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Tesla Reports Uptick in Model 3 Output, but Falls Short of Musk’s Goal For Tesla, ‘Production Hell’ Looks Like the Reality of the Car Business
(35 minutes later)
Tesla said on Tuesday that it had produced almost 10,000 of its Model 3 electric cars in the first three months of 2018, a significant increase from the fourth quarter of last year but still short of the goal that investors hoped the company would reach. Tesla began producing electric cars at its plant in Fremont, Calif., six years ago, starting with small quantities and ramping up to about 100,000 vehicles last year. Now, as it tries to double or triple that number, the company and its chief executive, Elon Musk, are getting a lesson in how hard it is to mass-produce automobiles.
The company said it had expanded output of the Model 3, its first mass-market offering, by “rapidly addressing production and supply chain bottlenecks, including several short factory shutdowns to upgrade equipment.” On Tuesday, Tesla reported that it had managed to increase production of a crucial new model in the first quarter of 2018, although it remained well short of the company’s already lowered target. At the same time, it encountered a new hitch — a drop in sales of its two established products, the Model S sedan and Model X sport-utility vehicle.
Tesla is counting on a rapid increase in Model 3 sales to drive revenue and help pare down losses as it invests heavily in vehicles it hopes to offer in the future. The company is counting on the success of the new offering, the Model 3, to increase revenue and help pare its losses as Tesla invests heavily in the vehicles it hopes to offer in the future.
The company had been aiming to produce at least 2,500 Model 3s per week by the end of the first quarter and took some extraordinary measures in its bid to do so. Tesla’s chief executive, Elon Musk, said he had been sleeping at its plant in Fremont, Calif. But a series of setbacks have left Tesla far behind schedule in turning out the Model 3 — for which nearly 400,000 prospective buyers have already put down $1,000 deposits — and it is taking some extraordinary measures to turn things around. Mr. Musk said on Twitter this week that he had been sleeping at the plant, and the company said some workers who normally assemble the Model S and Model X were shifted to Model 3 production.
In the past seven days, Tesla said, it produced 2,020 Model 3s, a rate it thought it would sustain in the coming week. “We expect that the Model 3 production rate will climb rapidly” through the second quarter, the company said in a filing with the Securities and Exchange Commission. The troubles reflect a reality overlooked by many people outside the auto industry: producing a quarter of a million cars a year in one plant is a daunting task.
But as it scrambles to ramp up production of one critical model, the automaker may be encountering a new danger — a drop in sales of its two other vehicles. Tesla said it delivered 21,800 Model S and Model X cars in the first quarter, down 23 percent from the fourth quarter. “You have to have a finish car rolling off the line every couple of minutes,” said Mark Wakefield, global co-head of automotive and industrial at AlixPartners, a consulting firm. “And each one has maybe 5,000 parts that come from different suppliers and have to arrive just in time, and each car is available in a couple of thousand build combinations with different colors and features. And all this has to happen at a competitive cost. There’s a lot that can trip you up.”
Michelle Krebs, a senior analyst at Autotrader.com, said that the decline might suggest that the initial allure of Tesla’s vehicles was beginning to fade. “You just wonder if there’s enough growth in electric vehicles,” she said. “At first everybody who wanted a Tesla and could afford a Tesla hopped on. But it’s not the newest thing anymore.” Even as he introduced the Model 3 at an event last summer, Mr. Musk warned that the company would find itself in “production hell” — and as those words proved prescient, he has had to repeatedly dial back his forecasts for how many Tesla could churn out.
Several weeks ago, Tesla said demand was strong for the Model S and Model X. In its S.E.C. filing, the company said first-quarter orders for the two vehicles were at a record and reiterated that “demand remains strong.” Mr. Musk once envisioned producing as many as 500,000 cars this year, and last summer he was hoping to be able to make 20,000 Model 3s a month by December. More recently, Tesla had aimed to produce at least 2,500 Model 3s per week by the end of the first quarter.
A sustained slump in Model S and Model X sales could complicate Tesla’s efforts trim the losses it has been reporting quarter after quarter. But that is more than it managed in the entire fourth quarter, and it has produced fewer than 10,000 in the first quarter, the company said Tuesday.
Even more important to the company’s stability is the increased production of the Model 3. Mr. Musk once envisioned producing as many as 500,000 cars this year, but production glitches and other delays have slowed Model 3 output to a crawl. In the fourth quarter, Tesla built just 2,425 Model 3s. There have been signs of momentum, however. In the past seven days, Tesla said, it had produced 2,020 Model 3s, a rate it said it expected to sustain in the coming week.
Tesla sought on Tuesday to allay concerns raised by some analysts that its production troubles could create a cash squeeze. It forecast that Model 3 output would reach 5,000 cars a week in “about three months” and that in the third quarter it would achieve “the long-sought ideal combination of high volume, good gross margin and strong positive operating cash flow.” In a filing with the Securities and Exchange Commission, Tesla said it expected its output to “climb rapidly” through the second quarter and reach 5,000 per week in about three months. It added that it was “rapidly addressing production and supply-chain bottlenecks, including several short factory shutdowns to upgrade equipment.”
