Tesla is months behind schedule on the production of its new Model 3 electric car. The company only produced 220 units in the three months to September 30, despite forecasting it would manufacture 1,500.
This target has now been pushed back until early 2018, making Tesla’s ambitious promise to build its $35,000 (£26,700) car look seem increasingly distant. In a report, CEO Elon Musk maintains the firm expects to achieve a production rate of 5,000 Model 3 vehicles per week by late in the first quarter of 2018.
Tesla’s third quarter shows it made net losses of $619 million (£468m). This is despite a profit last year of $21.9m (£16.7m). The financial results were the worst ever posted by the company.
With a pre-order waiting list of 500,000 the pressure is on Tesla to fight off the growing competition. But what does this delay means for Silicon Valley’s golden boy?
What’s up, Musk?
The Tesla CEO says his company’s ambitious focus on mass production is slowing it down. “The Model 3 production process will be vastly more automated than the production process of Model S, Model X or almost any other car on the market today,” he argues in Tesla’s most recent report. “Bringing this level of automation online is simply challenging in the early stages of the ramp.”
More specifically, Musk adds, “the primary production constraint has been in the battery module assembly line at Gigafactory 1, where cells are packaged into modules”. The complexity of the module design of the battery, and its automated manufacturing process, has taken longer to get working at speed than expected.
While Musk has provided reasons for Tesla’s problems, others are less sympathetic. “The bottom line is it’s hard to make a car that advanced, at the price and at that scale,” says Gene Munster, partner at venture capital firm Loup Ventures.
But we shouldn’t be jumping to conclusions about these new hurdles. “Tesla’s manufacturing struggles don’t suggest it is falling behind because none of the other major contenders have started an electric vehicle project as ambitious as the Model 3,” Munster says.
Musk says Tesla plans to produce about ten per cent less Model S and Model X vehicles in the next quarter, with the extra manufacturing capacity put towards the Model 3. The firm says production challenges may impact costs in the short-term, but won’t dent its 25 per cent gross margin target. But the market has reacted cautiously to Tesla’s recent struggles as shares dropped by 7.6 per cent following its most recent financial announcement.
As established car firms make the move towards electric, Tesla is being put under market pressure that wasn’t there before. Despite this, Munster says Tesla needn’t be concerned. “In ten years we expect three to five companies will own the market for electric vehicles and autonomy, compared to eight major auto companies today.”
Of those three to five winners, analysts expect two to three to be tech companies. And that means some will have to fall by the wayside.
Tesla’s real competition is the battle for autonomous cars. “Waymo has been making progress and is now testing in Michigan” says Munster. But, he continues, Tesla is still far more advanced than most major automotive companies. “The bottom line is even if you discount the ‘Musk hype’ factor on all of its claims, Tesla is still in the driving seat for the future of transportation,” he says.