Demand for Tesla’s entry-level car is high but the firm is struggling with production and taking big financial hits. Where will it end?
Julian Rendell
27 November 2017

Tesla may be the new standard by which financial markets measure the rest of the car industry, but the stock market darling is suffering a major hiccup as it struggles to launch the $35,000 Model 3.

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.

Tesla falls behind on Model 3 deliveries

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.”

Tesla posts $619 million loss in third quarter of 2017

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.

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Opinion: is Tesla Roadster surprise an attempt to distract from the firm's problems?

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.

Tesla Model 3: prospective owners reveal why they're buying one

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.

Tesla Model 3: Musk confirms 50kWh and 70kWh batteries

“It is fraught with danger to ramp up production so fast because of the pressure it puts on management, process control, purchasing and, of course, assembly,” said Wells.

Details of Tesla’s struggles to put the Model 3 into production have leaked out on several news websites and paint the picture of a company besieged by its own expectations.

Pictures of the Fremont factory in California appear to show parts stored chaotically line side, vulnerable to damage, and details have emerged of essential production processes very different from those of established car factories.

“You have to remember that it’s a very different mindset in California and Silicon Valley,” Wells said. “But now Tesla is having to pull in experienced automotive people to help.”

Sources suggest Tesla is recruiting significant numbers of car industry purchasing experts as pressure builds on the Model 3 ramp-up.

Tesla: Model 3 is 'not the next-generation Tesla'

Going mainstream with production methods will help Tesla solve its problems, but it goes against Musk’s passion for reinventing the factory – what he calls “the machine that makes the machine”.

Experts question whether a vitally needed production car like the Model 3 provides the right opportunity to reinvent the factory. “Tesla is clearly struggling with production issues,” Bernstein said.

One short cut understood to be causing trouble is the elimination of a whole stage of component development by going straight to production tooling without testing prototype parts first. Up to one year could be saved.

Wells said: “You can do all sorts of computer simulations and planning, but how accurate is that modelling when production actually starts?”

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The highly automated body- framing station, where panels for the Model 3’s body-in-white are clamped together to very close tolerances before being welded together, is another area of production concern.

Sources suggest the supplier of this vital equipment has shipped the line before it was fully proved in its own factory, another short cut to save time.

As a result, the equipment is not functioning as it should and the Model 3 cars built so far are essentially hand-assembled.

Tesla reveals Semi lorry with 5.0sec 0-60mph time 

Tesla itself claims to have demonstrated only short bursts of body-shop production of up to 500 per week, a far cry from the 5000 originally planned. Even that may be optimistic, as Bernstein Research has pointed out: “We are somewhat sceptical of the term ‘burst builds’, given that Tesla hasn’t yet built 500 units in a week.”

The handful of Model 3s so far built have been delivered to employee customers and the cars are being used for validation to report faults to Tesla’s engineering team. Tesla has previously said it would cut out the validation prototype stage to save time.

Tesla Model S review: 'practical, refined and desirable - a triumph'

Time, of course, is vital for Tesla, because Musk knows he has limited opportunity to exploit the Model 3 – maybe three years – before established car makers hit the market around 2020/2021 with their own more affordable battery-electric vehicles with a usable range of 200 to 250 miles, rigorous manufacturing quality and established dealer networks offering attractive finance deals.

So what of the future? Wells believes it holds three possible outcomes for Tesla: successful independence as a maker of a portfolio of technologies; or a merger with an existing car maker or industrial group; or, in his words, “to go horribly broke”.

Read more

Opinion: is Tesla Roadster surprise an attempt to distract from the firm's problems?

Tesla falls behind on Model 3 deliveries

Tesla unveils new Roadster

Tesla reveals Semi lorry with 5.0sec 0-60mph time 

Tesla posts $619 million loss in third quarter of 2017

Opinion: Tesla's second masterplan is ambitious but exciting

Analysis: can Tesla meet Model 3 demand? (from 2016)

Tesla Model 3: Musk confirms 50kWh and 70kWh batteries

Tesla Model 3: prospective owners reveal why they're buying one

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32

27 November 2017

But I’m beginning to wonder. I, like every other deposit holder, got my email the other day advising of “rescheduling” but since RHD were always at the back of the queue anyway, it made no difference. Apparently. So I called round the dealer and was told that realistically I’d get my car late 2019/early 2020, getting on for 4 years after placing the order. They suggested getting another car while I wait. Which I will. But from what I read about Model 3 I’m more and more sceptical that it will be good enough to justify the price AUD 80k here with luxury car tax or about the same as A4/320/C200.

