Elon Musk is about to reveal how many Model 3s he’s making. But that won’t answer all the questions facing Tesla
Five thousand Model 3s a week.
Early next week, Tesla is expected to reveal whether it has reached that long-sought production number for its highly desired but problem-plagued electric sedan.
Bullish investors, skeptical short sellers and anyone else fascinated by the fate of the 15-year-old electric car start-up and its swaggering chief executive, Elon Musk, will be watching closely.
Falling far short of 5,000 a week would probably sink Tesla’s high-priced stock, analysts say. Meeting that manufacturing milestone, or even coming close, would probably drive the stock higher.
Musk has been downgrading his ambitions for Model 3 production since May 2016. With Model 3 production at a trickle that year, he promised 5,000 cars a week — equivalent to 260,000 a year — by December 2017. That was put off until the end of March, and now the end of June.
According to Bloomberg’s Model 3 tracker, Tesla is now building 3,398 a week and so far has produced 38,559 Model 3s in total. In the past, Musk indicated 400,000 Model 3s would be built in 2018.
But hitting the 5,000-a-week mark will only raise new questions about the cash-burning company’s future.
Would a 5,000-a-week production level prove sustainable, or would it represent a one-off “burst” rate that won’t hold up?
Will demand continue as new electric cars from other luxury makers enter the market?
Even at a steady 5,000-car weekly pace of Model 3s, can Tesla sell those cars at a profit?
“If he meets the 5,000-a-week goal, great,” said Mike Ramsey, an auto industry market analyst at Gartner. “It’ll keep the stock from cratering. But the ultimate problem is, they need money to stem the tide of their cash losses. If they don’t produce the vehicles, they don’t get the cash coming in the door they need.”
Musk has said the company won’t require new infusions of debt or equity this year, although analysts widely agree he’ll need to raise billions more next year or cut back on his ambitions.
Beyond its three existing cars — the Model S, the Model X and the Model 3 — Tesla has announced an upcoming electric semi truck and a sports car. A crossover called the Model Y is under development. This week Musk teased an upcoming pickup truck on his ever-active Twitter account.
Some Tesla critics question whether demand for the Model 3 is waning because of persistent product shortages and reported quality problems. The company has said it’s received 450,000 refundable $1,000 reservations for the Model 3, but it rarely updates that number. How many potential customers have asked for refunds is unknown outside of Tesla.
Most reservation holders have been waiting more than two years to order their cars, much less have them delivered. Musk had planned high-volume, low-cost production of the Model 3 through an automation push so advanced he said his factories would be crawling with advanced robots and intelligent software that would make Tesla the most efficient manufacturer on Earth.
This month, though, Tesla erected a hangar-like open air “sprung structure” — which even Musk calls a tent — on a parking lot at its Fremont, Calif., factory to increase Model 3 production.
Hollow Model 3 body frames are transported to the tent from the paint shop on forklifts. Inside the solid walls of the factory, engineers are scrambling to rework a problematic assembly line that Musk himself admitted was over-automated.
To fix things fast, he said he’s been sleeping at the factory, overseeing the new assembly line and congratulating employees for extra effort.
But short interest — essentially, bets that the stock price will plunge — remains heavy, and critics have questioned Musk’s veracity. Drone footage of the tent area posted on YouTube appears to show the tent filled mostly with cardboard boxes and little production activity.
Musk recently tweeted that the tent operation has resulted in “slightly higher quality than the more traditional general assembly line” at lower cost.
Manufacturing expert Max Warburton of Bernstein & Co., meanwhile, told Bloomberg the setup is “preposterous…. Here we have it, build cars manually in the parking lot.”
The big problem with the tent is not necessarily where Tesla might be building cars, but the extra worker hours required to assemble cars manually on a new line that couldn’t possibly have been installed with the latest robot technology, said former General Motors Chairman Bob Lutz.
“The main issue is all the additional labor hours caused by a human-intensive manual line, which is what the tent will house,” said Lutz, a longtime Tesla critic. “The originally assumed hours per car, which had to be ridiculously low because it was to be an ‘Alien Dreadnaught’ super-automated production process, are now out the window.”
Tesla has not responded to a request for comment.
Musk will have to be right about the tent’s efficiency if he’s going to make money on the Model 3. So far, the company has reported negative gross margins on the car, meaning it loses money on every Model 3 it makes, even before sales, service and other expenses.
On Tuesday, Tesla said it would open up the ordering process for all U.S. customers who’ve plunked down $1,000 deposits. That’s where deposit holders get a chance to configure their Model 3 and place an actual order and put down an additional and non-refundable deposit of $2,500. But buyers aren’t told before they pay up how long they’ll have to wait. They don’t know whether they’ll get their cars before the federal government’s $7,500 federal subsidies begin to run out, as expected at Tesla later this year. The original $1000 refundable deposit becomes non-refundable, too.
That all raised a couple of questions for short-seller Mark Spiegel of Stanphyl Capital: “Are they doing that even for the $35,000 cars they’ll never build? Is inviting everyone indicative of really weak backlog or just a cash grab or both?”
Tesla said it intends to sell a $35,000 Model 3 but hasn’t pinpointed when. It’s unclear how many depositors had hoped to buy a Model 3 at or near its $35,000 base price. Such cars are not yet available. The lowest-priced Model 3 now starts at $50,000.
Gartners’ Ramsey said he thinks Musk would have been better off scaling back ultimate Model 3 production goals by a couple of hundred thousand or so and pumping them out on time, with less aggressive automation and higher levels of quality.
“But it’s in his DNA to double down when his targets are already ridiculous,” he said. “This is a problem of his own making.”
Musk, however, is hinting that he’s got a big deal for a new factory in China coming, with an announcement in July. That could include new Chinese investors.
“Short burn of the century coming soon,” he tweeted last month. “Flamethrowers should arrive just in time.”