Tesla owns a battery factory in Nevada. This factory is used for producing batteries for the model 3 and more general purpose batteries for storing electricity from solar panels. Part of the factory is used by Panasonic for producing the batteries. Tesla packages the batteries in another part of the factory.

Panasonic tries to earn back its investment with selling their batteries to Tesla via pre-negotiated purchase agreements. According to Tesla's filings these agreements result in a multi-billion off-balance sheet liability for the next couple of years.

My understanding is Panasonic and Tesla have not always been friendly towards each other in public. For example in the first half of this year Elon Musk accused Panasonic of not having installed enough capacity and Panasonic denied this. But for the rest they seem to be going along well. My understanding is Panasonic is quite flexible with the purchase obligations, as long as Tesla buys a certain minimum amount of batteries from Panasonic each quarter. Let's have a look how Tesla kept Panasonic happy so far.

Q3 and Q4 2018

So far Tesla tried to satisfy these purchase obligations by selling different variants of the model 3 and also by selling model 3 to new markets. In the third quarter of 2018 Tesla first sold the premium variants of model 3 in the US. In the fourth quarter of 2018 demand for these premium variants had largely saturated and therefore it sold a cheaper variant: the midrange. Demand for the midrange lasted only one quarter unfortunately.

Q1 2019

The first quarter of 2019 was pretty quiet because the EU had not homologated the model 3 yet. So Tesla started to sell the even cheaper and less profitable short range in the US. At the same time the first ships with model 3's arrived in the EU and China, around the end of the first quarter of 2019.

Q2 2019

In the second quarter Tesla sold model 3's in the EU and China and also benefited from demand for the short range in the US. It turned out demand for the premium variants of the model 3 in China and the EU was much lower than in the US. But together with sales of the short range in the US it was apparently enough to keep Panasonic happy.

Q3 2019

In the third quarter the company tried to sell the short range in the EU. In the second quarter the right hand drive variants of the model 3 were introduced, mainly in the UK. Tesla probably also tried to sell it in Japan but I do not think it was a success. It took some time to get sales in the UK going but in the third quarter the company finally sold thousands of model 3's there.

In the mean time demand in the rest of the EU remained strong, mainly because Tesla sold thousands of model 3 cars in The Netherlands. Many of these cars are lease cars. Somewhere on Twitter I read at least 50% but I think it's more. Sales of such lease cars are mainly driven by tax incentives. A large part of these incentives disappears in 2020 unless Tesla lowers the price of the short range with €5k. I do not think Tesla can afford such a price decrease.

Q4 2019?

It turns out every time Tesla introduces a new variant of the model 3 in a new market demand gets saturated in one or two quarters. To be more precise just one quarter for the expensive variants and two quarters for the short range. Currently I think demand for model 3 is largely saturated in Europe and the US. There might still be some demand in countries where Tesla was late: the right hand drive countries like the UK and Australia.

Because of this I think this quarter will be very difficult for Tesla. Other factors are more and more potential customers have learned about low standards for support at Tesla. That they have sold so many cars would have been good if their customers were happy. The more customers are complaining about service the more likely model 3 sales will suffer from negative publicity. But if Tesla lowers its prices again with a couple of thousand dollars it may still sell enough cars to keep Panasonic happy.

Model Y?

Another way to keep Panasonic happy would be introducing a new model: model Y. I think this is unlikely because it seems this car has been hardly tested so far. Furthermore I suppose Tesla would need to stop producing model X or S to make room for a new assembly line in Fremont. Since production of model Y has not been started yet I do not think Tesla can produce a meaningful number of model Y cars this quarter.

Moreover Elon Musk desperately tries to support the stock price with announcements on products that will never be sold, leaked emails, etc. I think he does that to prevent a margin call. Obviously discontinuing model X or S will not be good for the stock price, which is an excellent reason for him not to introduce model Y at all.

Bottom Line

I think Tesla can keep Panasonic happy this quarter, IF it lowers the model 3 price again. And also provided the company raises new equity to pay off debts and to finance ongoing losses.

But then in the first quarter of 2020 with lower tax incentives in The Netherlands and the US Tesla will not be able to sell enough model 3 cars. It might take yet another quarter, but then, in the second quarter of 2019 I expect Panasonic to give up on Tesla. It will start producing for other car manufacturers. Or it may remove its equipment from the factory in Nevada. Then I also expect Panasonic to start a lawsuit to get compensated for Tesla's failure to satisfy its purchase obligations. So game over for Tesla before the end of the second quarter of 2020!

Because of all this and other concerns Tesla remains an extremely good short. Of course if you are still long I recommend to sell your shares while the stock is still extremely overvalued.