Elon Musk: Tesla's China problems have been blown way out of proportion
Tesla reported fourth-quarter and full-year 2014 earnings on Wednesday. The company missed on quarterly revenue, at $1.1 billion versus an expected $1.22 billion, and missed substantially of EPS, with a $0.13 loss versus expectations of a $0.32 gain.
And while Tesla said in its shareholder letter that it hit its quarterly production goal, building 11,627 cars, it failed to deliver as many cars as it said it would in the quarter, with 9,834 vehicles ending up in customer hands versus a predicted 11,200.
The company chalked up the shortfall to a shift to production of the new all-wheel-drive version of the high-performance Model S, the P85D. Musk indicated that deliveries have also been affected by basic logistics.
"While we were able to recover the lost production by end of the quarter, delivering those cars was physically impossible due to a combination of customers being on vacation, severe winter weather and shipping problems (with actual ships)," Tesla said. "As a result, about 1,400 vehicles slipped December and were delivered in Q1."
We took a look at this situation back in October, 2014, and at the time figured that Tesla might miss on deliveries by a few thousand vehicles in 2014, but succeed in delivering them in early 2015. We also figured that Tesla might be able to make up lost ground on production before the end of the year.
But although Tesla takes deposits for its cars, it can't book a full sale until the car is delivered.
At the top of the call, Musk also addressed Tesla's recent problems in China. Reuters reported on Tuesday that only 120 Model S sedans were delivered in China in January. Citing an internal email, Reuters reported that Musk was so disappointed about this that he was considering management changes in the region.
"The China thing has been blown way out of proportion," Musk said.
He admitted that Tesla hasn't "executed super well" in China, but he added that whatever issues the company has been having in the country don't matter that much in terms of Tesla's 2014 performance, arguing that China was essentially irrelevant to last year's results.
Musk did reveal that some Tesla representatives in China were suggesting that it's difficult to charge a Model S electric vehicle in the country, a perception that the company has been seeking to combat, especially as it builds out its Supercharger network.
As he has on previous conference calls to discuss earnings, Musk stressed that Tesla doesn't have any demand problems globally. Lots of people want to but its cars. The challenge is in actually building, and then delivering, enough cars to satisfy demand without making customers wait too long to get their vehicles.
To address the production issues, Musk said that Tesla will spend a "staggering" amount of money to build more Model S sedans and, soon, Model X SUVs (the Model X is slated to arrive in mid-to-late 2015). However, he also said that Tesla isn't considering any new capital raises, but intends to fund growth through the company's operating cash flow.
An intense level of capital expenditure is needed, Musk said, to capture future revenue. So spend a lot now to make a lot more later. Tesla has said that it will produce 55,000 Model S sedans and Model X SUVs this year.
Musk also reported that because Tesla ran hard to achieve a 2014 production target of 35,000 cars, it gave workers a week off at the beginning of January, 2015, shutting down operations at its factory in California.
Tesla's gross margins are still pretty strong, in the 25%-plus ballpark. That's high for the auto industry, with major automakers targeting margins in the 10% range (that's net profit, but Tesla would argue that its gross margins are still very good because it needs to spend its money to rapidly grow its business).
Musk noted that regardless of how gross margins are accounted for - on a GAAP or non-GAAP basis - they remain at that level. In fact, Tesla said in its investor letter than a strong dollar negatively affected gross margin in the fourth quarter and will likely detract from gross margin in the first quarter.
If not for the strong dollar, gross margin would be higher in the first quarter than than in the fourth, the company said.