Recently, Tesla announced that the production ramp-up of its much-awaited Model 3 had achieved only 260 cars built compared with its plan of 5000 per week. The setback cost Tesla £468 million in financial losses in three months of late summer trading.
As Toni Sacconaghi, Tesla analyst at Bernstein Research, wrote in a research note last week: “Our key concern with Tesla is whether the company can profitably build the Model 3 and do so with sufficient quality. Q3 results reinforced our concerns.”
At the same time, cash has been flowing out as Tesla throws resources at the Model 3 production line. In three months during this summer, Tesla has seen £1 billion in cash leave the company, with similar sums expected in future quarters.
The dampening effect on Tesla’s share price has been marked, with Bernstein forecasting a target price of $265 per share compared with its recent $321 – a 17% drop. It is worth noting that Mark Fields was ousted as Ford boss in May over the same percentage decrease in share price, albeit spread out over three years.
So what has gone wrong at Tesla?
“The situation is really very simple,” said Peter Wells, automotive industry expert and professor at Cardiff Business School. “Tesla has seriously underestimated the challenges of bringing a new model to market in major volumes of production.”
The seeds of this misadventure were sewn in May last year, a month after Tesla triumphantly opened the order books for the Model 3 and reservations, each backed by a $1000 returnable deposit, hit 230,000 on the first day.
Success must have come as a pleasant surprise. Before the launch, Tesla had talked about a 2017 launch date with limited production and a slow ramp-up to more than the 50,000 per year each of the Model S and Model X.
Just a few weeks later, encouraged by the huge demand, Tesla owner Elon Musk boldly announced he would bring volume production forward by 24 months and, instead of making 500,000 units per year in 2020, pledged to hit that number in 2018. Left-hand-drive production is planned to increase to 10,000 a week by the end of 2018, when exports are scheduled to start. Right-hand-drive UK cars are expected in 2019.