Will The Tesla Model 3 Be Approved For Sale In Europe? – Tesla, Inc. (…


There’s a new issue that has emerged, from two separate directions, that we need to talk about. Over the last month or so, the lack of any word about Europe approving the Tesla (NASDAQ:TSLA) Model 3 for sale caused several people to reach out to me and ask whether I think that Europe will deny the Model 3 in its current form, from being sold in Europe.

My answer had been a resounding “No.”

Why? Mainly because the Model S and X were approved seemingly without any visible changes needed to be made for Europe. And if the S and X were approved, why not also the Model 3?

The argument went something like this: The Model 3 has a single touchscreen, from which all controls are handled, except those on the steering wheel. As the argument went, this is somehow incompatible with European regulations that do not view favorably upon single point of failure systems, and especially those that are distracting, as a touchscreen requires the driver to look carefully in order to hit the touch-target with his or her finger.

One can certainly see this argument in principle. However, how much worse is the Model 3 really, in that regard, compared to the already-approved Model S and X? That’s why the argument didn’t bite on me very much, and I dismissed it.

Then there were other arguments related to auto-emergency braking and Autopilot features. Again, they were interesting arguments but in absence of any confirmation from the European authorities or any other significant evidence, I must look to the analogy with the already-approved Tesla Models, the X and S. If these were such big problems, what would be the probability that those models would see a stop-sale and have to be revised?

Basically, one has to give the benefit to Tesla here, lacking any further evidence.

But then came an interesting piece of news over the weekend, that signals that European authorities may be taking a new and more stringent approach to an issue that has the potential to hit Tesla hard: here.

Let’s think about this for a minute: Audi announced a one-month delay to its eTron on-sale date (in Europe) because it needs to have the car re-certified in Europe – because Audi has to fix a software bug. So the car will now reach European consumer garages in December instead of November.

But why would Audi need to re-certify the eTron? The software was modified. Well, who else modifies the software all the time, and sends that modified software to the car fleet as often as once every few weeks, and certainly once every few months? Tesla, of course.

If Audi has to re-certify the car after a software update, one might logically conclude that so does Tesla. If Tesla keeps changing its Model 3 software all the time, it may be caught in a hamster-wheel of perpetual re-certifications, preventing the car from going on sale – or with never-ending stop-sale situations after it goes on sale in the first place.

Basically, what Tesla would have to do is the same as Audi and all the other automakers may have to do going forward: Spend an extra 18-24 months properly testing the vehicle before it goes on sale, so that it won’t need any software update for at least a very long time, if ever.

You know, the way it always used to be with cars. Do you remember your car getting a software update 20, 30 or 40 years ago? Me neither.

If the European authorities start to enforce this kind of software certification policy, Tesla would be hurt a lot more than other automakers. Why? Because Tesla famously has released all of its cars to date – Model S, X and 3 – in a de-facto Beta program, where employees and various fans, enthusiasts and investors drive the car for about a year or two while Tesla works out the development issues. Those issues may be hardware – panel gaps, various components – but at a minimum this process involves many software updates and iterations.

Other automakers test their cars internally, after which those many hundreds of cars get crushed. This all happens before the car goes on sale. That means those development programs take at least 18-24 months longer than Tesla. But those automakers have budgeted for that in their go-to-market timelines. Tesla has not.

And that’s why, if this new policy takes into effect – in Europe, let alone elsewhere – Tesla would have to re-set its entire go-to-market timeline. Tesla would have to do what the other automakers do: Spend that extra 18-24 months testing the cars before they go on sale. When they go on sale, they will do so with diligently tested and approved software, and there should be no changes to that software for years to come.

For the reasons listed above, I now think that there’s at least a reasonable possibility that the Tesla Model 3 might be delayed for its European introduction. I still think it is more likely than not that the Model 3 goes on sale without a significant delay, but the risk factor has gone from something like 1% to 20%, in my opinion. Tesla bulls should not laugh at that 20% probability anymore than Hillary Clinton should have laughed at Trump’s odds floating between 1% and 20% immediately prior to the November 2016 election day. It could happen.

The problem here is that we have no official word from either the European authorities or from Tesla about the nature of their negotiations. If Tesla were a transparent company it would – just like Audi did over the weekend – tell investors what the issue is, and what the expected delay will be. Audi said it was a software bug that therefore requires a new approval, causing a one-month delay. Would it be too much to ask Tesla to make a similar statement?

And if there’s no issue for Tesla on this front – I put that probability at 80%, down from 99% – then wouldn’t Tesla be better off simply stating so, publicly?

Tesla under pressure in Europe, including Norway

Everyone in the EV business knows that Norway is the country in the world with – by a wide margin – the highest percentage of EV sales. In September, 60% of the Norwegian market had a plug (45% BEV, 15% PHEV). That’s many times greater than any other country.

As a result, Norway has the most extensive EV charging infrastructure, and its consumers are the best-educated on EVs. Many new EVs go on sale in Norway first. It has become, over the last year or two in particular, “The canary in the coal mine” in terms of discerning EV sales trends: here.

For the last week, I have been assembling the Norwegian registration data in the evenings, Norwegian time. In the table below, I have listed the October-to-date results, for October 19 and 22, respectively:

2018-10 Norway

Oct 1-19

Oct 1-22

1

Nissan LEAF

700

718

2

VW eGolf

460

472

3

BMW i3

280

281

4

Jaguar i-Pace

241

256

5

Kia Soul EV

231

233

6

Renault Zoe

123

126

7

Hyundai Ioniq EV

104

110

8

Tesla Model X

89

96

9

Nissan e-NV200

59

59

10

Tesla Model S

58

59

11

VW eUp

53

55

Top 11

2398

2465

Others

191

196

TOTAL

2589

2661

As you can see in the table above, the Jaguar i-Pace is now the fourth-best-selling EV in Norway, and it’s outselling Tesla Model S and X combined to the tune of 65%. Of course, it’s still early in the quarter and Tesla typically sees a majority of its sales in the third month of the quarter. This means it remains more likely than not that Tesla will outsell the Jaguar i-Pace in Norway for Q4 as a whole, still.

One of the key Tesla arguments is that there will of course be good Model 3 sales in Norway – and the rest of Europe – once sales get started there, in early 2019. There’s little doubt about that – assuming that there’s no regulatory holdup for the Model 3 in Europe, of course.

That’s why we would like to hear – from Tesla and European authorities alike – whether there’s any such issue with European type approval, and if so, what that issue is, and what kind of delay we should expect in such a scenario. At this point, knowing nothing else other than the logic described above, including the Audi eTron analogy, I assign a 20% probability to a Model 3 delay in Europe (up form 1% previously).

Maybe the simple answer is that the Model 3 already has been approved for sale in Europe, and that there’s no delay whatsoever. If so, one might have thought that Tesla would simply tell us that. No such announcement has been made, either from Tesla or from European authorities. Tesla is typically not shy about opportunities to make positive announcements.

Conclusion: Please help us out here

This is an issue that’s a big question to anyone who knows, whether at Tesla, at the European authorities, or some other source. Please give us the facts here. It’s important to all Tesla investors, equally for bulls and bears alike.

Disclosure: I am/we are short TSLA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: At the time of submitting this article for publication, the author was short TSLA. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.



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