Tesla's new Semi: after the hype

Elon Musk pitches Tesla's new Semi tractors at the unveiling event last Thursday night.

Elon Musk pitches Tesla's new Semi tractors at the unveiling event last Thursday night.

Specification, production questions abound

Last Thursday night, Elon Musk held a Steve Jobs-style unveiling at Tesla’s Hawthorne, CA production facility that highlighted the new electric Semi truck and the second generation Roadster in front of a fawning audience of fans and media. The futuristic, aerodynamic tractor elicited the expected oohs and aahs from Tesla’s cult following, but after the hype died down, investors and industry analysts have even more questions than they did before.

“In essence, all last night’s event did was add to Elon Musk's shopping list of things he needs to spend money on at a time when the company is having difficulty making its base vehicle (Model 3) and its equity and debt has traded off,” wrote Cowen analyst Jeffrey Osbourne in a note on Friday.

There is so much we do not yet know about Tesla’s plans for its Semi, but our questions fall into two main categories: missing details on the specifications and capabilities of the truck itself, and deeper issues regarding Tesla’s ability to finance and manufacture a significant number of the trucks. We’ll dig into the Tesla Semi’s technical issues first, and then consider how the Semi will find its place in a company with ongoing production and profitability difficulties.

While Musk exceeded everyone’s expectations by promising a 500 mile range for Tesla’s Semi, he omitted some information that will be crucial to evaluating how truly competitive the truck will be. We still don’t know the price or weight of the truck. The battery alone could weigh 28,000 lbs and cost over $250K, cutting deeply into the truck’s available payload and driving the tractor’s cost up to more than double the cost of a conventional diesel truck. 

Musk claimed that carriers will be able to operate the Tesla Semi at $1.26 per mile, compared with $1.51 per mile for diesel trucks, but there are problems with these figures. Musk uses an industry average cost-per-mile figure for diesel trucks, but the day operations the Tesla Semi will be competing against have a lower operating cost than OTR operators. The cost-per-mile of the Tesla Semi does not tell us the full story, either: that number is only one component of the total cost of ownership (TCO) figure that carriers use to determine which truck to buy. When you multiply the cost-per-mile by the mileage you expect to get from the whole lifetime of the truck, you get the lifecycle cost. Then you have to add the upfront cost of the vehicle, and that gives you the TCO. Musk conveniently left out the initial price of the truck, which will be well above any diesel truck on the market. 

“Therefore, on a TCO basis, these trucks may not be that attractive. To develop and create a fleet of many such trucks, the upfront sticker shock plus cost of financing might make it impossible for many fleets to acquire these vehicles,” wrote Sandeep Kar, Chief Strategy Officer at Fleet Complete, in an email to FreightWaves.

Many automotive industry experts are having a hard time imagining how Tesla, which has struggled to reliably produce its mass-market Model 3—Tesla is shipping Model 3s missing seats and digital displays to dealers—will be able to compete in the much more rigorous commercial vehicles market. 

Stifel, for one, has concerns about how carriers will be able to service and maintain electric drivetrain vehicles. “Service is critical for commercial vehicle buyers as ‘downtime’ can be among the most expensive costs of equipment. Buyers of Freightliner, Volvo, International, Kenworth, and Peterbilt trucks, for instance, can rely on in-house maintenance (which know how to work on diesel engines but not electric trucks) as well as robust dealer and service networks. So can buyers of Cummins engines. Tesla, of course, does not have a network built out for that purpose,” wrote Stifel’s analysts yesterday in their Industry Update. Stifel also raised questions about the intended market for the electric tractor, noting that while the Tesla Semi is apparently designed for shorthaul routes of less than 250 miles, its large design seems more suited to longhauls and does not appear to be nimble enough to navigate city streets easily.

Established truckmakers have already entered the electric tractor competition, and the economy of scale afforded by their much larger production capacities gives them an inherent advantage over Tesla. Daimler, a one time partner of Tesla, is in particular looking to steal Tesla’s thunder: the German company plans to invest $10B in electric vehicle production and $1B in battery production and has a second battery plant underway that will begin production next year. Daimler et al plan to let Tesla burn through its billions getting battery technology to the point where it’s commercially viable, and then jump in with their superior infrastructure and market share to cut Tesla out.

Even though Tesla’s market cap per car sold is wildly inflated, some Wall Street investors are voicing concerns over the prospects for Tesla’s ROI. “Longer term, we continue to think that the capital intensity of the business model will keep returns below best-in-class auto(makers),” wrote Jefferies analyst Philippe Houchois in a research note.

Tesla currently has about $3.5B cash on hand, but will burn through most of it by the end of Q1 2018, at which point it will need to raise several more billion dollars. Tesla’s last debt sale raised more than expected, but its bond has underperformed in the secondary market, leading some to think that it will be difficult for Tesla to draw from the same well again.

“They are losing $1.5B a quarter and the bond is unsecured so it is not of interest to me,” said Jim Brilliant, chief investment officer at Century Management.

At some point, even assuming that Tesla manages to raise enough money to begin production of the Semi by 2019, their shaky finances and risky manufacturing processes—like skipping prototype and soft-tool stages—will make them vulnerable to well-heeled competitors. Announcing production partners would have done a lot to allay concerns about Tesla’s ability to actually turn a profit producing commercial vehicles, but the company remains stubbornly dedicated to its vertical model. 

“To the negative, we were anticipating that the company would announce production partners (i.e., for chassis and Semi truck vehicle build), as well as pre-ordered fleet customers,” said Goldman Sachs analyst David Tamberrino. “However, the company did not provide details on any partnerships, or color on the potential production capacity and location — only noting that they have historically vertically integrated and could likely continue that trend with the Semi truck (which the company anticipates will be available in 2019).”

Elon Musk is a talented, visionary pitchman, but as with so many of his other announcements, it’s unclear whether the claims he made at the Semi reveal are grounded in reality or merely aspirational goals meant to inspire the next round of investors willing to cover his losses.

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