As good a car? I don’t think so.

So, reluctantly I’ll hold on until production really starts next year, maybe, and offer my build slot to the highest bidder. And if there’re no takers, I’ll simply get a refund. If Tesla haven’t gone broke by then.

Shame.

Robbo

Aussie Rob - a view from down under

27 November 2017
One suspects that by the time these things are being produced at the intended rate, hydrogen will be just around the corner and these little golf cart type jiggers will be looking quaintly old hat.

28 November 2017
Jason, a Tesla is hardly a 'jigger' or a 'golf cart'. They're big, heavy, and very powerful cars, not to be confused with plastic children's toys or golf caddies,so please, spare us the unwarranted disdain. I won't bother mentioning the fact hydrogen cars are also, in essence, electric cars but I don't hear you calling those golf carts. But I beg to differ...

Hydrogen is not the singular future for cars. It's A future. Whilst we may see it play a role in trucks and service vehicles, it's extremely unlikely that hydrogen will be the choice route for consumer cars.

Toyota realised this. The other big automakers, they realise this. Partially it's because hydrogen is less efficient than simply running a battery directly by charging it off a socket. You have lots of middle processes like conversion and transportation. As a sustainable solution it comes nowhere near as efficient as battery cars do.

Secondly, the simple fact is electric cars are advancing at such a pace that soon we will have the range and charge times at the point where nobody cares about Hydrogen cars any more, except for endurance racing, and huge industrial machinery.

I know you think you were being quite witty but the truth is please leave the speculation to those of us who have at least a tiny modicum of research on the subject. If you did have even 1/5th of my interest in the subject you'd realise how absurd you sound by claiming hydrogen is going to wholly replace electric battery cars. If you're so enlightened I wonder why experienced automakers don't agree with you.

27 November 2017
It's nice to read an unbiased Tesla article on Autocar without a bunch of the inaccurate claims and mindless Tesla bashing for once (Rachel).

I know Tesla are investing most of their money into their electric car charging infrastructure, but if for whatever reason everything goes horribly wrong, isn't Space X still contributing a lot to Musks money pool? Reusable rockets are surely generating tonnes of money.

27 November 2017

If your meaning entails belief Space X is making massive profits. Don't think it in the red but don't think it quite a cash cow either.

 
 
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27 November 2017

General Motors, the epitome of the old, arrogant auto industry Elon has challenged, already has the Chevy Bolt which pretty much does everything promised by the Model 3, especially in terms of price and range.

27 November 2017

General Motors, the epitome of the old, arrogant auto industry Elon has challenged, already has the Chevy Bolt which pretty much does everything promised by the Model 3, especially in terms of price and range 

Very true plus GM got the collaboration of LG Corporation with the battery technology as well as using GM Korea (Daewoo) to design the car. The General has done a pretty good job of producing an electric car and has theiir existing sales/service network for product support as well. 

Problem is although Tesla's stock maybe at stratospheric highs it hasn't got the production capacity or the ability to satisfy the demand for the Model 3 and it could well regret taking those half million deposits from eager punters , it'd be ironic if Elon Musk joined the ranks of failed automakers  like Henry Kaiser & Preston Tucker who thought that they could take on Detroit but came to grief

27 November 2017

GM sells millions of regular cars at a profit, it sells the Bolt at a loss as a spoiler for Tesla and others.

It is nowhere near as quick and the battery tech is not as slick as Tesla's.

28 November 2017
So why is it so hard to buy one? Their own dealers are actively trying to shy people away from buying them - thats if you can even find one in the first place.

27 November 2017

I don't think you can rely on the deposits being returnable in any great quantity.

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