Tesla Inc is going to start building its mass market EV, the Model 3, this week. The firm’s fans are celebrating the news, but there’s just one problem. Deliveries from the firm’s second quarter came in low, and it looks like production problems may be to blame. For shareholders betting on a smooth rollout, that could mean rocky times ahead.
Tesla stock fell by around 2.5 percent on Monday after the firm revealed its production problems. A good part of that fall was in line with a broad sell off of bubbly technology stocks on Monday, but the market is also likely pricing in its disappointment in the delivery numbers.
It seems reasonably likely that the Model 3 is going to be a little bit late at this stage. The question that those who loaned Elon Musk $1,000 to build the car will be asking is: Why am I going to have to wait so long?
Look at the Tesla Model X
If you’re trying to understand what can go wrong for Tesla, take a look at the Model X. The firm’s crossover SUV project was delayed again and again as production problems crept in. There were all sorts of problems that kept that car off of the road. The firm’s CEO, however, put the whole fiasco down to “hubris.”
In his view the firm tried to do too much with the Model X and that made production much harder than it had to be. In April of 2016 Mr. Musk said “The root causes of the parts shortages were: Tesla’s hubris in adding far too much technology to the Model X in version one, insufficient supplier capability validation and Tesla not having broad enough capability to manufacture the parts in-house.”
What you think will happen with the Model 3 depends on how different the Tesla of today is from the Tesla of 2015. It’s true that the firm has moved more and more of its part production in house. It’s also true, however, that those production changes haven’t ramped up as quickly as was hoped.
Battery bonanza still behind
The reason given for the drop in deliveries in the second quarter was interesting. According to the carmaker, it’s not able to build new batteries fast enough to fit demand.
The firm commented on a “severe production shortfall” of its newer 100 KWh battery packs. Those packs are available for the firm’s Model X and Model S cars right now. The battery pack is built using a new technology, and it said they were being built on a completely new production line.
Though Tesla says that the production problem has already been solved, there’s reasons to be worried about the firm’s Gigafactory project. Elon Musk’s firm has made power cells a big, major priority. The firm is going to need a massive supply in order to meet the apparently huge demand for the Model 3. Already more than 400,000 people have ordered the car.
On top of that, Tesla says that it’s going to be building a new type of battery for the Model 3. It’s not clear if the chemistry is very different from that of the 100 KWh battery packs. What is clear, however, is that even without “gull wing” doors, the Model 3 may be open to delays stemming from technology problems.
Can the Model 3 be different?
The Tesla Inc Model 3 is a very different beast from the Model X. In trying to show Wall Street that he had learned his lesson, CEO Elon Musk has stressed this point multiple times over the last few months. He has made it clear that the Model 3 is going to be a whole lot easier to build.
That said, Elon Musk has been very clear on how easy it is to delay car production. Last year, when talking down a July 1 2017 production date for the Model 3 he said “The reason is that even if 99 percent of the internally produced items and supplier items are available on July 1, we still cannot produce the car because you cannot produce a car that is missing one percent of its components.”
Sure Tesla is more experienced right now, and the firm has apparently designed the Model 3 to be much easier to produce. All it takes, however, is one storm in the wrong part of the world in order to bring delays right to the Tesla factories in Fremont and Reno.
Combine that with Tesla’s own relative inexperience in mass production, and it seems likely that the forecast 20,000 cars in December comes with a wide margin of error. Fortunately for Tesla shareholders, the value of the company doesn’t depend on arbitrary numbers. It depends on how investors feel about the long term future. Right now that image is ever-changing, but as we learn more about the firm’s progress, it should become more concrete.
Tesla stock hits a rough patch
Now that we’re into delivery-watching, those holding Tesla Inc stock might be in for a rough time. Each new piece of news, and every time a Wall Street analyst visits the Fremont factory, traders are going to try to take advantage. That means that the coming months, right through the December mass production deadline, could be very rough for Tesla stock.
Those betting on the carmaker should be closely watching two numbers. The first, and most obvious, is the delivery numbers of the Model 3. The second is the firm’s cash burn.
Tesla doesn’t make a profit, and that means that it needs cash from external sources in order to fund its projects. In recent years the firm has raised that cash through a mix of bank loans and equity sales. It has also convinced fans to loan it money as a reservation fee for its upcoming Model 3.
If costs at the firm rise quickly as it moves into full-scale production of the Model 3, Tesla Inc may have to raise cash before the end of the year. That could add to the volatility around the shares if it comes at a weak moment for the firm.
In the past investors have generally welcomed cash-raising by Tesla. There’s no law, however, that says that pattern will continue forever. Frequent trading of Tesla stock right now is a very dangerous game. For those who believe in the firm, however, there’ nothing wrong with holding onto the shares, and waiting for this particular storm to blow over.