 vehicle factories (Fremont, CA and Shanghai, China) to 4 vehicle factories with the addition of Berlin, Germany and Austin, TX. Vehicle production in 2022 is expected to grow by at least 50% assuming no significant sustained disruptions in the supply chain. This growth will drive revenue, gross margin expansion and earnings growth.
Tesla Semi, FSD, Project Dojo, 4680 lithium ion battery and the rest of the product roadmap will also be updated with more detail in 2022 with Giga Berlin and Giga Texas moving towards commercial production. But for me, 2022 provided the opportunity to travel 1,500 miles in an electric vehicle without using gasoline. This electricity was likely produced with natural gas, but can also be produced with more sustainable options like nuclear power, wind, and solar in the future. ICE vehicles can improve with more efficient options, but at the end of the day these are just better ICE designs and do not accelerate the transition to sustainable energy.
However, I would also add that even though Tesla has done an exceptional job making its current vehicles competitive with ICE vehicle alternatives, purchasing a Tesla vehicle today is done as an early adopter. You are accepting a limited number of factory options for the desired vehicle model. And extended travel in a BEV with the current technology requires more frequent stops and longer charging times versus the driving range and time to refuel an ICE vehicle. As the BEV technology continues to improve and BEV vehicle production scales more people will decide an electric vehicle is right for them.
Daimler announced they will stop producing combustion engines by 2030.
I transitioned to a Tesla BEV in December 2021. Where are you on the BEV adoption curve? Are you an early adopter now with current BEV models from Tesla, Ford, Porsche, Audi, Volkswagen and others, or do you need more selection on options with more models from more brands in the future to join the early majority or late majority. But we are all likely to make the transition at some point either with BEV ownership or using BEV robotaxis. Governments and supply chains will eventually dictate the speed of the transition. The transition from horse and buggy to ICE vehicles required just over two decades. But that transition still included farms raising horses and companies making buggies.
The transition to BEVs will likely be faster assuming battery production can be adequately scaled to meet demand. Some leading auto companies have announced they have already stopped research & development to improve combustion engines. Daimler announced they will stop producing combustion engines by 2030. Key ICE vehicle components like transmissions and fuel injectors do not transition to BEVs, but will be needed to maintain the existing ICE fleet for a period of time. But the market for these components will decrease significantly as new vehicles sales transition to BEVs. That will likely lead to many suppliers stopping production of these core ICE vehicle components to let other companies pursue the smaller used car market. We will likely see a severely constrained supply chain to even manufacture ICE vehicles by 2030.
So the real question is not when to buy a BEV, but when you should exit ICE vehicle ownership while there is still adequate demand to sell those vehicles with discounting the price. That was December 2021 for me.
Best,
Stephen
I’m long GOOG, TSLA and VALE mentioned in this update. Nothing in this post is intended to serve as financial advice. Do your own research.