Tesla Model Y: Preparing for the Impact of the Market – Tesla, Inc. (NASDAQ: TSLA)



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Tesla (NASDAQ: TSLA) has introduced its next large-volume model vehicle, the Y model. The Y model is an affordable electric SUV designed to complement Tesla's affordable Model 3 sedan. "Hell of production". "At the start of production, Tesla worked hard to avoid a repeat of the Model Y. To ensure a smooth transition to production, Tesla will use assembly lines built from lessons learned from the disastrous production of Model 3. The Y model will also have a lot more demand than the Model 3, mainly because of the sheer size of the SUV market. Although there is a lot of competition in the SUV market, the Y model will be able to sell better than its competitors, especially in the electricity segment. While another author has described this decision as desperate, Elon Musk, CEO of Tesla, announced the date of the unveiling via Twitter (NYSE: TWTR) almost a year ago. Tesla will become more and more positive in terms of cash flow in the near future thanks to the production of the Y model.



Source: Mashable

Production

The production of Model Y is still mysterious. However, the information currently available to the public covers many important features of the vehicle. There is no doubt that Tesla faced a hell of production when he started assembling the Model 3 for the masses. The ramp was extremely slow and left many customers waiting years before receiving the cars they had ordered. At the announcement of Model 3, Tesla was convinced that it could quickly increase production. That's why Model Y is a "manufacturing revolution". The Y model is very similar to Model 3 and shares 75% of the components with Model 3. The Y model will also be built on the same platform as Model 3 which, as I already mentioned, is the most advanced of all electric vehicles (EV). At the unveiling, Tesla confirmed that the Y model will not be built with the X model falcon wing doors to reduce costs and further streamline production. However, Model Y will have 95% less wiring than Model 3, according to the company's first quarter 2017 earnings call. The 1,500 meters of wiring in model 3 caused many headaches at the beginning of production and the reduction to 100 meters greatly simplifies production and reduces the cost of materials. This simplification will allow faster production as well as a reduced cost per vehicle manufactured. Reduced wiring is possible with a flexible circuit manufactured by Tesla, a component patented in 2013 that changes the traditional wiring mode of car manufacturers.

In its fourth quarter earnings report, Tesla said it was confident in its ability to halve capital spending per unit capacity for this plant. [Gigafactory 3]"When you refer to the model 3. Although referring to the model 3, this also applies to the Y model because of the similarities that it shares with the model 3 and the general improvements made to the ramp of the model 3. model 3. As the Y model lines will be built from scratch, this reduced cost forecast applies to them, as well as to all other future vehicles, not just those built in Gigafactory 3. More specifically, Musk said during the call for results in Q4 2017 The company can produce one million units of the Y model annually at a price lower than the cost of model 3 and reach 500,000 units. Although Musk is sadly overly optimistic about Tesla's future production capabilities, it seems quite plausible and even if this exact scale is not achieved, Model Y will still be able to benefit from the lessons learned from it. With the new design changes and lessons learned from Model 3, the Y model will likely have a larger margin than Model 3, which aims to reach 25%.

Gigafactory 1, located in Nevada, USA, will host the first Y-model assembly line, which is expected to begin production in late 2020. Gigafactory 3, located in Shanghai, China, will also host the channels. Model Y (Recent reports now confirm that Tesla has successfully obtained the borrowing necessary for the first phase of construction of the facility). However, Musk hinted in a tweet that he was missing some information given in the presentation, and the photo below seems to corroborate the fact that it is a European Gigafactory. The Y model will go into production in the fall of 2020, according to the presentation. Both will provide access to different markets and are crucial to Tesla's future.



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None of Tesla's enhanced manufacturing capabilities will mean anything without proper demand. The SUV market continues to grow, recording 2.6% growth in global market share and accounting for 36.4% of the overall automotive market. YoY SUV sales volume increased 7%, the first four-digit SUV growth period in four years, but the largest growth of any other vehicle category. The Y model, which is an intermediate SUV according to the presentation, is in the second largest segment of the SUV market; Intermediate SUVs account for 25% of all SUV sales. China leads the global SUV market with 10.35 million SUVs sold in the country in 2018, of which 42% of the automobile market is SUV. The United States ranked second with 7.75 million SUVs sold in 2018, accounting for 45% of the total automotive market. Growing demand around the world is an essential part of the ultimate success of the Model Y on which Tesla seeks to capitalize. Elon Musk said when calling the fourth quarter 2018 results that he "would expect the demand for the Y model to be … perhaps 50% higher than that of the model." 3? ". The expected increased demand is due to stronger overall demand for SUVs and Tesla. ability to compete in this market.

There is no doubt that demand for sport utility vehicles is strong, but that means there are many more players in the SUV market that Tesla has to beat. Many new electric SUVs will arrive in 2019, more than a year ahead of the expected date for the production of the Tesla Model Y. What sets Tesla apart from the vast majority of them is the price range. The Nissan (OTCMKTS: OTCPK: NSANY) Leaf 2019, Kia (KRX: 000270) Niro EV and Honda (NYSE: HMC) Kona EV models are the only electric SUVs in the Model Y price range. The 2019 Nissan Leaf starts at $ 29,990 with a range of 150 miles. The Kia Niro EV has not yet received an official price, but the hybrid model starts at $ 28,000 and all-electric vehicles tend to cost a bit more, which should cost between $ 30,000 and $ 33,000 . The Niro also has a decent range of 239 miles, but will only be available in twelve US states. Finally, the Honda Kona EV, the car I see as the biggest competitor of the Model Y, starts at $ 36,450 with a range of 258 miles. This is the model most similar to the Y model, which will start at $ 39,000 with a range of 230 miles, although Musk said they could perhaps do better. Musk also stated that the base variant would not come into production until 2021. The interior of the Y model is also more luxurious than its competitors, very similar to the model 3 and probably with a similar safety rating to that of model 3, as Musk mentioned in the presentation. . Although it may be a little more expensive than its competitors, with nearly 60% of the model 3 changes as non-premium vehicles, Tesla has proven that its customers are willing to pay a little more for their vehicles.

