Tesla Selling Model 3 Test Cars: Accounting Questions

On a 4Q 2016 financial formula contention call in February, Tesla (NASDAQ:TSLA) reliable what we had been observant for some time about a initial Model 3 units going to Tesla’s possess employees: here.

From a transcript:

“The initial cars, arrange of Founder Series, indeed go to association employees, since we consider it’s critical for us to have a good feedback loop on a product that we’re making. And if there are any issues, bugs or things that need to be addressed that we can residence those before business knowledge them.”

A small after in a transcript:

“Probably going to be flattering tighten to production. We’ll open it internally. So, a initial cars will go to Tesla employees and investors and whatnot and so onward so that we can knowledge any hurdles before a business do. So we’ll apparently do it internally earlier than we would do it externally. So we consider it’s substantially 3 months or 4 months away.”

Basically, a initial so-and-so many Model 3 units will be going to Tesla’s possess employees. Seeing as Tesla says deliveries will start in July, how many units are we articulate about, that will be going to a employees first?

Tesla wrote in a 4Q 2016 financier minute that it will surpass 5,000 per week some time in a fourth entertain of 2017: here.

Assuming 12 weeks per quarter, a prolongation roof is therefore somewhere in a ballpark of 60,000 units per entertain as a run-rate starting some time in a fourth entertain of 2017. The existence before afterwards will naturally be dramatically less, and Tesla doesn’t have 60,000 employees anyway. Then again, any Tesla workman could get some-more than one automobile as a Guinea pig. Spread a risk inside a family!

Before we go any further, let’s inspect what Tesla pronounced about Model 3 for 2017 reduction than a year ago, on a 1Q 2016 gain call here.

“So as a severe guess, we would contend we would aim to furnish 100,000 to 200,000 Model 3s in a second half of subsequent year. That’s my expectancy right now. Yeah, so that’s a thing.”

Does anyone trust that that’s still a thing? Does anyone trust that Tesla will come even tighten to a reduce finish of that operation – 100,000 units of a Model 3 – before a finish of 2017?

For functions of this contention it doesn’t matter either it will be 3,000 or 15,000 Tesla employees who will be contrast a Model 3 until it is deemed good adequate for outsider-civilians to take smoothness of this differently untested rocket on 4 wheels. Remember what Elon pronounced in a quote above: “…experience any hurdles before a business do.”

There are so many issues with this methodology: Are these Tesla employees competent to be exam pilots? If you’re operative in a accounting department? Marketing? Janitorial services? On a open line?

Besides, Elon pronounced that this organisation wouldn’t embody usually employees. It would also embody “investors and whatnot.”

Seriously, are investors competent to weigh cars that are not nonetheless deemed good adequate to sell to a ubiquitous public? Which other automaker does this? Why do we suspect that is?

And would it be too most for Tesla to explain who is enclosed in this “whatnot” category? Are automotive reporters partial of “whatnot?” Inquiring minds wish to know.

Actually, automotive reporters might usually be some-more competent to weigh these things than roughly anyone else in society. Who else spends a year pushing 100 other new cars? It would seem reasonable that if Tesla indeed wanted some competent feedback, that it should send a initial 300 or so cars off a line to a tip reporters in a country.

Who are we kidding? That substantially won’t happen.

Instead, a some-more competent people are apparently those who don’t spend a year evaluating all new cars in a marketplace – such as a pointless Tesla in-house bureaucrat, line worker, “investor” and “whatnot.” One supposes that Tesla should brew it adult a small internally some-more mostly usually to exam a possess products and other functions: Swap a open line workman with a accountant, from time to time. It would make usually as most sense.

Per definition, these cars aren’t good adequate to sell to a ubiquitous open — that’s their whole justification for doing this in a initial place (see a quote from a twin above) – so what are a dangers to that these testers (including investors and “whatnot”) will be exposed? Anything safety-related? Wheels descending off? Cars stalling on a turnpike since of battery connector issues? (here)

That does poise an enchanting guilt question: What happens if a Tesla janitor or open line workman takes his family out for Sunday brunch or church in one of these cars not nonetheless deemed suitable for unchanging customers, and something goes wrong? How do we even protection a exam automobile that is a exam automobile precisely for a reason that it has not nonetheless been deemed estimable of sale to a ubiquitous public? Why would an word association wish to hold a automobile like that?

In any case, this leads us to a arrangement in that Tesla’s employees will be pushing these cars – either 3,000 of them or any other number. Will they be sole outright, in a demeanour no opposite than a Tesla Model S or X is sole to a unchanging patron today? Or will they be leased?

