Tesla’s Q1 2023 earnings call caught our attention, in particular analyst questions and Elon Musk’s comments about Tesla’s lack of meaningful service profits relative to their legacy automotive competitors. We think it’s a great way to show off the Stream expert transcript library, as it’s a classic use case for expert calls: do claims made by company management match the perceptions of other industry stakeholders? Discovering either mismatches or perfect congruence can spark a new investment thesis, and can be accomplished very quickly using an expert transcript library such as Stream by AlphaSense.
The part of Tesla’s Q1 2023 earnings call that caught our attention (1)…
Elon R. Musk
Technoking of Tesla, CEO & Director
…I think it is helpful to have the feedback loop with a service, because that means we feel the pain of service, and then we can adjust the design to make the car need less service. And I think that gives us the right incentive structure because the best service is no service. The car doesn’t break.
Whereas if you have, say, a dealer network that is reliant upon services revenue, then you arguably have a misalignment of incentives where they’re making money on service. But actually, the best thing for the consumer is the car doesn’t need servicing.
Philippe Jean Houchois
Jefferies LLC, Research Division
…for many of your traditional competitors, a fair amount of profits for them comes from selling spare parts and servicing? You don’t have that in your profit structure. And have you looked at the deficit you have compared to your peers?
Elon R. Musk
Technoking of Tesla, CEO & Director
Yes… people didn’t understand that the best short-selling argument against Tesla for the longest time was the fact that Tesla does not have an existing fleet and that the auto industry, the reason incumbents succeed and newcomers fail, the biggest reason is that the incumbents have a large fleet, and they’re able to sell new cars at close to 0 margin and then sell spare parts at a very high margin, sort of razors and blades type thing.
And so the only way… for a newcomer to succeed is to have a product that is so compelling that people are willing to pay a premium over the incumbent product. And in the absence of electrification and autonomy, I don’t think a newcomer can succeed.
Claim #1: Do automotive incumbents sell cars near zero margin because they make their money on service?
This expert seems to agree, mentioning BMW as the leader in the trend of over-engineering cars with parts that will fail in order to drive service margins, while lowering the price of the car.
For instance, in certain German OEMs, they have a 33% safety margin with their products and parts. Basically, after a certain period, they expect parts to fail and they expect the dealers to be able to sell a certain amount of parts. The whole business model is built around the customer relying on the service, as well as taking the car to dealerships and having repairs, and that’s part of their business model. Certain things are allowed to fail just because they meet the criteria that were set, which are not customer relevant.
Do you want Bentley-level quality and you’re willing to pay for it or do you want to go in the direction of something more sustainable that is more customer-relevant? Driving the price down per unit is where I see that happening but at the same time, you need to increase your margins. That’s what BMW is doing and I think BMW out of the big three in Germany is probably leading that race at the moment from what I’ve seen.
Perhaps more alarming for legacy automotive companies: consumers may be getting wise to the internal combustion engine (ICE) razors / blades model…
… the customers have slowly started to understand that although the initial cost of buying an EV is a little on the higher end when compared to ICE, when they think about how much they’re going to spend on servicing, how much they’re going to spend on refueling their vehicle, I think the EVs will have an advantage over a period of time. It’s like an insurance policy. You pay more now, but down the line, you reap the benefits of it. I’ve seen in customers that the mindset has changed.
-Ford Motor Company – Lead Advanced Manufacturing Engineer – BEV (Prior)
If that mindset changes, then EVs really could be 50% of car sales in the United States by 2030.
Claim #2: Does Tesla use service to improve the product, ideally leading to less service, instead of as a profit driver?
This former Tesla real estate manager speaks to the need for service locations: as a necessity to sell cars.
We went through a phase when Elon was like, “We’re not going to have retail anymore. Everyone’s going to buy their car on the internet.” There was really a focus on being able to find permanent service locations. We felt that people would only buy a car if there was somewhere near them where they could get it serviced.
There was a few different models that we went through. There was the physical service locations, there was the idea that a service technician will come to you with a service man and fix it at your house, and then an alternative where someone from Tesla would go pick up your car. If it had to be taken 2 hours away, we would deal with it so that customers weren’t having to worry about that… it came down to, we can’t sell people cars unless there’s somewhere where it can get serviced.
The lack of a dealer and service network could even be a competitive advantage moving forward. As this former Tesla director explains, a dealer network built for ICE service revenue doesn’t work for EVs.
All of the OEMs speak these days of EV. They all speak to how quickly they want to get there. The challenge is their operating models are all counter to the EV marketplace. Their profit and loss programs, how they’ve been able to work with their dealer networks, all those things, the way they built those operating models, they’re not built for the long term. The challenges I really see is how they’re going to be able to re-up those relationships and help change the mental model of what the EV market’s going to look like in the short, mid, and long-term for their dealer networks.
The dealer networks, traditionally, their profit centers have always been the service industry and their used car industry. Being able to really flip that model and being able to think about how they serve their clients, how they’re able to change the makeup of their staff, all those types of things are just going to be very different, I think, in their cultures versus how they’ve traditionally been.
