The Model 3, deemed crucial to Tesla’s success, won’t hit full-scale production of 5,000 per week until the end of June, Tesla said last week. If they do happen to defy reality and meet that newly established expectation, it would be nearly a year after the company began manufacturing the car in small numbers.
This is Ground Control to Major Tom.
With visions ranging from Mars colonization to hyperloops to a retro drive-in restaurant at a new Tesla Supercharger, it’s been all fun and games for the billionaire, CEO, Elon Musk. Maybe it still is. Only now that little Red Ryder BB Gun is about to put someone’s eye out. Things are getting real…aren’t they?
Ashlee Vance, who wrote a popular biography of Musk in 2015, observed Musk’s ability to get the most out of his engineers. He asks them “to do the impossible.”
While that may be motivating for smart, ambitious people, and while Steve Jobs also had his own unique capacity for “distorting the reality field” of what could be done and by when, reality’s gravitational pull is bringing Tesla's orbit back to the pale blue dot.
Musk has a long pattern of missing production and financial targets set not just years ahead but even just a few months ahead. “When someone is wrong that often one must question either his honesty or his competence; personally, I question both,” said Mark Spiegel of Stanphyl Capital, who is betting against Tesla by short-selling its stock.
But Tesla short sellers have been "battered as long-term investors mostly stay true. Several hundred thousand people have put $1,000 deposits down on the Model 3...Most will now wait three months longer than they’ve waited so far. The company started taking the refundable deposits early in 2016,” according to Russ Mitchell for the Los Angeles Times.
In Q3 of 2017, Tesla manufactured only 260 Model 3 vehicles, while it had estimated it would produce more than 1,500. Musk described the situation as “manufacturing hell," as Tesla worked to ramp up assembly line production.
And now Tesla is burning through billions as it struggles to achieve its vision of mass-market electric cars powered by Tesla-brand solar roofs through Tesla-brand home storage batteries. All of which remains in R&D.
Hail Mary Option #1: Outsource production
If Tesla is unwilling to humbly accept limitations and altogether cut the Model 3, then it needs to do what anyone who is lost should do: Ask for directions. In this case, in the form of outsourcing production.
“If Tesla has a core cultural flaw,” Matthew DeBord of Business Insider writes, “it's that it needs to do everything its own way. The good is a sexy, stylish, fast electric car and a brand that's adored with cult-like enthusiasm. The bad is that Tesla has no apparent interest in well-established best-practices in the car business."
Tesla also steadfastly refuses to sell through dealers, which means a comparative miniature front-line distribution system. They could outsource the Model 3 production, which is exactly what BMW does when they have too much demand. And Tesla, now valued nearly as much as GM in market share, continues to cast itself as a disruptive Silicon Valley startup.
“To bears, like myself, the company has overestimated the ease of manufacturing a profitable unit,” writes David Kass. “I remain skeptical of the company's ability to deliver product on a timely and profitable manner going forward. If I am correct, the bulging cash outflows will continue unabated and unit selling prices will have to be raised—maybe appreciably—serving to reduce the competitive attractiveness of a Tesla automobile.”
“I am also skeptical about the company's ability to assemble and deliver a low-priced Model 3 with an associated high gross profit—and margin—given higher component costs,” Kass says.
As FreightWaves has pointed out, “Despite a lack of a sophisticated supply-chain, staff that were prepared for such a large influx of orders, or even the production capacity, Tesla kept promising large production numbers that were not achievable for their infrastructure.”
Predictive outcome: While there might be a short-term delay in shipping materials to various production facilities and prepping them to specification, at least there would be a demonstration that Tesla is serious about meeting its production promises, therefore earning credibility in the market without taking a hit from Wall Street long-viewers.
Hail Mary Option #2: Cut the Model 3
Better yet, disbanding the Model 3 and refunding the orders would probably make for the best strategy. The EV market is growing more competitive by the day. The commercial truck market is one thing that will be challenging enough, but to also play in the moderate-priced, consumer-market for EVs? Best case scenario is they actually some do the impossible and meet demand on their current course but then without actually being profitable.
2018 is brand new and already another competitor announces itself. The Byton CES 2018, created by former BMW and Nissan execs, is the first of three vehicles Future Mobility Corp is hoping to launch by 2022. Byton’s plan is to start with a mid-size SUV slated to arrive in Q4 2019, before adding a sedan and a seven-seater shortly after. The company is already claiming it will sell a base model starting at $45,000 with a range of 250 miles, along with a pricier, 325-miles per charge unit.
Predictive outcome: Tesla could focus on what it already does well, high-end luxury cars with fewer production and capacity issues. Revenue might be modest at first, but it would also develop a more viable and ultimately profitable scenario—which is really the bottom line for any successful company, not mere market share. It would also extend and develop brand credibility. Also, they could hammer down on the Semi and fulfilling those already-seemingly-unrealistic projections—we’re not even going to call them deadlines anymore.
Downplaying expectations is something that must be done in any scenario, but will not be the difference-maker. Elon Musk may be the greatest car salesman ever, but Tesla is currently one of the least capable automakers. It's 4th and long on profitability. Musk is going to have to step up and take the biggest, and possibly most humiliating, hit of his career. If he does, though, he just might still convert the 1st down, and continue achieving the impossible.
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