Tesla Hits Model 3 Target and Focus Shifts to Sustainability
(Bloomberg) -- Tesla Inc. reached a milestone critical to Elon Musk’s goal to bring electric cars to the masses -- and earn some profit in the process -- by finally exceeding a long-sought production target with the Model 3.
By building more than 5,000 of the sedans in the last week of the second quarter, Tesla “just became a real car company,” the chief executive officer said in an internal email Sunday obtained by Bloomberg News.
He may turn out to be right, if Tesla can hit these manufacturing goals again and again. After all, producing 5,000 units of one vehicle in a week is far from unheard of in the auto industry, and the company had to pull out all the stops to get to this point, including constructing a tent and makeshift assembly line next to its factory. What Musk still needs to prove is that this level of output can endure.
“Now that Tesla has achieved the 5,000 mark, it needs to do so on a steady, routine basis and with excellent quality,” said Michelle Krebs, an analyst with car-shopping website Autotrader.
Tesla rose 4.6 percent in pre-market trading, pushing gains this year to more than 10 percent.
Hitting the 5,000-a-week target is a major achievement for Musk, who first revealed the Model 3 in late 2016. It’s also a relief for customers who have waited for their cars for more than two years. Their patience has been tested by a series of setbacks that forced Tesla to push back the goal from an earlier plan to reach this level of production by the end of 2017.
“We did it!!” Musk proclaimed in the email to employees Sunday. “We either found a way or, by will and inventiveness, created entirely new solutions that were thought impossible. Intense in tents. Transporting entire production lines across the world in massive cargo planes. Whatever. It worked.”
Optimism about the Model 3 transforming Tesla into a much bigger carmaker that sells to the mass auto market sent the company’s market capitalization past Ford Motor Co. and General Motors Co. for the first time last year. While production hiccups have led to tumultuous periods for the shares, the company is valued at $58.2 billion.
Musk wrote that, not only did Tesla “factory gate” more than 5,000 Model 3s, it may make 6,000 Model 3s a week next month. Including Model S and X production, the company had a “7000 vehicle week,” he wrote.
The key will be whether Tesla can keep this pace, said Dave Sullivan, manager of product analysis for AutoPacific Inc. “Reaching it is one thing,” he wrote in an email. “Consistently producing 5,000 per week with outstanding quality is another.”
The assembly plant reached the target by early Sunday, according to workers who asked not to be identified, with one saying cheers were heard at the end of the line around 5 a.m. local time. A photograph of employees signing a banner welcoming them to the “Model 3 5K Club” was deleted from Twitter and remains on Reddit.
Tesla is expected to release a formal statement on second-quarter vehicle production and delivery figures as soon as Monday. Here’s a rundown of what company observers still will have to look for in the release:
Under the Big Top
In early June, Musk told shareholders at Tesla’s annual meeting that he was feeling optimistic about Model 3 production thanks to a third general assembly line. It turns out that third line was being built outside -- and under the massive tent.
How crucial a role this additional line played in achieving this goal remains an unanswered question. It’s also unclear how much longer the company will need this line and the tent, or if more outdoor assembly systems will be necessary to reach future targets.
“It is increasingly important to understand exactly how the 5,000 units were achieved and how Tesla is manufacturing/assembling vehicles in ‘The Tent’, said Evercore ISI analyst Arndt Ellinghorst. “There is plenty of hearsay about the level of automation in ‘The Tent’ or lack thereof.”
Fits and Starts?
In the past, Tesla has said that it’s been able to boost production by idling its factories for short periods of time to address bottlenecks and upgrade equipment. Are more shutdowns in store, or does Tesla think it’s achieved a steady rate of production? What needs to happen to ultimately get to 10,000 cars a week, and when is that going to be achievable?
Concentrating on Cash
In April, Tesla said that by the third quarter, it would have the “long-sought ideal combination of high volume, good gross margin and strong operating cash flow,” and that the company wouldn’t require a capital raise this year. Musk cut 9 percent of Tesla’s workforce in June, the largest job reduction in its 15-year-history. Will the company give any update on its quest for profitability and its cash condition?
Tesla opened the floodgates last week, inviting all Model 3 reservation holders in the U.S. and Canada to configure their car and put in their order, a step that costs $2,500.
The standard battery version of the car that starts at $35,000 still isn’t available in the design studio, so anxious customers can either order a higher-priced Model 3, continue to wait, or cancel their order. Will Tesla indicate what net reservations currently are?
Tesla doesn’t disclose vehicle sales by region, but it’s expected to hit 200,000 cumulative sales in the U.S. any day. That’s a critical threshold: Once an automaker hits that number of electric-vehicle deliveries, the $7,500 federal tax credit begins to ratchet down and phase out over subsequent quarters.
The company sent many cars to Canada in the second quarter, and Twitter is filled with posts from customers who say they are scheduled to get their Model 3 in July. If Tesla managed to put off the 200,000th delivery until after June, tens of thousands more customers will have a chance to take advantage of the full credit.
©2018 Bloomberg L.P.