China Schools Tesla Motors (TSLA) on How to Build 500k EVs Fast

Tesla Motors Inc (NASDAQ:TSLA) Model 3

Tesla Motors Inc has a highly ambitious dream to build 500,000 cars by 2018. This from a company that has found it challenging to build 50,000 in a year.  A new report from Cairn ERA, a global research firm with a specialty in energy storage believes that the EV maker could succeed. Elon Musk revealed that his firm moved the 500,000 cars production milestone forward by two years after the successful launch of the Model 3. You’ll remember that buyers fell in love with the Model 3 on first sight and preorder numbers are breathtaking. In fact, the firm has about 400,000 preorders backed by a $1000 deposit on the car.

Tesla Motors Inc (NASDAQ:TSLA) Model 3
Source: Tesla Motors Inc

Now, Cairn Era believes that Musk won’t be doing the impossible with its target to deliver 500,000 cars in the next two years. The research firm issued a report noting that Chinese automakers have done something similar in the past. If Chinese automakers could grow aggressively, there’s nothing stopping Tesla from doing the same.

Tesla to learn about scale from Chinese automakers

Cairn Era revealed that the Chinese car market grew from producing 1.4 million cars in 2000 to producing an incredible 24 million passenger cars in 2015. In essence, the Chinese car industry grew by 1,614% within the last 10 years. The Cairn researchers then noted that Tesla Motors should be able to replicate the Chinese growth strategy from 600 cars in 2010 to 500,000 cars in 2018.

Sam Jaffe, Managing Director at Cairn ERA makes an interesting comment in his conclusion of the report. He noted that, “Based on our analysis, three of the top ten car companies in China reached or exceeded the growth rate that Tesla will need to reach over the next three years. We think the most likely scenario is for Tesla to produce 450,000 cars in 2018″.

It might be difficult but not impossible

Gaffe further noted that a conservative estimate suggests that the Tesla might not deliver more than 340,000 cars in 2018. However, he observed that an electric car is relatively simpler to build than cars with ICEs.  Tesla already has working prototypes of the Model 3; it is relatively easier for the firm to match the growth pace recorded by Chinese automakers.

In the words of Jaffe, “the Tesla Model 3, which will comprise the majority of Tesla vehicles manufactured in the year 2018, is a significantly cheaper car to assemble than any of the Chinese cars made by the ten automakers surveyed in this study. Tesla has revealed that there are approximately 8,000 discrete parts in a Model 3. Any internal combustion vehicle, even the cheapest sub-economy model, will have at least 20,000 discrete parts. An internal combustion engine (ICE)-based drivetrain is and always will be dramatically more sophisticated and complex than any electric drivetrain vehicle.”

Bears have a word of caution

Tesla Motors ‘ fans will surely be happy with the new market report supporting the firm’s ambitious targets. However, it is worthy of note that the report did not touch on the difference between the quality control systems in China and the U.S. It is doubtful that any of the Chinese firms that Cairn Era tracked in the report could meet U.S. safety standards with the vehicles that they produced during the study period.

In essence, the firm might not find it easy to grow and scale at the same pace with the studied Chinese automakers. Given the bad press that trailed the quality issues on the Model X, it is doubtful that Musk would want to repeat the same mistakes with the mass-market Model 3.

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Victor Alagbe is a seasoned business and finance writer with a specialty in writing about how to invest for the long-term in healthcare, pharmacology, energy and tech stocks. His long-term focus is on stocks that provide a nice mix of growth and income. For the short term, he passionately writes about trading stock options for the excitement and leverage that stock options offer.

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