Tesla: Not At Your Service
After The Way Tesla Treated A Top Corporate Customer, Imagine What Its Retail Buyers Experience
nextmove, one of Tesla’s (TSLA) largest fleet owners overall and its largest in Germany, just posted the most devastating Tesla review yet in a comprehensive YouTube video to explain why it canceled a $5.55 million order for additional Model 3s, which I can crystallize in a single quote:
"From our point of view Tesla has no process for a defect-free delivery."
Stefan Moeller, nextmove video, 8/16/19
I long have warned, most recently in Tesla Q2 Deliveries Beat; Demand and Profit Trends Less Clear and The Trouble With Tesla's Arrested Development, that Tesla is actively impairing demand with its increasingly problematic manufacturing issues which have produced notably poor quality and reliability in now all its models as well as its poor customer service which has angered customers and spooked potential buyers who are increasingly driven to more trustworthy competitors. And, as I have observed, this can't be fixed with nearly a year of drastic price cuts.
Such problems are far from over, so it won't be the last time we hear such stories or brace for the resulting impact.
Tesla's loss of the vital nextmove order is a reminder that losing a customer can mean not just one lost sale, but scores and even hundreds of lost sales in one fell swoop--amplified by negative coverage which scares off buyers they never see.
How to drive away your biggest fans
nextmove is more than a rental car operator, it is the largest electric car rental in Germany and an active electric car enthusiast that has aggressively promoted Tesla for years. It also encourages longer-term rentals of several weeks to a month or more so customers can better experience daily living with electric vehicles under variable conditions. Happy customers can even buy a Tesla from nextmove's fleet or be chauffeured to the nearest Tesla dealership.
nextmove received the first ten Tesla Models S delivered to Germany back in 2015 and has bought hundreds more Models S and X since then. It has won races and achieved multiple range records with its Teslas. It maintains a vibrant social media program with hundreds of articles and YouTube video reviews promoting and comparing electric cars where Tesla has been prominently featured--and favored. nextmove's CEO Stefan Moeller still owns and loves his 2014 Model S.
nextmove started importing Model 3s into Germany in spring 2018, a year before Tesla's launch of the model across Europe, providing its customers early driving experiences, the ability to buy one from their fleet, and comprehensive reviews on long-term road tests still available on its YouTube channel. (There's even one demonstrating how to open a Model 3 when the door handle is frozen shut--a particular annoyance European buyers discovered last winter. Hint: it takes a while).
"We demonstrated the qualities of the [Model 3], even before it officially came to Germany. And by doing so we encouraged many reservation holders to turn their 2016 reservation into a purchase order... So obviously we didn't do this just because we like Tesla but because we firmly believe that the Tesla Model 3 is the best electric car of the year 2019 and probably even 2020."
Stefan Moeller, nextmove video, 8/16/19
So it's important to understand that nextmove's very public news that its order is cancelled is much more damaging to Tesla than losing $5.55 million in sales--this was a 24 minute-long video breakup letter from a long-suffering promoter in a critical market:
If this is how you treat your friends...
The first of nextmove's 100-car Model 3 order started arriving in Berlin in February and were delivered with much fanfare by Tesla. Tesla's Jochen Rudat said then the company was "delighted" to deliver the first four Model 3s in Germany to nextmove, which offers "potential buyers the opportunity to see for themselves the everyday practicality and multiple benefits of our affordable mid-range vehicle. This is how many drivers in Germany have already found their way to their own Tesla in recent years."
Trouble started immediately as nextmove discovered so many problems that "the anticipation of the cars was gone in the first hour" with annoying to serious faults in all the first four.
This included paint defects, scratches on interior surfaces to bumpers, tire damage and a broken wheel which rendered a Performance model "unroadworthy," faulty and/or incorrect wiring, a missing emergency call button, defective blinker, nonfunctioning onboard charger, condensation in headlights, and more.
One car was dead on the road and had to be towed two hours after nextmove took delivery. nextmove's alarming experience has not improved with the fifteen cars received so far, with some problems still not fixed six months later.
Remember these were the first of Tesla's ballyhooed Model 3 launch into Germany, the home of BMW, Mercedes, and Volkswagen. They were delivered to its most important fleet owner in that market. Tesla should have ensured the cars were no less than perfect before nextmove ever laid eyes on them.
I submit again that Tesla is not new at this, having now several years of experience manufacturing cars at scale as well as shipping cars to Europe and China. Its expansion of Model 3 overseas was not a secret, or a surprise, or an urgent near-term commitment. Tesla has had all the time it wanted to get its manufacturing and delivery and service processes right—it has failed miserably.
nextmove said it was "undisputed" that Tesla has "no process for a defect-free delivery" or "for the elimination of defects after successful hand over is missing." Rushed employees record defects at delivery and those reports are "then simply filed away," leaving customers with the responsibility to "actively" pursue Tesla to fix the problems—which can take months.