China, however, is a story quite different from that of America. Their electric SUV market is already full of various brands and models, all well established in the country. There are too many important competitors to list, but they cost almost all between $ 5,000 and $ 10,000 + less than a basic Y model. However, they all have a range of about 75 to 100 miles and are much less elegant and polished than the Y model. The S and X models sold well in China, giving Tesla 9% of the electric vehicle market in 2017, the highest of all foreign manufacturers by more than 5%. However, both models were sold at an incredibly higher price than the US price to account for customs duties and were also not subject to any government subsidy. Prior to the recent Chinese tariff reduction on Tesla vehicles, a basic Model S cost $ 122,525 and a basic Model X, $ 171,000. To provide the context, in America, these same vehicles would cost $ 76,000 and $ 82,000, respectively. The purpose of these figures is to demonstrate that the Chinese market is willing to pay more than a simple premium for Tesla vehicles.

Overall impact of the company

Model 3 aimed to make Tesla a true vehicle manufacturer and not just a player in a niche market for luxury electric vehicles. I would say it was accomplished even before the car became really affordable; Model 3 dominated the US luxury car market in 2018. The Y model will push Tesla even further as a manufacturer. Since Tesla will eventually produce one million Y models per year, it is expected that Model 3 will reach more (both projections are in line with the guidelines of the manufacturing facilities known to date), Model Y will have a more sustainable impact on the society. Without model 3, the Y model would not be possible, but the Y model will soon become Tesla's best-selling vehicle due to the increased demand created by the SUV market. As I mentioned earlier, the SUV market is the largest in the world, which will allow the Y model to outperform Model 3 in popularity. However, the biggest contribution of the Y model to Tesla's future will likely be its margins. Earlier in the article, I mentioned the possibility for Tesla to improve the gross margins of its Model Y through multiple design and production improvements, but what will these margins be? Model 3 is targeting a non-GAAP gross margin of 25% by 2019. I have used the Model Y price, as well as production improvements (including battery technology and efficiencies). Global Overview, also discussed above) to determine that Model Y will likely target a non-GAAP gross margin of 30%, similar to Model 3, making it by far the most profitable vehicle for Tesla, especially when It is associated with its volume. Because of its incredible profitability, Tesla's value is expected to increase by about 20% after the Y-model is manufactured for the first two quarters. Indeed, the Y model will be able to prove its profitability through profit reports and display the high demand for the vehicle.

As Tesla's best-selling vehicle, this margin will have a significant impact on the company and help it grow its earnings in the future. The Fremont Model 3 production line, excluding the "tent" structure, "hundreds of millions." In accordance with Tesla's instructions regarding the Model 3 production ramp and previous declarations, the Y model's production lines will be significantly cheaper, while generating greater profits and volume. As a result of reduced costs, increased margins and increased production, the Y-Model will become Tesla's most important vehicle and propel it into an era of constant profitability.

The Y model will be able to generate the necessary capital to finance its development and production in just three quarters a year. To find this number, I took the average selling price of Model 3 of $ 59,300 and likened it to what it would represent with the price of Model Y. I then used a rate of 6,000 vehicles produced per week. I've doubled the rate of 3,000 units a week, which will be produced in Shanghai and Nevada (3,000 units based on the target set for the initial production of Model 3 in Shanghai), at a later time . – 15% margin to determine the time needed to produce the Y model to generate $ 1 billion. I found that in just under a half year, the Y model output would generate $ 1 billion – and these numbers are rather conservative. The production ramp could involve 5,000 Y models per week by the end of the two quarters (faster than Model 3) with a margin of more than 15% (although margins are lower in initial production as product). In addition, $ 1 billion is more than what is needed to cover the Y model development and production expenses, both in Nevada at Gigafactory 1 and in Shanghai at Gigafactory 3. This means that model development This will not increase Tesla's currently significant debt burden and therefore be very beneficial to Tesla's future health without jeopardizing its current well-being.

If Tesla is unable to generate the request that I think is reasonable, or if its production of the vehicle is delayed, this thesis will fail. As there are more and more competitors in his field, electric SUVs, Tesla could face a slight pressure related to the demand of his vehicle. However, as I mentioned earlier, the Y model will be able to compete successfully with other vehicles through brand recognition and the overall higher quality of the vehicle. In addition, production is very unlikely to be delayed as Tesla will likely choose a conservative pattern for its Y-style production, such as the base going into production in early 2021, in order to avoid disappointing production figures. promised by the company. Thanks to all the design improvements, Tesla is designed to meet its production estimates without a hell of production. Therefore, the most important risks of the thesis are unlikely to occur.

Overall, Model Y will give Tesla a long-term boost for its profits with relatively little capital required. Regarding the future of Tesla, the Y model is a key element for Tesla to remain profitable and to continually increase its total profits. With strong demand and high manufacturing capacity, the Y-model will become Tesla's most important vehicle and outstrip all other vehicles. Not only will it be able to pay for itself quickly enough, but it will also allow further development of Tesla's other aspirations, such as solar and new plants. The Y model will have a lasting impact on Tesla and make it a real powerhouse.

Disclosure: I / we have / we have no position in the actions mentioned, and we do not intend to initiate a position within the next 72 hours. I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose actions are mentioned in this article.

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