The future of the Tesla Semi dims
Yesterday CNBC reported that a number of current and former Tesla employees have confirmed that Model 3 productions problems are deeper and more persistent than has been previously reported or acknowledged by the company in its last earnings call. When in the past Tesla CEO Elon Musk has tried to minimize the depths of ‘production hell’ at the Gigafactory, he pointed to specific, limited issues like a last minute rewrite of battery software to explain hangups in production. Yesterday’s reports, however, identified more widespread problems, ranging from hand-assembled batteries to hiring temp workers with no automotive experience to perform quality control.
Responding to concerns about the company’s reliance on unqualified temps, a Tesla spokesperson wrote that “We’ve been able to teach new skills to thousands of new employees.” Tesla stock has dropped 5% since reaching its peak on January 23rd.
Most startling were the claims by two engineers that Model 3 lithium ion batteries were being assembled by hand so hastily—borrowed Panasonic employees were “slapping bandoliers together as fast as they possibly could”—sometimes without adequate gaps between the cells. If separate battery cells touched, the engineers warned, the battery could short-circuit or even catch fire.
“The implication that Tesla would ever deliver a car with a hazardous battery is absolutely inaccurate, contrary to all evidence, and detached from reality,” a Tesla spokesperson wrote in response. “Every battery in a Tesla vehicle has thousands of cells, the vast majority of which are at the same voltage potential as neighboring cells. Hypothetically, even if two cells of the same voltage potential were touching, there would be absolutely zero impact, safety or otherwise – it would be as if two neutral pieces of metal touched,” the spokesperson continued. The Tesla representative went on to describe the safety and quality checks performed in Tesla’s battery production process.
Model 3 batteries are still being assembled by hand at Tesla’s Nevada Gigafactory because the machines that would automate that process are still being completed. Early last year, Tesla made a controversial decision to skip the soft-tooling prototype stage of car production that would have allowed the company to adjust and calibrate its machines before the final versions were ordered. At the time, Elon Musk argued that skipping soft-tooling would allow the Model 3 to reach full production more quickly, but the opposite has proven true. One Tesla engineer said that even today, “There's no redundancy, so when one thing goes wrong, everything shuts down.” Tesla is still not close to mass-producing the battery for its basic $35k Model 3.
Of course, we know that Tesla doesn’t actually want to sell the base model because they’ve said they’re prioritizing the higher-spec models—the least expensive car they’re offering is priced at $49k. “While I've no doubt that Tesla will eventually work out its Model 3 production problems,” said Mark Spiegel of Stanphyl Capital, “the base model will cost Tesla at least mid-$40,000s to build. The company will never deliver more than a token few for less than the current $49,000 lowest-cost offering. Sales will hugely disappoint relative to expectations of over 400,000 a year. And even at those higher prices Tesla will never come anywhere close to its promised [profitability].” Stanphyl Capital has taken a large short position against Tesla stock, representing about 15% of Stanphyl’s assets under management. Spiegel clarified that he doesn’t expect Tesla stock to decline linearly, but instead views the company as a landmine that could explode at any moment with “company-killing news”, and he wants to make sure that he has a large short position when the inevitable happens.
For his part, Elon Musk told the New York Times that, “I actually see the potential for Tesla to become a trillion-dollar company within a 10-year period.”
But what do the Model 3’s seemingly insurmountable production issues mean for the Tesla Semi? Tesla’s arduous pursuit of profitability will only be encumbered by an additional multi-billion dollar investment in completely new truck manufacturing lines. The carmaker is already more than $8B in debt and would have to raise additional capital to begin truck manufacturing—far more money than what Tesla has already collected from pre-order deposits. Even though a Tesla Semi was spied on the road in Santa Clara (see Brandon Camargo’s video), the array of other issues Tesla is currently facing make it difficult to imagine mass production of the Semi by 2019.
To sum up: Tesla is having trouble mass producing the Model 3 and only has a hope of making a profit on the most expensive $49k higher spec version. A car at that price is much less competitive in the mass market than a car selling for $35k. If Tesla is forced to commit to the high end version of the Model 3, the company will not meet its sales targets of 400k units in 2018 and will continue losing market share to its competitors. Where does the money to invest in the Semi come from in that scenario?
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