Tesla Fremont Is Working Beyond Capacity, Says Morgan Stanley

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Tesla Fremont is working beyond the capability originally calculated for it. Morgan Stanley analyst Adam Jonas made five key takeaways from his recent Tesla factory tour.

On Tuesday, March 15, Morgan Stanley analyst Adam Jonas visited the Tesla factory in Fremont, California. He had a tour of the facility and also had the opportunity to test Model 3, Model Y, and Model S Plaid. As a result of this visit, Jonas made the following five key findings:

1. The Tesla Fremont plant is 'bustling' to say the least.
The factory was never designed to produce 450,000 units and at its peak produced about 300,000 units before Tesla took it over from Toyota, the analyst noted. Tesla is not embarrassed that the factory was designed inefficiently and has few assembly buildings (one of which is a tent). Manufacturing in California also comes with higher costs associated with: sourcing labor, labor costs, and logistical complexity as supply chains are not located nearby. However, all factory workers were actively busy ramping up production of the Model 3 and Y for shipments to North America. Jonas noted that Morgan Stanley sees the Fremont factory as an important learning "lab" for Tesla, which not only produces the world's most popular electric vehicles but also provides lessons for the future expansion of the manufacturer's production.

2. Tesla is demonstrating strong pricing power.
The comparable standard Model 3 trim model was ~$36,000 a year ago and today starts at approx $47,000 (up >30%). Jonas thinks Tesla is raising prices from a position of strength and is still not seeing wait times go down, which range from 2-3 months wait to 6+ months depending on the model. Tesla believes supply and demand dynamics will continue for at least the next 18 months, the analyst wrote. Tesla is able to utilize this period given their superior value prop for customers to layer on further pricing. Morgan Stanley had underappreciated the pricing power and lead Tesla has and expects won't need to cut prices until 2024/25 to maintain its market share, and by then the software can contribute more to the P&L. "Saying that, we still believe that it remains Tesla's mission to invest its margin' into lower and lower prices to expand the addressable market for EVs at entry-level segments in developed markets as well as expanding into ultra-low-priced emerging markets like India," wrote Jonas.

3. Raw material impacts is felt, but not at the rate of pricing increases.
The analyst believes that the chips are actually a bigger concern in real time. Tesla has long-term contracts in place and is already feeling commodity pressures that were in the Q4 results and should not come as a sudden impact on margins, believes Morgan Stanley. "In addition, as we start to lap periods of higher prices from September last year and only recently this week after layering in further price increases, this will more than positively offset any headwinds in later quarters. Tesla is not worried on nickel given their reliance on LFP for 50% of models today for standard range which doesn't need nickel or cobalt and going forward LFP could move to 60-70% of units if needed if nickel became uneconomic supply," wrote Jonas.

4. Capacity & Margins.
Tesla reiterated its volume growth guidance "comfortably above 50%" whether with or without the launch of Giga Berlin and Giga Texas. As Tesla's CFO mentioned during the latest earnings call, microchips remain a major hurdle. Tesla has been creative by recalibrating the software to rely less on individual chips and removed the chips for things like lumbar support and also removed the radar such that now FSD relies entirely on eight cameras and 12 sensors. Tesla also mentioned that Model Y shares 75% of the same components as Model 3. In addition, capital costs per unit of power are 65% lower in Shanghai than in Fremont. Switching to a structural battery pack and moving from 2170 to 4680 battery cells will also result in a 50% reduction in battery cost in the long run. Tesla has also reduced assembly steps at Giga Shanghai from 100 (which other OEMs typically have) to just 45 steps, and reduced the welding line from 1,000 robots in Model 3 to just 300 in Model Y, and is constantly looking for ways to improve production efficiency while reducing investment in the plant. "Tesla IR also mentioned that it believes the industry is grossly under-supplied across capacity and all other adjacent bill of materials in 2025 if we believe OEM projections and if EV adoption remains strong to ~25% in 2025. Tesla should be in a key position of strength to capture a meaningful amount of EV demand," wrote Jonas.

5. Full self-driving impact.
Investors believe that the sales rate is about 15% in the US and a much lower percentage in other regions. However, once Tesla releases an updated city-wide FSD, this will change. "The impact of this on 500k cars in the US (1/3 of 2022 deliveries) at 15% take rate and 40% incremental recognition at $12k (cost of FSD) is approx $360mm of incremental pre-tax profit realized (but note no change to cash flow) and has potential to boost margins by ~40bps structurally going forward," wrote the analyst.

NEWS: Morgan Stanley analyst Adam Jonas toured the Tesla Fremont Factory on Tuesday March 15th, test drove the Model 3, Model Y and Model S Plaid and attended a meeting with IR.

Here are his key bullet points (thread):

1/3 pic.twitter.com/2JqhcwDYHv

— Sawyer Merritt 📈🚀 (@SawyerMerritt) March 16, 2022

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