Analyzing Tesla's demand

How does consumer demand look as we enter a potential recession?

Put simply, Tesla’s revenue growth depends on increasing both demand and supply. As we head into a likely recession, the obvious area to question is demand. The auto industry is very cyclical and one of the most impacted sectors in a recession, as many consumers can no longer afford new cars and often look to extend the life of their existing vehicles. This concern has been amplified by recent Tesla layoffs, which many think suggests a weakening sales outlook.

In the case of Tesla, and really any other electric vehicle today, the key concern isn’t demand. It’s all about production/supply. This post will briefly cover 3 areas to analyze Tesla’s demand (backlogs, pricing, and EV adoption) before summarizing the key risk to their growth targets: production.

Backlogs

Despite significant increases in prices (see below) and production rates, wait times are currently at record highs. If you order a base Model Y in the US today, you have to wait until next year to get it! International wait times are similar and also at record levels.

Troy Teslike is a great resource for tracking Tesla’s delivery forecasts. He recently noted that Tesla’s backlogs have increased to a record high in June. This is despite significant increases in both prices and production rates, both of which put downward pressure on customer wait times, implying strong net order growth.

The last point worth noting on backlogs is that long wait times are actually a headwind to order growth. People can only wait so long for their cars and are unlikely to order if they have to wait several months for delivery. The increase in net order growth, despite long wait times, is another indicator of strong demand.

Price Increases

In late 2021, and multiple times in 2022, Tesla increased vehicle prices across all models and regions. This most recently happened in mid-June, after recession fears had already begun.

By raising prices to this degree, it’s clear there’s high demand for their products, even at higher price points. Additionally, once customers have placed an order, they’re locked into the price at that time. Price hikes make it more unlikely that existing orders are cancelled because customers would lose the benefit of the lower price they locked in.

But aren’t car prices rising for every OEM, not just Tesla? The key difference is that Tesla’s production is rapidly increasing, while the rest of the industry is experiencing significant declines in volumes due to ongoing supply chain issues. Lower supply is artificially increasing the prices for other brands, while Tesla is significantly increasing its supply.

Source: Cox Automotive

More cars sold + higher prices = strong demand. I do think Tesla will lower prices again in the coming year, but it’s clear that demand far exceeds supply right now.

EV Adoption

It’s no secret that inflation, especially at a 40-year high, is a serious issue for the economy. What’s unique here is that inflation’s most significant contributor, energy, is largely a tailwind for electric vehicles. With soaring gas prices, there’s been a significant increase in the number of consumers considering an EV for the first time. There are many anecdotes and use-cases supporting strong EV demand, including Uber Drivers leasing Teslas for less than it costs for just gas alone. Ride sharing, yellow cabs, and rental car companies all adopting EVs, specifically Teslas, has a compounding effect on demand as hundreds of thousands of people are exposed to the product for the first time.

So EVs stand to benefit, but does that mean Tesla will too? Right now, Tesla’s share is so high (~70% of US EV sales) that any increases in EV adoption will benefit Tesla indirectly. When people consider an EV for the first time, they’re likely to compare prices/specs against the market leader. There’s no better example of this than the Super Bowl, where 8 different OEMs advertised their electric vehicles. Tesla doesn’t even advertise but still saw a large increase in orders from competitors’ EV ads! With EV penetration still so low (only ~5% of US sales), this is a long-term tailwind for Tesla’s demand that will play out over many years.

Tesla’s Biggest Risk: Production

Clearly demand is not an issue for Tesla and I believe the same for most other EVs today. This is very critical heading into a potential recession, where demand is the biggest issue for most other companies/industries. Unfortunately, ramping production has been a significant challenge for Tesla this year, specifically at its new Austin and Berlin factories. The production ramps have been slower than they company had hoped. There are many factors at play, but the most important ones are new manufacturing methods and internal 4680 cell production.

By introducing completely new manufacturing methods (i.e. front and rear castings and structural packs) in Austin, Tesla’s production has been slower than what the Shanghai facility experienced when it first opened in 2020. Shanghai’s initial Model 3 and subsequent Model Y ramps both used similar production methods as Fremont, which helped the company get to volume production quickly.

New factory production has also been limited by 4680 cell supply. In February, Tesla produced its first million 4680 cells but that’s only enough for ~10k vehicles. There have been some challenges in scaling cell production, which is fairly predictable given the new technology. Tesla has largely de-risked this issue by starting Berlin with vehicles using 2170 cells and recently introducing a 2170 production line in Austin. Additionally, their Shanghai facility was recently upgraded to increase its production capacity to over 1M units annually. These moves will help scale production for the rest of 2022, but growth in 2023 onwards will be largely reliant on scaling vehicle and cell production in Austin/Berlin.

These new technologies will eventually lower Tesla’s production costs and increase gross margins, but for now, they present risks to achieving their growth forecasts.

Conclusion

Entering a potential recession, many skeptics think Tesla should be worried about demand, but there’s no data to back this up. The real risk lies in their ability to meet strong demand by scaling vehicle and 4680 cell production. I’m confident in Tesla’s ability to overcome these challenges given their track record of scaling production and top engineering talent. A production issue is a significantly better problem to have relative to a demand issue, especially in a potential recession, because you can still mostly control your own destiny. Their Q2 earnings call this week will hopefully give more insights into the company’s progress in these areas.

If you’ve made it this far, please consider subscribing and feel free to provide feedback! Thanks for reading