This is no way to run a car company, yet this is the way Tesla seems to do business no matter where in the world it operates. nextmove notes that other carmakers and dealers are "more interested in a long-term cooperation with us." They typically identify any defects themselves and notify the customer. Then "the problem is fixed accordingly on time" before they are delivered.
With "other carmakers and dealers"..."we even can dare to hand over cars blindly to our rental customers, namely that we sometimes bring our customers to the car dealer so they can experience the 'brand new car handover.' At Tesla of course this is not possible."
Stefan Moeller, nextmove video, 8/16/19
Indeed, nextmove noted that Tesla doesn't manage even typical dealer delivery protocol correctly; e.g. sold cars are inadequately prepped, without full charges, and without correct paperwork ready. There's no capability to hand off cars inside so they are delivered even in the rain where customers can't inspect them for problems before acceptance.
Before one assumes that nextmove is just being nit-picky about a few bad experiences, consider how remarkable it is that the company placed such a sizable Model 3 order at all after years of experiencing this as a major Tesla customer:
"Of course, in terms of the quality of the vehicles, we are used to grief. We are not petty all in the things that we know that Tesla is not perfect at. So gap dimensions, the misaligned chrome strip between the front and back door is a classic Tesla example. The Model 3 glass roof. The rear roof is a bit smaller than the rear one so it's never properly aligned...Of course in that case we do not demand that the glass roof is cut out again. So those deficiencies we have also accepted in the hope that eventually it gets better at Tesla over time."
Stefan Moeller, nextmove video, 8/16/19
This is what I call an unusually patient longtime customer.
"No Satisfying Solutions"
After years of buying hundreds of cars from Tesla, nextmove has endured inexcusably bad deliveries (one car was missing the driver's seat!) and inept to indifferent customer service. At worst, nextmove "often" has been stuck with defective cars and "no satisfying solutions" even after meriting "high level" management attention on occasion from Tesla.
Not to mention the perpetual pressure nextmove incurs with dismal follow-up service for maintenance and repairs to sustain an inventory of Teslas given their notoriously poor reliability.
The Model 3 delivery fiasco confirmed to nextmove that Tesla is not getting better, even though nextmove has tried to work closely with Tesla to develop a point by point protocol to help ensure defect-free deliveries. Not only does Tesla continue to routinely deliver defective cars, but it also tends to balk at remedies nextmove suggests as compensation, from a "financial discount" to an exchange of goods, e.g. charging cables, etc., to accept cars with flaws like paint defects, which are unacceptably common.
Take the car; leave the car. Either way, nextmove is at risk given the inordinate delays and battles to get Tesla to acknowledge and fix problems—problems it still shouldn't be having to this extent. This has hurt nextmove's business since it naturally expects to rent the cars soon after purchase and continuously thereafter, which it can't do until problem cars are repaired without damaging its own reputation.
So one of Tesla's oldest and largest customers, not to mention one of its biggest fans, finally was driven to ask "Does Tesla care about us at all? Do we see any efforts?"
Sure, when it's convenient for Tesla. Moeller says Tesla becomes more interested in service when it "senses the chance for follow-up business. Especially when the quarter is coming to an end and they have to achieve targets. Then they start to care about us."
Bingo. I speculated Tesla pursued such last-minute Hail Mary sales to boost results for the third quarter last year and the second quarter this year (see Tesla Q219 10-Q Notes and Big Red Flags and Great Magic Trick Tesla; Now Do It Again).
That's quite enough.
nextmove finally drew the line when only one-in-four of the first 15 cars from its 100-car order was delivered comparatively free of faults. The rest had troubling to serious defects, including several that were considered "unroadworthy."
Months of efforts to help Tesla to improve its delivery protocols or agree to timely repairs of defective vehicles with quality and safety concerns proved fruitless, so nextmove decided to stop taking delivery on additional cars until Tesla's "service hell" could be resolved.
Tesla's solution? Fire the customer.
Tesla sent nextmove an ultimatum to accept all 85 cars remaining on order, with some EUR 5 million still due, and canceled the order when nextmove let the threatened 24-hour deadline expire.
There are problems with Tesla's version of events
Tesla told Reuters it was nextmove that canceled the order, and that "it was in the process of resolving the issues and had provided replacement vehicles."
“We believe the customer’s decision not to take delivery of its remaining Model 3 orders wasn’t entirely due to quality issues, but was largely influenced by their frustration with an unrelated dispute from earlier in the year,” Tesla said in a statement, without elaborating further."
Perhaps, except nextmove also posted Tesla's email which spelled out its ultimatum and order cancellation. Otherwise, yes. We can see why nextmove remains understandably unsatisfied by previous and ongoing problems it has encountered with most of the 15 Model 3s Tesla has delivered since February.
Tesla even acknowledges it still is repairing brand new cars delivered in the spring, some so defective they had to be replaced.
nextmove demonstrates there are good reasons to doubt Tesla's conviction, sincerity, and integrity after enduring now years of serious problems that Tesla hasn't fixed, or that Tesla fixed late, and that Tesla keeps delivering with its new cars.