“As a result, Tesla does not require an equity or debt raise this year, apart from standard credit lines,” the company’s filing said. Tesla has closely guarded the details of its manufacturing system, but Mr. Musk has described it as highly automated.
On Monday, Mr. Musk took exception to a report by The Information, a technology news website, that he had pushed aside the company’s senior vice president of engineering, Doug Field, and taken direct charge of Model 3 production. Ron Harbour, a partner and auto-manufacturing specialist at Oliver Wyman, a consulting firm, said that adding more automated equipment tends to create a more complex production environment. “You have more new equipment to launch, there’s more programming, more maintenance,” he said. “More automation doesn’t necessarily make it more efficient.”
“Can’t believe you’re even writing about this,” Mr. Musk wrote on Twitter. “My job as CEO is to focus on what’s most critical, which is currently Model 3 production. Doug, who I regard as one of the world’s most talented engineering execs, is focused on vehicle engineering.” The highest-volume plants he’s seen, Mr. Harbour added, often have more assembly workers and fewer robots. “It’s a little counterintuitive, but that’s how it is,” he said.
After others commented on his post, Mr. Musk elaborated, saying he and Mr. Field had taken a “divide and conquer” approach that had him sleeping at the factory. With a starting price of $35,000, the Model 3 is more affordable than Tesla’s other models and a crucial part of its ambitions to become a mass-market automaker — as well as to stabilize its finances and turn a profit.
Including the Model S and the Model X, Tesla produced almost 35,000 vehicles in the first quarter, 40 percent more than the previous quarter. In the regulatory filing, the company called it “the most productive quarter in Tesla history.” But Mr. Wakefield noted that working out bottlenecks and hitches in auto production often isn’t as straightforward as it could appear. For example, modifying one part to make it fit better or stronger can require other parts to be modified, or can alter the car’s driving characteristics.
Tesla has been dogged in recent weeks by a barrage of negative news. Concern has grown over the safety of its Autopilot driver-assistance system after a fatal crash in California on March 23 that the company said occurred while Autopilot was engaged. It was at least the third fatal crash that has taken place while a driver was using Autopilot. “If you make a change to solve one problem, you can create five other problems,” he said. “People think you just find a problem and solve it, but it’s not like that. There are literally millions of problems that come up and require thousands of engineers, working in teams, either at the car company or the suppliers, to deal with.”
Tesla’s stock and bond prices have plunged amid concerns about how much cash the company is using as it struggles to speed up assembly and sales of the Model 3. With a starting price of $35,000, the car is e more affordable than Tesla’s other models and the company has been counting on a quick expansion of its Model 3 business to increase revenue. While Tesla scrambled to work out the kinks in making the Model 3 in the first quarter, deliveries of the Model S and Model X declined by 23 percent from the previous quarter — to 21,800 — even as the company reported “the most productive quarter in Tesla history.”
Tesla’s shares closed up 6 percent on Tuesday after the company’s filing, but they have still shed 23 percent of their value in barely three weeks. Tesla said it had been hurt by a shortage of battery packs for its cars, made at the plant it calls the Gigafactory, near Reno, Nev.
Michelle Krebs, a senior analyst at Autotrader.com, said the decline in deliveries of the Model S and Model X might suggest that the allure of Tesla vehicles has somewhat faded. Electric cars make up fewer than 1 percent of all vehicles sold in the United States.
“You just wonder if there’s enough growth in electric vehicles,” she said. “At first everybody who wanted a Tesla and could afford a Tesla hopped on. But it’s not the newest thing anymore.”
In its statement on Tuesday, the company said that “demand remains strong” for the Model S and Model X. But a sustained slump in sales of those vehicles could complicate Tesla’s efforts to trim the losses it has been reporting every three months — including a net loss of $771 million in the fourth quarter.
Even aside from its production struggles with the Model 3, the company has been hit by a barrage of negative news in recent weeks.
Concern has grown over the safety of Autopilot, its driver-assistance system, after a fatal crash on March 23 that occurred while the system was engaged. It was at least the third fatal crash that has taken place while a driver was using Autopilot.
On Friday, Tesla said the driver had not heeded several visual and audible warnings to put his hands on the steering wheel before his Model X hit a concrete barrier. Neither the driver nor the car appeared to activate the brakes before impact.
Also last week, Moody’s Investors Service downgraded Tesla’s credit rating and said the company risked running short of cash by the end of the year.
The company said Tuesday that it saw no need to take special measures this year to raise cash. Its shares closed up 6 percent on Tuesday after the regulatory filing, but they have still shed 23 percent of their value in barely three weeks.