Claim #3: To succeed, does a newcomer need a product that is so compelling that consumers are willing to pay a premium for it?
This expert discusses exactly the challenge outlined by Mr. Musk for newcomer Rivian (RIVN): even with a notably superior product, Rivian cannot charge enough to make a profit on the cars.
I think [Rivian is doing extremely well] in product. I haven’t read a single review of the Rivian R1T that did not like what they were driving. You have to get used to the headlights, which took me a while, to be honest, but it seems like they’ve hit it out of the park as far as the product is concerned. It’s very thoughtfully engineered. It’s put together with a high degree of quality. Their software is solid, fairly non-glitchy.
In fact, I’ve got a Volkswagen ID3 here and their software is a little glitchy, to be perfectly honest with you, even more so than my Tesla was. Software is tough to get right and I think Rivian has done a good job with that. I think where they’re going to struggle a little bit is just being profitable, being able to make enough of the vehicles with a profit for each one in order to turn themselves into a profitable company, but at the same time, Tesla was not profitable for quite a while, until suddenly that they were.
–Daimler Trucks North America – EMG Ecosystem Infrastructure Lead (Prior)
Claim #4: To succeed, does a newcomer need electrification and autonomy?
The obvious counter to electrification is hydrogen fuel. This expert is very pessimistic on hydrogen fuel cells relative to electric.
It’s much more efficient to take energy, put it into the battery, put it into the motor and go into propulsion, and it’s a lot cheaper just from a business case standpoint, even if hydrogen gets down to $5 per kg, which is nowhere near today, it’s still not cost comparable to a battery electric vehicle. You have to get down to $3 and change, if I remember right, in order to be even close to cost comparable with a battery electric. We’re not going to get there any time soon, and especially not with green hydrogen.
I think the reason that hydrogen fuel cells are such a big topic is because you have some of the most massive industries in the world that are reliant upon what I call dinosaur juice, that are really good at refining things and moving things around in tanks and pipelines. They view hydrogen as a way to stay relevant and alive, and so they are working really hard to try and make hydrogen and hydrogen fuel cells relevant, so that they can stay relevant and alive. I think it’s the last throes of an aging and dying industry.
–Daimler Trucks North America – EMG Ecosystem Infrastructure Lead (Prior)
According to this former Rivian (RIVN) engineer, the company is taking the same approach to advanced driver assistance systems (ADAS) as Tesla by owning the entire stack, as opposed to relying on suppliers for the code.
If you’re looking at ADAS as a good example, the ADAS systems that are on the vehicle will likely all be controlled by one centralized computer focused primarily on ADAS. That will take in lidar, radar, ultrasonic, vision, and all of that is going back to a central compute platform. That central compute is then sending out torque requests and braking requests and steering requests essentially to, what we consider, the chassis of the vehicle.
How is that architecture [in a Tesla or Rivian] different? I think the primary difference in the architecture there is that Tesla and Rivian own the entire stack through and through. The main difference for them in how they look at software is that they own all of it as much as possible. If you’re looking at a normal car, for instance, from an architecture standpoint, like an ICE car, they’re usually buying all of their parts from a supplier, and that supplier is defining the inputs and outputs of the device.
Tesla and Rivian, they define all their own interfaces on a given time and all of the code is written in a single stack, meaning you might be writing ADAS code in the same code base that you’re also writing door handle code.
Summary: Do Elon Musk’s Claims Match the Perceptions of Other Industry Stakeholders?
The quotes above lean more towards congruence than mismatch, but we found these six transcripts in a quick search of Stream’s expert transcript library. There are many more expert call transcripts on Tesla, electric vehicles, and the automotive industry. You can investigate management claims for yourself by requesting a free trial to Stream by AlphaSense here.
Tesla Expert Call Transcripts Quoted in this Post
- TSLA: Competitor Is Bearish on German Auto Manufacturers Current Management Style, Lots of Fat to Be Cut to Remain Competitive in Current Market -Diehl Group – Launch Management (Current)
- TSLA: Former Competitor Thinks Legacy OEMs Will Catch up to TSLA Over Time – Ford Motor Company – Lead Advanced Manufacturing Engineer – BEV (Prior)
- TSLA: Former Real Estate Manager Believes TSLA Must Continue Market Expansion to Maintain Moat With Newcomers Such as RIVN and LCID – Tesla – Real Estate Manager (Prior)
- TSLA: Former Director Believes TSLA Can Grow Production Volumes ~50% Annually but Acknowledges Quality Challenges – Tesla – Director (Prior)
- TSLA: Former Competitor Is Optimistic About EV Transition and Sees Compelling TCO for BEV Trucks by ~2025 – Daimler Trucks North America – EMG Ecosystem Infrastructure Lead (Prior)
- TSLA: Former Competitor Thinks the Cost of EVs Will Largely Come Down to More Suppliers Being Available, Especially With Battery Technology – Rivian – Staff Special Projects Engineer (Prior)
- Tesla Q1 2023 Earnings Call Transcript
- Image via DALL-E 2 (prompt: a pointillist painting of cars being electrified)