Tesla Tests the Patience of Customers, Investors

Model 3 production woes overshadow short-term optimism

A Tesla dealership in the Dadeland Mall in Miami on on June 6, 2013. (Joe Raedle/Getty Images)

In July 2017, Tesla Inc. CEO Elon Musk predicted that the company would produce 20,000 Model 3 sedans by December.

Stating that Tesla fell well short of expectations is a huge understatement.

On Jan. 3, the Palo Alto, Calif.-based company announced it had produced only 2,425 Model 3 vehicles and delivered 1,550 of them.

In addition, Tesla pushed back its production target of 5,000 Model 3 vehicles per week—again—to the end of June 2018, merely two months after it pushed back the production target the first time, to the end of the March 2018.

At $35,000 each, the Model 3 is Tesla’s lowest-priced model, which Musk hopes will propel the company from a niche luxury player to a mainstream automaker delivering electric cars to the masses.

Tesla has never been about current, tangible production figures.

At the onset of Model 3’s announcement in 2016, Tesla said almost 400,000 prospective buyers had put down the $1,000 in deposit to secure their orders.

But issues surfaced not long after the first batch of Model 3s rolled off the production line in the fall of 2017. Marred by manufacturing delays at its assembly factory in California and its battery plant in Nevada, Tesla delayed its production goals not once, but twice, leaving investors, Wall Street analysts, and customers puzzled and disappointed.

Musk called the situation at the company’s battery gigafactory “production hell,” in a tweet on Oct. 26, 2017. On a Nov. 1 conference call with analysts, Musk further explained to Morgan Stanley’s Adam Jonas, a noted Tesla bull, that “we’re now in level 8 and I think we’re close to exiting level 8 [of hell].” Musk sent some of the company’s top engineers to Reno and noted that employees were working seven days a week to resolve the production issues.

Neither Tesla nor Musk commented in detail about the types of issues encountered, but the CEO mentioned certain “robot calibration issues”—a reference to the highly automated nature of Tesla’s production process, which involves complex robots, thousands of individual processes, and tens of thousands of parts.

Stock Price Barely Affected

Once again, Tesla’s stock barely fell on the disappointing news. Its shares briefly dipped in morning trading on Jan. 4, but recovered shortly afterward. Tesla’s stock was up 1.7 percent as of Jan. 5 close. Its stock was up around 48 percent over the last 12 months.

The company remains a favorite of short sellers. As of Dec. 15, 2017, short interest in Tesla was at 31.2 million shares, according to Nasdaq. That’s about 19 percent of its total shares outstanding.

But Tesla’s sterling stock performance cannot last if the company continues to miss deadlines and fail to meet its expectations.

Tesla is burning cash. It uses about $1 billion in cash each quarter, about the same as General Motors, yet it sells only a fraction of the vehicles GM does. In the fourth quarter, Tesla delivered 29,870 cars—a record for the company—but that’s only 4 percent of GM’s fourth-quarter deliveries of 806,739.

At this burn rate, Tesla only has enough cash to operate through 2018 before it needs to raise additional financing.

Tesla CEO Elon Musk in Adelaide, Australia, on Sept. 29, 2017. While Tesla is mired in its self-proclaimed “production hell,” its competitors are ramping up the pressure. (PETER PARKS/AFP/GETTY IMAGES)

Patience Not Boundless

But Tesla has never been about tangible, current production figures. For Musk and his customers, it’s all about the future. Tesla has always preached that once Model 3 production ramps up to 5,000 per week, the company would “generate significant cash flows from operating activities,” according to its third-quarter 2017 update to investors.

This will be a critical year for Tesla. And getting Model 3s out the door matters, as otherwise that future may never arrive. It matters for Tesla’s liquidity and, more importantly, for confidence from customers and investors.

If Tesla continues to push back production targets for the Model 3, Musk risks becoming the boy who cried wolf. Prospective buyers may withdraw. Competitors may smell blood in the water.

For the hundreds of thousands of prospective customers who placed $1,000 deposits and waited months, if not years, their patience is not without limit.

In an online forum on Model3OwnersClub.com, some prospective owners on the waiting list have vented their frustrations.

“How do you think this makes those of us feel who have close to half a million people in line before us,” one depositor lamented.

“I can’t take this much failure anymore,” commented another.

While Tesla is mired in its self-proclaimed “production hell,” its competitors have been ramping up the pressure.

Volkswagen announced on Jan. 4 a new partnership with Aurora, the Silicon Valley-based autonomous car company, to co-develop and fast-track Volkswagen’s self-driving platform. China-owned Volvo has a plan to phase out gasoline and diesel-powered vehicles by 2019, which is around the time Tesla’s Model 3 should have solid ongoing production figures. And Volvo already has a massive advantage in market share in Europe and Asia. Existing mainstream manufacturers, from Mercedes-Benz to Toyota, have announced plans to increase investments in electric and self-driving cars.

Short-Term Optimism

For Tesla investors and prospective customers, there is some recent good news. None of them will save Tesla in the long term if Model 3 fails to deliver, but they could extend the company’s lifeline in 2018.

The final version of the Trump administration’s tax reform bill kept incentives for electric vehicles. For Tesla and other automakers selling electric vehicles, that brought a sigh of relief.

The credits, which reduce a customer’s federal tax liability by up to $7,500, are available for the first 200,000 electric vehicles a manufacturer delivers. Once that threshold is reached, the tax credit is reduced by 50 percent every six months until it phases out completely.

It’s a key incentive for electric car buyers. While it’s debatable whether everyone on the Model 3 waitlist would enjoy the tax credit given the phase-out process, it does help to prevent those already in line to purchase the car from leaving.

In early January, Tesla also opened up the Model 3 Configurator—a kind of online design studio where cars can be customized before orders are made—to reservation holders in the Midwest and Northeast, according to industry newsletter Electrek. Previously, the Configurator was only available to prospective customers in California and existing Tesla owners.

While Model 3’s production delays are disappointing, the release of the Configurator should hold the interest, in the short term, of those reservation holders anxiously awaiting word on their cars.

For investors concerned about liquidity, Musk has a few options outside of traditional fundraising channels of debt and equity financing. Within the last few months, Tesla has unveiled an all-electric semitruck as well as a new Roadster sports car.

In typical Tesla fashion, Musk opened up both future models for reservation, with delivery dates years in the future. The semitruck requires a $5,000 deposit, and companies including Wal-Mart Stores Inc. have already lined up for preorders. The Roadster requires a massive $250,000 deposit—an initial reservation of $5,000, and a $245,000 cash wire within 10 days, according to Tesla’s website.

Investors can do the math, but if demand is anywhere near that for the Model 3, Musk could avoid the capital markets altogether in order to prop up Tesla’s liquidity.