Whether sole or leased, dual questions immediately arise: Will there be a discount, and will there be lapse rights?

As pre-production exam cars, these can't – per clarification – be of a same peculiarity as a cars that will be sole once a contrast duration is over, and a Model 3 has been deemed estimable of being delivered to unchanging non-employee customers. We know this from a Models S and X, of march – a initial several thousand units, arguably even some-more than that, are widely deemed to have been of defective peculiarity compared to those that are being constructed right now.

If we are going to take smoothness of an defective product, presumably we should get a discount, no? And saying as this is a rarely surprising – rare – box of an automaker distributing exam cars to people who are not veteran exam drivers, what about undisguised lapse rights? Will a employees be means to palm them behind in some form, if something is detected during a contrast duration and therefore doesn’t spin out flawlessly? Will they be means to trade them in on auspicious terms?

This all goes to a accounting question: Are these “sales” (or leases) of Model 3 exam cars indeed “sales” from an accounting perspective? we don’t have a answer, though we have not nonetheless seen anyone else seeking a question, so I’m seeking it now!

Federal and state taxation credits: Why practical to exam cars?

Are Tesla’s possess employees awaiting to take advantage of a $7,500 sovereign taxation credit while employed in a charge of being partial of Tesla’s new automobile contrast regime? Why should a U.S. taxpayer finance association employees contrast a new car? Do other automakers get this kind of funding for contrast their electric cars as well? If we can find any such example, greatfully let me know. I’m not wakeful of any other automaker being means to check a U.S. taxpayer $7,500 for any electric exam car.

And if there are lapse rights or poignant discounts to these exam cars as a outcome of them being pre-production exam cars, should someone be means to collect $7,500 from a U.S. Treasury for any of those potentially thousands of units as well?

The elemental dilemma: Tesla can’t have a cake and eat it too

Either a automobile is a exam automobile and it’s not sole to, or driven by, civilians: There is no income from it, and it’s dejected on a finish of a contrast period. The automobile does not count as a sale. No $7,500 per electric automobile funding is collected as a outcome of being partial of a contrast module among association employees. These cars lift manufacturer’s permit plates.

That’s how all other automakers do it, as distant as we know. Is Nissan an exception? Is Hyundai? Is Ford (NYSE:F)? Is General Motors (NYSE:GM)? You tell me. we can’t find an exception.

Alternatively, a automobile is not a exam automobile if it’s delivered to everyone. At that point, a automobile doesn’t come with “test automobile standing discount” or special lapse rights for being a exam car. It’s a approach any automobile is sole to a ubiquitous open by any other automaker – Chrysler (NYSE:FCAU), Toyota (NYSE:TM), BMW, anyone. You can take a sovereign electric automobile taxation credit, and there are no lapse rights for being a pre-production tester.

Basically, we don’t co-mingle a dual groups described above. You finish a contrast duration regulating veteran exam drivers. These cars are not sold, no sovereign electric automobile taxation credit is collected, they lift manufacturer’s permit plates, and in a finish these cars are crushed.

Then, once that routine has been finished – and that can take good over a year – we can sell cars to a public.

It seems to me that Tesla is fundamentally perplexing to co-mingle these dual groups here. It wants a advantage of counting these cars as “sales” and potentially for a employees to collect a $7,500 per automobile Federal electric automobile taxation credit — though but a liabilities that go along with carrying veteran exam automobile drivers toll out a issues before correct sequence prolongation starts, and abrasive those cars in a end.

To be clear: Tesla is enchanting in required automotive contrast – right now – with veteran exam drivers, cars that have manufacturer permit plates, etc. We have all seen a view photos. This routine looks to have started around a second week of Mar 2017. The indicate is that a normal automaker routinely doesn’t take anywhere nearby 4 months to control this arrange of testing, they don’t do it mostly in California’s flawless climate. This arrange of contrast would take dramatically longer and embody really severe and extended contrast in some of a harshest places on earth.

Tesla: Well, it looks to be handing over this routine after usually 4 months, to “employees, investors and whatnot.” Therein resides a disproportion compared to all a other automakers.

It all boils down to this:

If a Model 3 is good adequate to be sold/delivered to Tesla’s possess employees, investors and “whatnot” – it is also good adequate to be sold/delivered to a ubiquitous public. And if a Model 3 is NOT good adequate for a ubiquitous public, afterwards it’s a pre-production exam car, and should be treated as such from an accounting, insurance, licensing, and taxation credit perspective.

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