Tesla also tried to get nextmove to accept cars as new which it previously had registered to other buyers, an innocent "mistake" Tesla claims even though I have heard about such shenanigans by Tesla since summer 2018 (see "Musk and Weird Q3 Developments Are Driving Investors to Telsa's Rivals" and 'Telsa Party Today; Hang the Details").
nextmove's experience calls into question Tesla's claim that "customers have largely been satisfied with their vehicles, including the quality and condition of their cars upon delivery." nextmove is a major Tesla customer and for years has been its largest buyer in Germany.
It loves Tesla cars and remarkably had come to accept the "grief" of their persistently poor build quality and the company's even worse customer service—until now.
If Tesla can't or won't take good, honest care of its biggest and best clients, in Germany or anywhere, there's little chance it will meaningfully improve deteriorating individual customer service.
Tesla Can’t Afford To Squander Already Generous Goodwill
Tesla can ill-afford to sour already fragile relationships with fleet owners with poor service because of persistent quality and reliability problems it can't seem to fix.
Tesla's cars have proven to be so notably defective and unreliable in fleet service they have caused scores of rental car, taxi, and ride-hailing service operators all over the world to file bankruptcy.
Indeed, this has added to mounting skepticism, by me as well, at Tesla's bombastic projections to establish a worldwide "robotaxi" fleet (see Tesla “Autonomy Day” Takes Investors For Another Ride).
The world is watching. Tesla has allowed this costly nextmove deal to implode over its inability and/or unwillingness to deliver reasonably defect-free cars just as it's trying to grow Model 3 sales across Europe and China. This expansion has become more imperative as sales in the US have begun to temper partly because, as I have speculated, quality and reliability issues have angered owners and spooked potential buyers (see "Tesla Q2 Deliveries Beat; Demand and Profit Trends Less Clear" and "The Trouble With Tesla's Arrested Development").
If Tesla will ruin a long-term relationship with a major fan and revenue generator in a critical market packed with credible rivals due to its own arrogance, incompetence, and indifference, there's little chance it has the will or capacity to convincingly correct its many entrenched problems across the board.
I also have projected such problems and their consequences will worsen at the new Shanghai plant, where Tesla will no doubt employ even less management oversight and accountability and potentially encounter even less regulatory scrutiny ("Tesla Q219 10-Q Notes and Big Red Flags" and "The Trouble With Tesla's Arrested Development").
nextmove also publicized a devastating distinction that can hurt Tesla even more long-term: that the company doesn't back its cars.
“The Model 3 is a fantastic car...But the organization behind it doesn’t match that. It’s really sobering.”
Stefan Moeller, nextmove video, 8/16/19
Tesla's persistently poor production quality and customer service are becoming indefensible, but there's little indication of serious improvement anytime soon.
This not only hurts sales and squeezes meager margins, it's likely still traced to self-perpetuating liquidity pressure as reported cash on hand remains insufficient given actual run-rate cash drained in operations versus Tesla's more realistically comprehensive cash obligations from its long-delayed and chronically underfunded pipeline, extensive expansions underway to restore store count and grow supercharging networks, speculative capex projects like battery cell production, and with plant construction and equipment still required but potentially not totally funded in Shanghai (see "Tesla Q219 10-Q Notes and Big Red Flags").
And it this rate, Tesla could be running out of last-minute fleet sale opportunities to help it salvage ambitious quarterly targets, even if they are increasingly less profitable via falling prices.
This comes just as Tesla is working on its first tough comps with the considerably more profitable second half of last year when Model 3 sales were as hot as they're ever going to get.
TSLA 5.3% Senior Notes due 2025 are little changed since my last report at 88.2 (7.8% ytw; 632 bps). That’s a measly 80 bps of spread per turn of estimated leverage by yearend 2019, woefully inadequate compensation for a volatile triple "C" rated issuer with such precarious prospects. Given Tesla's persistent uncertainty and escalating risks, we see 3-5 points of downside pressure from here. Maintain “Underperform."
Contact Us:
Disclaimer
This publication is prepared by Bond Angle LLC and is distributed solely to authorized recipients and clients of Bond Angle for their general use. In addition:
I/We have no position(s) in any of the securities referenced in this publication.
Views expressed in this publication accurately reflects my/our personal opinion(s) about the referenced securities and issuers and/or other subject matter as appropriate.
This publication does not contain and is not based on any non-public, material information.
To the best of my/our knowledge, the views expressed in this publication comply with applicable law in the country from which it is posted.
I/We have not been commissioned to write this publication or hold any specific opinion on the securities referenced therein.
Bond Angle does not do business with companies covered in its
publications, and nothing in this publication should be construed as a solicitation to buy or sell any security or product.Bond Angle accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this publication and/or further communication in relation to this document